FEDERAL COURT OF AUSTRALIA

Rawson Finances Pty Ltd v Commissioner of Taxation [2013] FCAFC 26

THE COURT ORDERS THAT:

1.    The appeal be allowed.

2.    The orders made by the primary judge on 17 July 2012 be set aside, and in lieu thereof it be ordered that the application by way of appeal from the Administrative Appeals Tribunal be dismissed with costs.

3.    The respondent pay the appellant’s costs.

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

REASONS FOR JUDGMENT

Jessup J

1    This is an appeal from a judgment of a single Judge of the court given on 17 July 2012, allowing an appeal under s 44 of the Administrative Appeals Tribunal Act 1975 (Cth) (“the AAT Act”) from a decision of the Administrative Appeals Tribunal (“the Tribunal”) given on 6 September 2011. In that decision, the Tribunal had set aside decisions previously made by the respondent, the Commissioner of Taxation, on objections lodged by the appellant, Rawson Finances Pty Ltd, to assessments (or amended assessments) of income tax made with respect to the taxation years 1997 to 2008 inclusive.

2    The proceedings in the Tribunal related to international funds transfers made as between the appellant and the Mercantile Discount Bank, of Israel (“the Bank”). To the extent that payments were made by the Bank to the appellant, the appellant contended that they were advances in the nature of loans. To the extent that the payments were made by the appellant to the Bank, the appellant contended that they were either repayments (in whole or in part) of loans previously advanced or payments in the way of interest on those loans. The Commissioner did not accept those contentions. The payments made by the Bank to the appellant were treated as income, and no deductions were allowed for interest over the period to which the assessments related. The substantial focus of the inquiry by the Tribunal was whether the payments made by the Bank to the appellant, which had all been made in the calendar year 1997, were by way of loans. The appellant’s contention that they were was its only basis for resisting the Commissioner’s assessment of them as income. Correspondingly, if these payments were loans, I did not understand the Commissioner to propose that the appellant’s identification of interest paid in respect of them as a deductible business expense should not be accepted.

The Nature of the Case

3    The appellant was incorporated on 21 April 1997. The whole of its issued share capital – two $1 shares – was held, and has subsequently been held, by Ligon 158 Pty Ltd, (originally incorporated in February 1988), a company associated with, and substantially owned by, Erwin Binetter and his family. Until March 1998 Mr E Binetter and his wife were the only directors of the appellant.

4    The appellant’s tax returns in respect of the years ending on 30 June 1997, 1998, 1999 and 2000 indicated that its only material income was interest receipts, predominantly from entities associated with Mr E Binetter. According to the Tribunal, the “overwhelmingly preponderant” expenses incurred by the appellant, as shown in those returns, were interest payments to the Bank.

5    The appellant did not lodge a timely tax return with respect to the year ended on 30 June 2001, or with respect to the immediately following years. The Tribunal noted that this corresponded with, and was probably related to, the fact that the accountant with whom Mr E Binetter had had a long association, Emeric Szanto, retired from practice in about 2001. It was also in the later part of that year that Mr E Binetter’s family noticed some deterioration in his (Binetter’s) short-term memory, which was confirmed by neurological assessment, but characterised as being of no great consequence. In 2002 and 2003 Mr E Binetter was hospitalised on several occasions with heart problems and, in November 2003, he underwent heart bypass surgery. A further neurological assessment undertaken in early 2004 indicated that Mr E Binetter’s “mini mental state examination score was 25 out of a possible 30”.

6    On about 19 March 2004, the Commissioner sent final notices to entities related to Mr E Binetter, including the appellant, requiring the submission of tax returns for each of the years ending on 30 June 2001, 2002 and 2003. Mr E Binetter and his son Andrew shortly thereafter went to Israel, and spoke to an officer of the Bank, Eli Septon. On 5 April 2004, after their return from Israel, Mr A Binetter wrote to the Commissioner, indicating that his father had requested him to “undertake the work of bringing matters up to date”. Subsequently in 2004, further neurological examinations of Mr E Binetter were undertaken and, in August of that year, a psychogeriatric specialist diagnosed him as suffering from Alzheimer’s disease.

7    According to the Tribunal, the events of April to August 2004 resulted in Mr A Binetter assuming the principal responsibility of carrying out the work necessary to bring up to date the accounting affairs of the many entities in which his father was involved. Mr A Binetter had been a director of Ligon 158 Pty Ltd since May 1988 (when he was 22 years of age) and of the appellant since March 1998, but he was, neither at these times nor for some years afterwards, an active officer of either company. His task of bringing the accounting affairs of his father’s entities up to date, which, according to the Tribunal, involved “reconstructing accounting records”, was complicated by his lack of previous close involvement in the affairs of the entities in question, including those of the appellant, and the absence of some relevant records. The Tribunal noted that the latter circumstance was potentially, at least to some extent, attributable to fire damage which had been sustained by the office in which Mr E Binetter kept most of his business records in late May 2004. In the result, the appellant lodged its tax returns for 2001-2005 inclusive in March and April 2007, for 2006 in May 2007, and for 2007 and 2008 in early 2009.

8    The following is a modified version of a table set out in the Tribunal’s reasons, which showed the payments made as between the appellant and the Bank between 5 June 1997 and 11 December 2009. As appears from that table, there were three payments only by the Bank to the appellant, each sought to be characterised as an advance in the nature of a loan. There were more payments by the appellant to the Bank, and they are shown in the table below as the appellant characterised them, that is to say, whether as repayments of principal or as interest. The Commissioner, of course, does not accept that characterisation; neither does he accept that the three payments by the Bank to the appellant were loans.

9    The appellant contended that each of the payments by the Bank in 1997 was an advance for five years at an interest rate of 8.298%. It contended that the “repayment” of 18 September 1998 related to the whole of the loan of June 1997, and to $200,000 of the loan of July 1997. It said that the principal then outstanding was $1.55m. It said that these loans were extended by agreement with the Bank, and that there was also an agreement for the suspension of interest payments (which latter aspect was said to explain the discontinuity in the timing of payments to the Bank claimed to be interest). The appellant contended that the outstanding principal of $1.55m was repaid on 20 July 2009 ($800,000), on 8 October 2009 ($375,000) and on 11 December 2009 ($375,000). The Commissioner accepted that payments were made in the amounts, and on the dates, shown in the table above, but resisted the contention that the payments made by the appellant reflected interest obligations which it had to the Bank. In this respect, the Commissioner disputed that those payments reflected the full amount of those interest obligations, and made the point that the discontinuity to which I have referred was (as described by the Tribunal) “probative of the absence of any real loan and interest payment obligations.”

10    It would seem to be a simple matter for a party which claims to have entered into a loan transaction with a financial institution to prove the existence of the transaction by tendering the contract under which the transaction arose. However, if there was a loan agreement between the appellant and the Bank, it was not in evidence before the Tribunal. This was, according to the Commissioner, a major deficiency in the appellant’s evidentiary case, and I shall return to that aspect of the matter in due course. For the present, however, it is sufficient to note that Mr A Binetter was not involved in making the arrangements, whatever was their character, under which the three payments were made by the Bank to the appellant in 1997; that the appellant claimed to have made a comprehensive, but ultimately unrewarding, search for a loan agreement; that Mr E Binetter passed away in August 2009; and that, at least according to the appellant, the Bank did not fully cooperate in providing documents that might support the appellant’s case at the Tribunal. In consequence of those circumstances, the appellant’s evidentiary case in the Tribunal had a certain fragmentary quality about it. However, ultimately, the Tribunal held that the appellant had done enough to prove that the payments of 1997 were loans.

The Tribunal’s Decision

11    In the light of at least one aspect of the Commissioner’s case before the primary Judge, and on appeal, it is necessary to describe how the Tribunal went about its task of reviewing the Commissioner’s decision disallowing the appellant’s objections. Having identified the “critical issue” for determination, the Tribunal briefly referred to that decision. It set out a history of the appellant’s circumstances, including those said to be responsible for its failure to lodge timely tax returns. It set out the table from which that in para 8 above was taken. It summarised the appellant’s assertion that the transfers of 1997 were loans, and that the payments by the appellant to the Bank were by way of interest or of loan repayments.

12    The next subject dealt with by the Tribunal was “loan documentation produced by [the appellant]”. The Tribunal noted the appellant’s suggestion that the fire in May 2004 was possibly the reason why it was not able to produce more satisfactory documentation than it did, but, while accepting that that possibility was “real”, it stated that “the actual extent and location of [the appellant’s] material records at the time of the fire was not the subject of specific evidence”.

13    The Tribunal then turned (still under the loan documentation heading) to the “many attempts” which those associated with the appellant had made to obtain records from the Bank. Although the Bank had not been fully cooperative, it had provided some copy documents to the appellant, which it placed into evidence before the Tribunal. In para 28 of its reasons of 6 September 2011, the Tribunal identified these documents as follows:

(a)    [The appellant’s] 4 July 1997 letter to Mr [Elie Septon], a Senior Manager of [the Bank] in Tel Aviv. The letter, signed by [Mr E Binetter], nominates a loan account number, requests a further draw down of AUD$1m “under the loan” and acknowledges the consequential loan balance of AUD$4m. It also refers to the 5 year loan term, the 8.298% interest rate for the required biannual interest payments, and the additional 1% interest if those payments are tardy by more than 45 days.

(b)    [The appellant’s] 4 December 1997 letter to Mr [Septon]. The letter, written by [Mr E Binetter], requests a further AUD$0.75m advance “under the existing loan arrangements”. The letter is in very similar wording to the 4 July 1997 letter.

(c)    [The appellant’s] 9 December 1997 letter, again written by [Mr E Binetter] to Mr [Septon]. The letter acknowledges the three requested “drawdown” amounts and their separate account numbers. It requests “favourable consideration” of the 4 December 1997 drawdown request.

(d)    [The appellant’s] 18 September 1998 letter, again written by [Mr E Binetter] to Mr [Septon]. The letter refers to a discussion “yesterday” and records an intention to immediately transfer AUD$3.2m (in partial repayment of the loan account) and AUD$65,564.44 (interest from 1 July 1998 to 18 September 1998).

(e)    [The Bank’s] “Deposit / Withdrawal in Foreign Currency” standard forms, with handwritten notes in Hebrew attributed to the [B]ank’s Tel Aviv head office branch. The completed forms are dated 3 July 1997, 11 December 1997 and 23 September 1998. Each form appears to have been noted with brief, but appropriate, details and codes relating to the bank’s internal recording procedures. The 23 September 1998 notes allocate the AUD$3.2m repayment to the discharge of the June 1997 drawdown and the reduction of the outstanding July 1997 drawdown by $200,000.

(f)    Two completed [Bank] forms entitled “Loan Application in Foreign Currency for a Foreign Resident”. The forms have been partly completed by the inclusion of typewritten particulars. They include [the appellant’s] details, the date “23.12.02”, the loan amounts (AUD$750,000 and AUD$800,000), the interest rate (8.298%), loan term (to 31.12.04). The typewritten insertions include the overstriking of the word “APPLICATION” in the form heading, the substitution of the word “EXTENSION”, and a request at the top of the form to “Please sign where marked X (5)”. There are five handwritten “X” marks in the margin of the form, corresponding to the position of typewritten insertions. Four of those have been initialled by [Mr E Binetter]. The fifth mark appears in the margin alongside where [Mr E Binetter] has signed the document and written his name.

(g)    Two [Bank] Amortisation Schedules, apparently dated 30 December 2003, referring to loan principal amounts of $750,000 and $800,000. These have been generated by a computer reporting system at the [B]ank’s main branch in Tel Aviv. They appear to show the accumulation of unpaid interest and to record a “complation [sic] date” of 31/12/04.

(h)    Six [Bank] payment forms, apparently generated by a computer reporting system at the [B]ank’s main branch in Tel Aviv on 11 December 2009, recording the calculation of interest due, and its debiting to, the loan accounts for loan balances of $750,000 and $800,000. The stated interest periods are those ended December 2003, June 2004 and December 2004. A note on each form states that arrears interest is not included in the amount until the actual date of payment.

(i)    [A Bank] Amortisation Schedule, dated 3 January 2005 and apparently generated by a computer reporting system at the [B]ank’s main branch in Tel Aviv. The schedule refers to a loan principal of $750,000 and identifies the interest payments due in June and December in 2005 and 2006. The schedule appears to show the accumulation of interest for a two year period, and to record a “termination date” of 31/12/006 [sic].

(j)    About 44 [Bank] statement form letters dated 24 January 2008 (although apparently printed on 27 January 2008) and relating to principal and interest amounts for:

(i)    Loan account No ...0013 (AUD$3,000,000) – 3 statements covering the period from 4 June 1997 to 23 September 1998;

(ii)    Loan account No ...0021 (AUD$1,000,000) – 4 statements covering the period from 3 July 1997 to 23 September 1998;

(iii)    Loan account No ...0021 (AUD$800,000) – 16 statements covering the period from 24 September 1998 to 30 December 2006;

(iv)    Loan account No ...0048 (AUD$750,000) – 19 statements covering the period from 10 December 1997 to 31 December 2006;

(v)    Loan account No ...0086 (AUD$1,550,000) – 2 statements covering the period from 31 December 2006 to 31 December 2007.

14    In the present appeal, the evidence referred to in para 28 of the Tribunal’s reasons lay at the centre of the appellant’s case, in ways to which I shall later refer. It is, therefore, appropriate to give some attention to the documents referred to in each of the subparagraphs set out above.

15    The letter referred to in subpara (a) was in respect of “Loan Account Number 971189-650013”. The borrower was specified to be “Rawson Finances Pty Ltd”. Taken at face value, the letter was in effect a draw-down notice, and purported to confirm the appellant’s request to draw down a “further” $1m, the effect of which was to increase its loan from the Bank to $4m. The letter also dealt with the payment of interest and the term of the loan. It stated that the term of the loan was five years, subject to the appellant’s right to repay the first draw-down amount of $3m at any time after 15 June 1998, and the second draw-down amount of $1m after 15 July 1998. The letter stated that the interest payable on the loan “shall be 8.298% per annum” calculated “upon the basis that this rate is after Australian interest withholding tax”, the payment of which was the sole responsibility of the appellant. Interest was to be payable no later than on 31 December and 30 June of each year. If interest was not paid within 45 days of the payment date, an additional 1% of interest was payable for each month that payment was delayed. The letter requested the remittance of the $1m draw-down amount to the appellant’s account, held with ABN-AMRO Finance (Aust) Limited. The letter was marked by a stamp in Hebrew. An English translation of the stamp was set out on the rear of the letter, which read:

Mail

Mercantile Discount Bank Ltd Head Office Tel Aviv (654)

4-7-1997

Addressed to:

For file:

incoming Mail

16    The letter referred to in subpara (b) was, as the Tribunal noted “in very similar wording to the 4 July 1997 letter”. It purported to be a further draw-down notice in the sum of $750,000. It contained the same loan account number and borrower details as the 4 July 1997 letter, but, unlike that letter, it did not appear to make an adjustment to the loan amount by virtue of the requested draw-down. It reiterated the interest arrangements set out in the 4 July 1997 letter. Unlike the 4 July 1997 letter, however, it did not refer to the “term of the loan” but rather referred to the “term of the further advance”, which was specified to be five years. This was subject to the appellant’s right to repay the loan at any time after 15 June 1998 and to repay the further advance after 15 December 1998. The letter made no mention, however, of the appellant’s right of early repayment in respect of the $1 million purportedly drawn-down on 4 July 1997. The letter contained the same remittance advice as the 4 July 1997 letter but, unlike that letter, it was not stamped.

17    In the letter referred to in subpara (c), Mr E Binetter confirmed the receipt of previous amounts purportedly lent by the Bank to the appellant, including the amount requested in the draw-down notice of 4 July 1997. He also requested the Bank’s “favourable consideration” of the request for a further advance. He stated that the appellant had allocated the amounts previously received from the Bank, and the amount which it had requested, to different “loan” accounts. The account number of those accounts differed from the loan account number specified in the letters of 4 July and 4 December 1997, being “971189-650013”. Rather, the appellant informed the Bank that it had allocated the $1m received pursuant to its request of 4 July 1997 to loan account number “971189-650021” and would allocate the amount it received pursuant to its request on 4 December 1997 to loan account number “971189-650048”. Why these “loan” account numbers were different from those specified in the letters requesting the draw-downs on 4 July and 4 December 1997, and different from the loan account number of the initial $3m advanced, was not explored by the Tribunal save as to the conclusion that they must have been allocated by the Bank.

18    The letter referred to in subpara (d) confirmed a discussion between Mr E Binetter and Mr Septon on the previous day, during which repayment of the loan was apparently arranged. The repayment was to be of the appellant’s loan account, the number of which was specified to be “980 199/35 10 83”. This account number differed from the account number specified in the letters of 4 July and 4 December 1997, and the account numbers specified in the letter of 9 December 1997. This apparent discrepancy was not considered by the Tribunal in its description of the document in subpara (d), or elsewhere in its reasons. The amount of the repayment was specified as $3.2m, and the interest owing in respect of that amount was $65,564.44. Those amounts were stated to be on their way to the Bank by way of electronic transfer.

19    The three “standard forms” referred to in subpara (e), were in Hebrew, and only the numerical notations and the appellant’s name is readily identifiable on the front pages of them. As the Tribunal observed, the 23 September 1998 form dealt with the discharge and partial discharge of what was termed “[f]oreign currency loans for overseas resident”. The discharge and partial discharge were stated on the form to have been made by reference to the letter referred to by the Tribunal in subpara (d), in which the appellant notified the Bank of its intention to repay loan account “980 199/35 10 83” in the sum of $3.2 million. But the form specified an allocation of the sum of $3.2 million in a manner not stated by the appellant in the letter referred to in subpara (d). That allocation involved the allocation of $3 million to discharge what the Tribunal identified as the June 1997 drawdown and the allocation of $200,000 in partial discharge of what the Tribunal identified as the July 1997 drawdown. The 23 September 1998 form did not, however, evidence any payment of interest in the sum of $65,564.44 in the manner contemplated in the letter referred to in subpara (d) and, as it transpired, there was no interest paid on the loan at that time.

20    As it turned out, the appellant made no further repayments of the purported loan amounts outstanding with the Bank for several years and, on or around 23 December 2002, it entered into two further agreements with the Bank, extending the date for repayment of the remaining $800,000 outstanding on the amount drawn-down in July 1997 and the $750,000 drawn-down in December 1997. The Tribunal referred to those agreements in subpara (f), to which nothing can be usefully added.

21    Each of the schedules referred to in subpara (g) was specified to be an “Amortization Schedule” in respect of a loan in foreign currency. The Bank was named variously as “Marcantile Discount Bank Ltd” and “Marcantil Discount Bank Ltd”. One schedule dealt with the $1m drawn-down by the appellant in July 1997, and in respect of which the principal sum of $800,000 remained owing. The account number is incomplete, but its first few digits are “654-0971”. These digits do not appear in the numbers set out in any of the correspondence, or pro-forma forms, relating to the relevant loan amount. They also do not appear on the relevant extension agreement, where the relevant account number was specified to be “971189-650021”. The schedule specified that payments of interest, in the amount of approximately $34,000, were due in six-monthly intervals (on 30 June and 31 December of each year) until a final payment of interest and the principal sum on 31 December 2004. The second schedule dealt with the $750,000 drawn-down in December 1997, and, like the first schedule, it too scheduled the making of several interest payments in advance of the final interest payment and repayment of the principal sum on 31 December 2004. Both schedules specified the rate of interest payable at 8.2980%.

22    The payment forms, or statements, referred to in subpara (h) purport to evidence the calculation and payment of the interest amounts (and in the case of the final payment statements at the end of 2004, the principal sum) in respect of both the $800,000 and $750,000 outstanding. As the Tribunal noted, the statements contained a note that arrears interest was not included on the amount until the actual day of payment. The account numbers specified for each loan, and for the appellant’s account, with the Bank appear to have been changed to the extent that the numbers “654-0971-18” or “654-0980-18” have been inserted at the start of each number. This may explain the discrepancy in the loan number specified in the Amortisation Schedule for the $800,000 referred to in the previous paragraph, but why these numbers were subsequently inserted, or why the additional numbers were not included on the relevant loan account number, and the appellant’s account number, on the second Amortisation Schedule, does not appear.

23    The number of the account with which the further Amortisation Schedule referred to in subpara (i) was concerned was “654-0971-18-660086”. The schedule stated that interest payments were due on 30 June and 31 December in 2005 and 2006, the final payment also including the repayment of the principal sum. The interest payable was stated to be 8.2980%, with an additional adjustment amount of 0.4701%. The loan’s termination date was specified as 31 December 2006, and its apparent commencement date was 31 December 2004 (noting, however, that this date appears next to the words “LOAN VALUE”).

24    The only comment I would add to what the Tribunal said about the 44 “statement form letters” in subpara (j) would be to note that every letter was dated 24 January 2008, regardless of the period to which it related, and was printed on 27 January 2008. This circumstance was not explored by the Tribunal in its description of the statements.

25    Returning to the Tribunal’s reasons, it then referred to evidence, other than documents obtained from the Bank, upon which the appellant relied. That included copies of a number of letters, signed by Mr E Binetter, which it had written to its Australian bankers instructing them to make some of the transfers referred to in the table in para 8 above. These letters tended to be in standard form. The letter dated 11 February 1998 asked the addressee banker to include the following message with its transfer of $187,784.85 to the Bank:

Attention Mr Elie Septon

Interest for 6 months to 31 December on the total drawdown of $4,750,000.00 on behalf of Rawson Finances Pty. Limited on Current Account No. 980 188 / 35 10 83.

A like message was contained in the letters requesting each of the transfers made on 1 June 1998, 19 February 2001 (the letter being dated 14 February 2001), 5 January 2005 (the letter being dated 4 January 2005), 4 April 2005 (the letter being dated 31 March 2005) and 10 January 2006 (the letter being dated 4 January 2006). The letter dated 14 February 2001 was over the name of Mr E Binetter, but the copy tendered in the Tribunal did not contain his signature as such. All of the other letters referred to above were over the hand of Mr A Binetter, and those dated 1 June 1998, 4 January 2005 and 4 January 2006 contained his signature as such.

26    There were two further letters in evidence before the Tribunal which ostensibly related to loans which the appellant had with the Bank. Each was over the hand of Mr A Binetter, and was an instruction to make a transfer to the Bank. The first letter was dated 17 July 2009, and related to the payments shown as principal and interest on 20 July 2009 in the table in para 8 above – a total of $1,066,194.38. The addressee banker was requested to include a message that the transfer was by way of “principal and interest payments by Rawson Finances [Pty Ltd] to 20 July 2009” in respect of account number “980 188/35 10 83”. The second letter was dated 8 October 2009, and related to the payments shown as principal and interest on 6 and 8 October 2009 in the table – a total of $643,563.44. A message in the same terms as that set out above, in respect of the same account number, was again requested. This letter was, as it happened, on the letterhead of the appellant’s shareholder, Ligon 158 Pty Ltd, and the transfer was to be made from its account, but nothing turns on that circumstance.

27    In its reasons, the Tribunal also said that the appellant had produced –

… various handwritten ledgers and journals apparently recording the use of funds by [the appellant] between 1997 and 1999, in connection with various payments made to, or on behalf of, entities associated with [Mr E Binetter].

Our attention was drawn in this respect to two pages in the Appeal Book which were said to be photocopies of entries in “handwritten ledgers” which were in evidence before the Tribunal. It was apparently common ground that the “ledgers” from which these pages were copied had been prepared by Mr Szanto, and recently discovered in a garage somewhere. The books in question were received by the Tribunal very late in the piece, and Mr Szanto was not called. On the application of the appellant, and over the hesitations, if not opposition, of counsel for the Commissioner, we permitted the original books to be handed up although they had not, it seems, been shown to the primary Judge. Counsel for the appellant assured us that this was for the sole purpose of the court being satisfied that the photocopies in the Appeal Book were what they purported to be, and came from an apparently continuous record maintained on behalf of the appellant.

28    Regrettably, only one of the books served that purpose, that being a ledger of some kind which related to Ligon 158 Pty Ltd and which covered the period from 1994 to 2000. It contained an entry for interest paid by, or on behalf of, the appellant, to the Bank on 29 December 1998 ($62,235.00) and on 25 June 1999 ($64,309.50). That entry was consistent with the transfers that were in fact made as shown in the table in para 8 above. Of present relevance is not the fact of the transfers, but their description as interest in the ledger maintained by Mr Szanto. It seems to be uncontroversial that that description would have been given to the payments on the instructions of Mr E Binetter.

29    The other book did not contain the page from which we were invited to accept that the relevant photocopy was taken. Indeed, that book was not in the nature of a ledger at all. Going only on the photocopy, the page is headed with the name of the appellant and, for 21 September 1998, has an entry for “loan repayment” in the sum of $3.2m alongside the name of the Bank. A transfer in that amount was made to the Bank on 18 September 1998. Interest payments to the Bank on 29 December 1998 and 25 June 1999 in the sums of $62,235.00 and $64,309.50 respectively are also recorded. These are the same payments as were referred to in the so-called ledger mentioned in the previous paragraph.

30    The next section of the Tribunal’s reasons was a short but important one. It was headed “Deficiencies in Loan Documentation and Conduct”. It opened with the observation that the Commissioner had pointed to “a number of unusual circumstances, and apparent irregularities” to highlight the justification of the decision under review and to oppose the appellant’s application. They included the “apparent commercial unreality of the asserted loans”, particularly the absence of loan documentation, security and personal guarantees and “(assertedly) unusual loan interest rates”; the Bank’s failure to calculate interest, to require payment in accordance with the asserted loan terms or to take any action to enforce those terms despite the appellant’s default in the payment of interest over a substantial period; and the “absence of significant evidence of the subsidiary loan transactions to which [the appellant] says it applied the impugned [Bank] loans”, from which the appellant said it derived income. The Tribunal noted that both parties had provided expert evidence as to “the degree of apparent completeness, sufficiency and regularity of the available documentation and records”, especially those provided by the Bank to which the Tribunal had referred in para 28 of its reasons. The Tribunal said that there was a conflict in that evidence, but that there was “some evidence to indicate that ordinary Israeli banking practice would be consistent with the existence” of documentation demonstrating the verification of the appellant’s identification details and its capacity and authority to operate a bank account, of a description of the appellant’s business, including financial accounts and business history, and the Bank’s independent background check on the appellant, of “a formal [l]oan [a]greement” and of “a list or file containing material such as details of any guarantee or collateral security” for the loan, “perhaps including evidence of charged assets and assessments of their realisable value”. The Tribunal observed that there was no evidence of any formal loan agreement, other than the two forms referred to in para 28(f) of the Tribunal’s reasons; nor of any charge that the appellant provided as security; nor that Mr E Binetter, or any entity associated with him, had provided any guarantee for the asserted borrowings.

31    The Tribunal next referred to the appellant’s tax returns and financial statements for the years 1997-2000, they having been prepared and lodged before the appellant became aware of what the Tribunal described as “the Commissioner’s concern about the apparently [sic] irregularity of the contentious loan transactions”. Those returns and statements had been prepared by Mr Szanto. The Tribunal held that they were consistent with the ledgers/journals to which I have referred above, and with the appellant’s case that it had been lent money by the Bank. In making that assessment, the Tribunal referred not only to the various transactions as between the appellant and the Bank as isolated entities, but to the whole financial circumstances of the appellant as disclosed in the statements. It found a general situation which was consistent with the appellant’s case.

32    Specifically, the appellant’s income and expenditure statement for the year to 30 June 1997 showed interest of $13,640.54 “paid/accrued” (presumably accrued) to the Bank by name. In the balance sheet for that year, a liability of $3m was shown as a loan from the Bank. An asset was the tax office for $4,303.60 by way of “resident withholding tax”. Subsequent financial statements were consistent with this pattern, and with the characterisation of the funds transfers for which the appellant contended.

33    In the course of this section of its reasons, the Tribunal dealt with the appellant’s failure to call Mr Szanto to explain the entries in the “handwritten ledgers and journals” referred to above. It said:

41.    I accept that [Mr Szanto] might have been able to elaborate on at least some of the cryptic narratives that appear in his handwritten ledgers and journals. Explanations of that kind might have contributed to a more complete understanding of the on lending arrangements between [the appellant] and the other [Mr E Binetter] related entities. But [Mr A Binetter] included in his affidavit evidence a transcription of many of these entries, and some additional explanations he said had been provided by [Mr E Binetter]. [Mr A Binetter] compiled an apparently comprehensive table setting out the way the 1997 funds had been applied, as recorded in the handwritten ledgers and journals. It is unlikely that [Mr Szanto] could have contributed any materially greater understanding to the circumstances of the 1997 [Bank] fund transfers that would in any way have detracted from the inferences and conclusions I would otherwise draw from the evidence. I am definitely of the view that there is no proper evidentiary foundation for concluding that [the appellant’s] failure to provide evidence from Mr [Szanto] is relevantly attributable to apprehension that his evidence would not assist in the resolution of these proceedings. Conversely, I am satisfied that the direct evidence from Mr [Szanto] would not have detracted from [the appellant’s] position and would not have been likely to assist materially in the resolution of the real issues in the present proceedings.

34    The next section of the Tribunal’s reasons was a lengthy one headed “The Evidence about Loan Documentation Expectations”. In it, the Tribunal canvassed the expert evidence which the parties had called with respect to the documentation and other formal requirements that might be expected under normal Israeli banking practice. The question, generally expressed, was whether the Bank would have been likely to extend a substantial loan to a foreign company (with a nominal capital, I would add) without a formal loan agreement and with no security. In its reasons, the Tribunal gave careful and lengthy consideration to that evidence.

35    In the next section of its reasons, setting out its conclusion on these matters, the Tribunal said that a fixed-interest, five-year loan with no requirement for periodic repayments of principal during the term, and permitting early repayment without penalty, was “unusual”. It said that “usual Israeli banking practice would require security for the loan.” It held that, for these reasons, the loans asserted by the appellant were “unusual”. But it added that it was “readily apparent from the nuances of difference between the views of all the Israeli banking experts that there is a degree of flexibility about the real ultimate meaning, and the significance of that characterisation.” The Tribunal elaborated upon that, and concluded that –

… the 5 year original loan term, the nominated interest rate, and the repayment provisions for the loans asserted by [the appellant] were comparatively unusual, but not to an extent that meaningfully contradicts the likely reality of the [Bank’s] loans.

36    The Tribunal headed the next section of its reasons “The Loan Documentation Issues”, and there addressed the obvious gaps which existed in the appellant’s documentary case, particularly having regard to the evidence which had been led about Israeli banking practices. The Tribunal said that “[t]he absence of any document evidencing the original loan agreement is strange.” It said that “[t]he absence of some kind of written agreement for the original loan would have been quite contrary to all of the expert evidence about ordinary Israeli banking practice.” The Tribunal continued:

104.    Despite the seeming deficiencies in the presently available loan documentation, there are also good reasons to accept the reality of the fact of the loan [the appellant] asserts. The fund movements appear to be objectively corroborated. The fact is that [the Bank] did allocate separate loan account numbers to the asserted loans. It also allocated an account number to [the appellant’s] deposit account, into which all of the subsequent payments were made. These various account identifiers are apparent from the earliest of the available documents, the July and December 1997 letters. Their use is apparent in the [Bank’s] accounting style documents referred to in paragraph 28 above. In addition, the “Application / Extension” documents referred to in paragraph 28(f) implicitly assume the prior existence of the designated loans and explicitly use the account numbers for the existing loans….

105.    I infer from this information that [the Bank] did record the asserted loans within its ordinary management and accounting systems. I would infer that it is unlikely to have done so unless the reality was that it had advanced the loan funds as [the appellant] asserts. I have previously referred to the fact that [the Bank] was a large Israeli bank, and a wholly owned subsidiary of an even larger Israeli bank that was a publicly listed corporation. I would infer the likelihood that such an institution would have appropriate management and accounting systems and a lawful, responsible, ethical approach to the conduct of its business. The expert witnesses, in their descriptions of [the Bank], confirmed the reasonableness of drawing such an inference. The significance of this inference is that, to my mind, it makes it unlikely that [the Bank] would, in 1997, have engaged in a procedure of merely contriving the appearance of a genuine loan transaction with [the appellant]. It also makes it unlikely that any such contrivance would have escaped detection over the whole of the subsequent years. Finally it makes it unlikely that, in response to [the appellant’s] repeated enquiries, including enquiries that came to the attention of [the Bank’s] legal department and senior managers who were apparently not involved in the events of 1997, [the Bank] would have continued dishonestly to assert the existence of genuine loans.

37    Nonetheless, the Tribunal recognised that “the apparently substantial interest payment irregularities” raised a question whether the appellant could discharge its onus of proof with respect to the reality of the asserted loan transactions. Accordingly, the next section of its reasons was headed “The Interest Payment Issues”. It said that it was at first troubled by a lack of correspondence between the Bank’s interest statements, provided to the appellant in January in 2008, and the interest payments which were (on the appellant’s case) in fact made. However, with respect to this lack of correspondence, the Tribunal said that “its disquieting appearance fades considerably under further analysis”. It undertook such analysis, and provided a detailed commentary about the alleged interest payments set out in the table from which an extract appears in para 8 above. Subject to two qualifications, the Tribunal did not regard the apparent discrepancies as being of much significance. Those qualifications related to “two puzzling aspects” of the differences between the Bank’s statements and the payments in fact made. For present purposes, it is not necessary to identify them, or to rehearse the terms in which the Tribunal resolved them. It is sufficient to say that, after careful consideration, it did so. The Tribunal said:

116.    I accept that [the Bank] regards [the appellant] as having fully discharged its interest obligations. I regard that acceptance as somewhat ambiguous, given [the Bank’s] evident reluctance to provide evidence from any of its staff in the present proceedings. Furthermore, even accepting the likely mathematical correctness of the Commissioner’s evidence, I do not regard the disputed amount contended for by the Commissioner as sufficiently material to be of any real probative value in assessing the reality of [the appellant’s] asserted loans. It represents a tiny proportion of the $6.8m total payments [the appellant] made, and a tiny proportion even of the $2.05m that [the appellant] asserts it paid by way of interest on the contentious loans.

38    The next section of the Tribunal’s reasons dealt with the Bank’s personnel, and particularly with their refusal to give oral evidence in the case. The Tribunal first considered the circumstances of Mr Septon, who had been, it seems, Mr E Binetter’s main point of contact at the Bank. The Tribunal’s conclusion on this subject was expressed as follows:

125.    Despite the probably uninviting prospect of becoming involved as a witness in contested proceedings of a foreign jurisdiction, and notwithstanding a lack of information about [Mr Septon’s] personal circumstances (other than the fact of his retirement) it is perhaps surprising that [Mr Septon] was not willing to cooperate by giving evidence in the present proceedings. There was no evidence about the nature of any restrictions to which [Mr Septon] thought he might be subject, either under Israeli law or (and perhaps more significantly) under the terms of this former employment with [the Bank]. I would be surprised if there were any effective prohibitions that would have restrained him from giving evidence of the objective facts of loan transactions, at the request of the borrowing customer. However, I also recognise that the course of cross examination is unpredictable, and that [Mr Septon] might have been reluctant to volunteer to give evidence after having been told that his former employer was unwilling to participate in the proceedings. Consequently, in the absence of further explanation from [Mr Septon], neither surprise nor disappointment about his refusal to give evidence in the proceedings, justifies any adverse inference being drawn against [the appellant] in the present proceedings.

39    The Tribunal then referred to the foreign exchange department manager at the main Tel Aviv branch of the Bank, Israel Zamir. He too had refused to give oral evidence, but had provided the appellant with statutory declarations which were received into evidence, and which the Tribunal regarded as significant for reasons which it gave. The Commissioner urged the Tribunal to treat the material in the declarations with scepticism, particularly in the light of Mr Zamir’s refusal to make himself available for cross-examination. The Tribunal recognised that there was, in the circumstances, “the need for appropriate scepticism”, but added that that did not detract from the conclusion which it had formed about the significance of the declarations. It said that much of the information attributable to Mr Zamir was consistent with other evidence, or derived from the Bank’s regular administrative systems. The Tribunal accepted that it was unfortunate that the parties had not had the opportunity to cross-examine Mr Zamir, but expressed the satisfaction that the appellant “persistently tried to induce his participation as a witness”.

40    In the next section of its reasons, headed “The Limited Assistance [the Bank] Provided to [the appellant]”, the Tribunal referred to the Commissioner’s criticism of the appellant’s case to the extent that it did not involve the full cooperation of the other party to the alleged loan transactions. The Tribunal took the view that the Commissioner’s criticism of the Bank’s limited assistance to the appellant was “not a substantial consideration”, having regard to the following passage in its reasons:

138.    There is an undeniable element of validity in the Commissioner’s criticism. But attributing to it a properly balanced significance is a rather more difficult, and problematical, exercise. As I have endeavoured to point out, such objective and contemporaneous records as do exist are consistent with the reality of the asserted loan transactions, notwithstanding the thrust of some of the expert evidence I reviewed earlier in these reasons. Furthermore, as I explain later in these reasons, (where I deal with the “overseas assets” hypothesis – see paragraph 140 below) I consider that there is no factual basis for the hypothesis that the 1997 fund transfers were merely illusory loans by [the Bank], as the Commissioner’s particulars assert. (I have referred to the particulars in paragraph 8 above.)

41    There was then a discussion, by the Tribunal, of the question whether the appellant had any assets outside Australia. The relevance of that question does not need to be presently explored, but it was the Commissioner’s case that the appellant did have such assets, while the appellant contended that it did not. On this question, extensive evidence was given by Mr A Binetter and by Mr E Binetter’s brother Emile and widow Margaret. In addition, the Tribunal had documentary evidence which bore on this question. After lengthy consideration of this evidence, the Tribunal resolved that question of fact favourably to the appellant’s position.

42    Next in its reasons, the Tribunal dealt with the Commissioner’s criticism of Mr A Binetter’s credibility. In doing so, it related that witness’s evidence to the documentary and other evidence which it had in the case. It rejected the Commissioner’s criticism.

43    The Tribunal then dealt with the Commissioner’s criticism of the appellant for having made inadequate attempts to require the Bank to produce better documentation than it had. The Tribunal held that the fact that the appellant did not take proceedings against the Bank, or make any more formal demand for the Bank to produce its records, was a relevant consideration. It held, however, that it was “not a matter of much significance, against the totality of the evidence”. The Tribunal said:

196.    Against this background I very much doubt that [the appellant] could reasonably have expected to obtain any more meaningful information by making formal demands of [the Bank]. Although the [Bank’s] relevant officers refused to co-operate by giving evidence in the present proceedings, I am satisfied that it would not be correct to conclude from the evidence that they were either deliberately or intentionally withholding material information from [the appellant]. I am also satisfied that it would be wrong to conclude that [the appellant] refrained from making any formal demand on [the Bank] because of any apprehension that further production by [the Bank] would undermine its assertions about the reality of the loans, or the interest payments it claims to have made.

44    Having dealt, briefly, with a particular hypothesis, put forward by the Commissioner, as to a possible non-Australian source of security which was provided to the Bank, the Tribunal then gave consideration to the burden of proof. It noted the Commissioner’s submission that the appellant could not discharge its burden merely by criticising the Commissioner’s reasoning process, but that it had to demonstrate that the Commissioner’s assessment was excessive. The Tribunal accepted the generality of that basic proposition. It continued:

But it is immaterial in the circumstances of the present case. There is in my view simply no factual basis for the Commissioner’s assessment in relation to the characterisation of the 1997 fund transfers as [the appellant’s] assessable income. [The appellant’s] evidence demonstrates convincingly that it conducted no business other than the onlending of funds to other entities related to [Mr E Binetter]. It did not conduct any income producing activities before it received the funds from [the Bank]. There is no factual circumstance that would permit [the appellant’s] receipt of those funds, even in the unlikely event that [the Bank] held some kind of realisable security on which it had relied in making the transfers, to be characterised as income.

45    With respect to the question of what had to be proved, and by whom, the Tribunal set out the competing positions of the Commissioner and of the appellant as follows:

210.    The Commissioner contended [the appellant] could only discharge its burden of proof by showing that (i) it obtained the contentious funds as loans from [the Bank], (ii) there was no security for the loan, (iii) the only security for the loans were personal guarantees by [Mr E Binetter] and (iv) [the Bank] did not provide the funds as a result of any kind of “back to back” dealings with other banks or as a result of some kind of security having been provided by some entity related to [the appellant]. The Commissioner characterised this fourth matter as one that was a crucial matter for [the appellant] to prove. Moreover, it was something that [the appellant] could not prove by merely partial disclosure of its dealings with [the Bank], and by inference from loan dealings involving other [Mr E Binetter] related entities.

211.    [The appellant] accepted that it had the burden of establishing that the Commissioner’s assessments were excessive. It contended that doing so involved establishing (i) the impugned funds were borrowed, (ii) that it applied the funds for income producing purposes, and (iii) it remitted interest payments to the lender in discharge of payment obligations under the impugned loan transactions.

46    The Tribunal gave some consideration to the legal framework which governed its fact-finding process, referring to s 14ZZK of the Taxation Administration Act 1953 (Cth) (“the Administration Act”) and to s 33(1AA) of the AAT Act. Essentially, it seems that the Commissioner was urging upon the Tribunal the proposition that it was incumbent upon the appellant not only to establish a positive case, on the balance of probabilities, that the 1997 funds transfers were loans, but also to exclude, on the probabilities, each of the other alternative explanations, or hypotheses, advanced on behalf of the Commissioner. The Tribunal rejected that approach, but did give consideration to the possibilities and hypotheses upon which the Commissioner relied. Ultimately, according to the Tribunal, there was only one question which needed to be determined. The Tribunal said:

220.    The critical matter for [the appellant] to establish is the reality of the loan transactions and liabilities. That task is complicated by obscurity of the evidence about the nature of any security for the loans. But it is incorrect to say that [the appellant] must show, as independent matters additional to the reality of the loan transaction and liabilities, that there was no security for the loans, or no security other than a personal guarantee. It is also incorrect to say that [the appellant] must establish that there was no “back to back” arrangement.

And:

226.    In the absence of any, or at least any persuasive evidence, of security for the contentious loans the Commissioner is quite correct to hypothesise that the explanation for the fund transfers [the Bank] made, and perhaps for those asserted repayments that [the appellant] made, may lie in “back to back” arrangements and in some kind of right of set off over some other asset. But that hypothesis has to be assessed against the available evidence. The purpose of that assessment is not to cast an affirmative burden on the Commissioner. Neither does it involve subjecting [the appellant] to the positive burden of disproving the existence of any arrangement consistent with the hypothesis. [The appellant’s] relevant onus is to satisfy the Tribunal that the loan liabilities were real. The quality of [the appellant’s] evidence in tending to contradict the hypothesis of “back to back” arrangements is relevant to assess. But that evidence does not have to go so far as to negate the mere possibility that such an arrangement might have existed. Neither is it the case that [the appellant] cannot discharge its onus of proof in the absence of complete disclosure of all [the Bank’s] records. The ultimate question remains whether on the available evidence, including any inferences that can and should be drawn from the absence of evidence that it was within [the appellant’s] power to produce (and ignoring any question of the destruction or loss of relevant records) [the appellant] has satisfied the Tribunal of the reality of the contentious loans.

227.    The answer to that question inevitably involves testing the hypothesis, of some other explanation for the contentious loans, against the available evidence. It is here, in my opinion, that the strength of [the appellant’s] case lies. There is simply no evidence of any other kind of transaction. As the Commissioner’s submissions implicitly accept, perhaps the most readily conceived possible explanation for the contentious loans is the existence of some other asset, located in Israel, to which [the Bank] could have resorted. But not only is there no evidence of any such asset, I accept the evidence of [Mr A Binetter] and [Mrs Binetter], that they were not aware of any such asset. Their ignorance of any such asset is, to my mind, powerfully persuasive in justifying satisfaction that no such asset existed.

47    The Tribunal made it clear that it was not suggesting that the Commissioner had any onus of proof. But, in a situation in which the appellant had led evidence which the conclusion for which it contended was open, the Tribunal took the view that the Commissioner had to do more than merely to advance, without evidence, some other explanation or possibility which the appellant then had to exclude. In conclusion under this part of its reasons, the Tribunal said:

231.    Notwithstanding the Commissioner’s various submissions, [the appellant’s] evidence satisfies me that it had no asset, nor did it ever assume any liability, consistent with any kind of “back to back” arrangement. Consequently, whilst I do not consider that [the appellant’s] evidence had to go so far as positively disproving even the possibility of such an arrangement, I am satisfied that [the appellant’s] evidence does discharge its onus of proving that the contentious loans were real and that its asserted liabilities for repayment and interest reflect the intended and enforceable reality of the transactions with [the Bank].

48    Finally, the Tribunal dealt with the deductibility of the interest payments which the appellant claimed to have made. On the basis that it had held that the 1997 transfers were loans, it was readily persuaded that the transfers in favour of the Bank had the character of interest.

49    In its formal decision published on 6 September 2011, the Tribunal set aside the Commissioner’s decisions under review, insofar as they included in the appellant’s assessable income, in any of the years to which they related, any part of the funds transfers by the Bank in June, July and December 1997. The Tribunal also set aside those decisions insofar as they disallowed deductions for interest liabilities which the appellant incurred to the Bank in relation to those funds transfers.

The proceeding before the primary Judge

50    The Tribunal’s conclusion that the funds transfers of 1997 were in the nature of loans by the Bank to the appellant lay at the centre of the Commissioner’s challenge in his appeal under s 44 of the AAT Act. His first two grounds of appeal dealt with the sufficiency of the evidence before the Tribunal to support the holding referred to, in circumstances where the appellant bore the onus of proof. The grounds were expressed as follows:

Onus of proof

1.    The Tribunal erred in law in applying s 14ZZK(b)(i) of the TAA 53.

Particulars

The Tribunal:

(a)    assumed that the “likely reality” of the transfer of funds was a loan from MDB to the Respondent: [93]-[98];

(b)    required the Commissioner:

(i)    to establish a factual basis for his assessment in relation to the characterisation of the 1997 fund transfers: [208] and [215]; and/or

(ii)    to provide the alternative analysis for the contentious loans: [227] - [230].

(c)    held at [213] that Rawson had to show the result of the original decision was not the appropriate outcome of the exercise of the decision-maker’s statutory function and powers and this was consistent with Bailey v Federal Commissioner of Taxation (at [214]);

(d)    held at [215] that the review process includes being satisfied that there is a proper basis for deciding that the facts as found by the Tribunal give rise to the amount of the liability in the impugned decision;

(e)    held at [226] that Rawson was not subjected to the burden of disproving the existence of any arrangement consistent with the hypothesis that explains the fund transfers made; and

(f)    held at [226] that the ultimate question was whether Rawson had satisfied the Tribunal of the reality of the contentious loans.

Findings based on no evidence or on evidence improperly admitted

2.    The Tribunal erred in law in finding that Rawson had satisfied the Tribunal that the assessments were excessive in circumstances where there was no evidence to support that finding or to the extent the Tribunal relied on material before it, it should not have been relied upon.

Particulars

The Tribunal:

(a)    found, contrary to the evidence, and the inferences available from the evidence, that there were documents that established the existence of genuine loans, as itemised at [28];

(b)    found, that Mr Erwin Binetter had a certain net worth and that this was relevant;

(c)    accepted that there was sufficient contemporaneous documentation when there was none;

(d)    relied on statutory declarations of Mr Zamir;

(e)    accepted that there was no security or personal guarantee for the loan but did not take that into account;

(f)    relied on a finding that the funds could not have been the Respondent’s which was irrelevant;

(g)    found that the respondent did not have assets in Israel, or elsewhere, and concluded that was a determinative factor;

(h)    found that the failure to pay interest and the anomalies in payment as required was immaterial; and

(i)    accepted that the funds were used by Mr Erwin Binetter-related entities and therefore had a business purpose.

51    The Commissioner’s third and fourth grounds of appeal were expressed as being in the alternative to the second and, omitting for the moment the particulars to the third, were expressed as follows:

3.    In the alternative to ground 2, the Tribunal erred in law in finding that a regulated Israeli Bank acting prudentially would have provided a loan of $4.75 million to Rawson as an Australian company with share capital of $2 and no net assets, without obtaining either security or any personal guarantee in circumstances where there was no evidence to support that finding or to the extent the Tribunal relied on material before it, it should not have been relied upon.

4.    In the further alternative to ground 2, the Tribunal, in concluding that the payments made by MDB to the Respondent were loan payments and the payments made by the Respondent were interest payments made on the loans implicitly found that MDB, a regulated Israeli bank loaned $4.5 million on an unsecured basis to an Australian company with no assets, such a finding was perverse, irrational and/or so unreasonable no reasonable decision maker would have made it.

52    The Commissioner’s Notice of Appeal then asserted that the Tribunal had failed to take certain identified relevant matters into account, had failed to make findings on certain factual questions which were in controversy before it, had “adopted a process of reasoning that was so illogical, irrational or lacking a basis in findings or inferences of fact supported on logical grounds that its reasoning was affected by errors of law” and had denied the Commissioner procedural fairness.

53    In his reasons of 17 July 2012, the primary Judge held that the Tribunal’s characterisation of the receipt by the appellant of funds from the Bank in 1997 as loans was not open on the evidence. That being the case, it followed that the appellant had not discharged its onus of proof under s 14ZZK(b)(i) of the Administration Act. His Honour said:

19.    The Tribunal’s error seems to me to be a product of the way in which the Tribunal approached the issue. It seems to have reasoned from a position that [the appellant’s] contention that the funds transferred to it in Australia in 1997 were by way of loans from [the Bank] should be accepted unless the “unusual” features and circumstances of the loans “contradicted” or “cast doubt” on their “reality” in fact. It concluded that the “unusual” features and circumstances did not contradict or cast doubt on that characterisation, but it did not consider whether there was any other alternative explication consistent with those “unusual” features and circumstances; it should have.

His Honour then proceeded to provide the “analysis” which led to that conclusion.

54    His Honour commenced by noting that “[t]he essence of a loan of money from A to B is a corresponding contemporaneous obligation on the part of B to repay the money transferred from A to B”, and continued:

Absent that obligation, the transfer of the money from A to B is something else – a gift, a payment by direction, a payment or repayment of an anterior obligation – but it is not a loan. The obligation of repayment is not proved by subsequent payment of the same amount, let alone a different amount, from B to A; that may be explicable by reference to another obligation or circumstance having nothing to do with the original payment from A to B. Rather, the obligation of repayment is proved by the terms of the contract under which the money was transferred from A to B.

His Honour said:

21.    In the present case, there was no evidence before the Tribunal of any such contract nor, otherwise, of any obligation on the part of [the appellant] to repay the amounts it received through [the Bank] in 1997. In certain circumstances this may not be fatal to proving that the funds transferred were subject to an obligation to repay and were therefore by way of loan; but that will not always be the case. For example, where, as here, the alleged lender refrains from giving evidence that the transfers of funds were by way of loans, or subject to an obligation on the part of the recipient of the funds to repay them, such a conclusion may not be open to be inferred if other objective features or circumstances suggest an alternative explanation.

His Honour said that the transfer of funds to the appellant in 1997 might have been “equally explicable” as a transfer from an account of the appellant itself with the Bank in Israel; and that such an explanation was “far more likely to represent what the Tribunal called ‘the reality and substance’ of the fact”. His Honour said that, unless the appellant could show that the funds did not have the character of income, it would not have discharged its onus to show that the assessments were excessive.

55    His Honour identified the reasons why a transfer of the appellant’s own funds from an account with the Bank in Israel “more likely represent[ed] ‘the reality and substance’ of the fact[s]” than the conclusion reached by the Tribunal as follows:

(1)    There was no evidence that the transfer of funds to Rawson’s Australian account aggregating in total AUD 4.75 million, a substantial sum of money, carried with it any obligation of repayment to MDB; no agreement, either in writing or oral, imposing an obligation of repayment of Rawson was adduced in evidence.

(2)    The alleged lender, MDB, was not prepared to have any of its officers give evidence in those terms, apart from furnishing representatives of Rawson with documents which went into evidence through such representatives but did not establish any obligation of repayment on Rawson’s part. It is odd that a bank which was willing to allegedly lend Rawson a substantial sum of money, unsecured and in circumstances where Rawson did not have any resources to meet its obligations on the alleged borrowing, was not prepared to have one or more of its officers corroborate the alleged character of the transactions. That oddity evaporates under the alternative explication.

(3)    There was no evidence that Rawson or any other entity, affiliated or not, gave security for the transfer of funds to Rawson’s Australian bank account, whether by way of charge, lien, set-off or surety. That is entirely consistent with the alternative explication of the funds being Rawson’s funds, and not MDB’s funds, before they arrived in Australia.

(4)    Rawson had no assets in Australia nor any apparent capacity to repay the alleged loans, but that is irrelevant under the alternative explication.

(5)    No withholding tax was withheld from the alleged interest payments, at least until the transactions fell under the scrutiny of the Commissioner, and even then there was no evidence of such withholding. But there is no liability to withhold under the alternative explication.

(6)    That the alternative explication is more likely “the reality and substance” of the fact is a view to which one is impelled by the irregular making of such payments without any protest or action on the part of MDB for such delay or non-payment. Non-payment of alleged interest over the twelve year period of the loans for separate periods of four years and three and a half years respectively without any protest or action on the part of MDB is explicable if the remittances are no more than transfers from one Rawson bank account to other Rawson bank accounts.

56    In the light of his Honour’s conclusion as to the proper characterisation of the funds transfers in 1997, it followed that the appellant had not shown that the transfers were not in the nature of income; nor that the transfers by the appellant over the ensuing years were deductible expenses by way of interest. His Honour allowed the Commissioner’s appeal. He did not, however, set aside the decision of the Tribunal (as contemplated by s 44(5) of the AAT Act), an omission which, in the light of the absence of a cross-appeal on behalf of the Commissioner, may prove problematic if otherwise we were disposed to reject the appellant’s grounds of appeal.

The Appeal

57    The appellant’s grounds of appeal were centred around the proposition (expressed in terms in Ground 1) that the primary Judge had been in error to have held that the Tribunal’s finding that the funds transfers in 1997 were loans was not open on the evidence, or that there was no evidence capable of supporting that finding. In elaboration of the point, the appellant contended on appeal that the primary Judge had not considered the evidence that supported the inference that the 1997 transfers were by way of loans. Various other specific aspects of his Honour’s reasoning were attacked in the appellant’s Notice of Appeal, but it is not necessary to refer to them further at this stage.

58    The Commissioner filed a Notice of Contention, by which he indicated that he did not seek to cross-appeal from any part of the judgment at first instance, but in which he contended that the primary Judge erred in one respect, and that his Honour’s judgment might be upheld on grounds other than the no-evidence point upon which that judgment substantially turned.

59    As mentioned previously, the primary Judge took the view that the appellant had not, before the Tribunal, excluded the possibility that the transfers of 1997 were in the way of income. It was not, his Honour effectively held, sufficient for the appellant to have led evidence which was consistent with the transfers having been loans: if there might also have been some other explication for the transfers, the appellant ought not to have been held to have proved that they were not income. The other explication which his Honour considered was open – indeed, which his Honour considered was “far more likely” to represent reality – was that the transfers were of the appellant’s own funds, held in Israel, being returned to its bank account in Australia.

60    I accept, with respect, that it would be an error, correctable on appeal, for a tribunal of fact to make a finding, in favour of the party who carried the onus of proof, upon evidence which reached no higher a level of persuasion than that it was consistent with the finding, while also being as consistent, or more consistent, with a different finding. But the correction of such a finding would be done by an appellate court having jurisdiction with respect to questions of fact. The primary Judge was not sitting as such a court. His Honour could reverse the Tribunal in the present case only on a question of law. To disagree with the Tribunal on matters of fact was not enough. Neither, in my respectful view, was it enough for his Honour to have identified an explication for the primary facts, other than that favoured by the Tribunal, which he considered to be a likely one, or even the most likely one. Deciding the facts by reference to the likelihoods was not the function of the court under s 44 of the AAT Act.

61    So long as the Tribunal did not otherwise err in point of law, its conclusion on the question of fact which arose in the present case was not to be disturbed unless it was not reasonably open to it on the evidence in the case. The analysis of the primary Judge at least commenced by reference to that truism, to the extent that his Honour expressed the conclusion that the Tribunal’s finding was not open on the evidence. However, the passage which I extracted from his Honour’s reasons at para 55 above demonstrates that he ultimately came to the point of reviewing the Tribunal’s reasons in the manner of a court having appellate jurisdiction with respect to facts as well as law. That would not be fatal, of course, if his Honour was otherwise correct in his conclusion that the Tribunal’s finding was not open on the evidence. But I do not, with respect, consider that that conclusion was correct; moreover, there are some aspects of the reasoning process by which his Honour reached that conclusion which are problematic.

62    Before turning to those issues, it is necessary to say something about the legal framework within which the Tribunal’s fact-finding function was set. The Tribunal is not a court, and is not bound by the rules of evidence: AAT Act, s 33(1)(c). It must, however, proceed by reference to “rationally probative evidence” rather than on mere “suspicion or speculation”: Minister for Immigration and Ethnic Affairs v Pochi (1980) 31 ALR 666 at 685. If it does so, its finding on a question of fact will not be assailable in a proceeding under s 44 of the AAT Act unless that finding was not reasonably open on the evidence. Where the finding has been made by inference, no error of law will have been made so long as there was some basis for the inference: Australian Broadcasting Tribunal v Bond (1990) 170 CLR 321 at 326. The nature and limits of the Tribunal’s function in these and allied respects were described in detail by Greenwood J (Weinberg J agreeing) in Wecker v Secretary, Department of Education, Science and Training (2008) 168 FCR 272 at 294-299.

63    Counsel for the Commissioner sought to characterise his Honour’s holding that there was no evidence of any loan contract, or of any obligation to repay, as a holding that there was no “direct” evidence to that effect. It was said that his Honour accepted that, in some cases, evidence from which the relevant factual conclusion might be inferred would travel the required distance. Counsel were, in this respect, referring to the second passage which I have set out at para 54 above. Counsel sought to uphold his Honour’s conclusion on the no evidence ground as based on the view that the Tribunal’s finding was mere conjecture from fragments of evidence, the value of which rose no higher than a state of consistency with the conclusion for which the appellant contended. It was submitted that his Honour was correct to hold that the finding was not open on the evidence.

64    It is true that there was no direct evidence of the existence of a loan agreement between the appellant and the Bank. The Tribunal well appreciated that. Its finding that the transfers made in 1997 were by way of loans was, in the circumstances, one of inference. Since that finding was attacked in the proceeding below as having been the result of an error of law, the question was, or should have been, whether there was some rational basis for the inference in the evidence before the Tribunal. Any treatment of that question should, therefore, have proceeded by way of a consideration of the evidence before the Tribunal which formed the basis of its inference, that is to say, the evidence to which I have referred at paras 13-32 above. The primary Judge did not proceed in that way. His Honour held that the Tribunal’s finding was not open to it without having given consideration to the primary evidence upon which that (inferential) finding was based. That was, in my respectful view, an error on the part of his Honour. If his conclusion is to be upheld, it must be for reasons other than those which supported his judgment of 17 July 2012.

65    Was the inference drawn by the Tribunal open to it on the evidence? The circumstances which might make one sceptical about the appellant’s case that a loan existed are referred to by Jagot J in para 79 of her Honour’s reasons, and they are quite powerful ones. On the other hand, such material as the appellant did put before the Tribunal clearly indicated the existence of the loan. That material included documents that pre-dated the emergence of any concern by the Commissioner about the legitimacy of the tax treatment of the money flows as between the appellant and the Bank. As it seems to me, the Commissioner’s case necessarily involved the proposition that there had been, from the outset, a fraudulent paper trail laid down by the appellant, with the connivance of the Bank, in order to achieve an advantage under Australian revenue law. We were assured by counsel for the Commissioner that such stratagems are “an extremely common practice”. Whether or not that is so, it does not derogate from the gravity of the allegation upon which the Commissioner’s case was implicitly based in the Tribunal.

66    As indicated previously, it was submitted on behalf of the Commissioner that the Tribunal’s error lay in its having drawn an inference by reference to material which was no more than consistent with the factual conclusion for which the appellant pressed. It was put that the material before the Tribunal was “evenly balanced”, and –

… if you’ve got the material upon which one or another inference is capable of being drawn and they’re evenly balanced, then to prefer one over the other is guesswork or mere conjecture.

I would not accept that submission. In hard cases, it is often the function of a Tribunal of fact to resolve controversies as between relatively “evenly balanced” evidentiary material. Once a finding is made one way or the other, it resolves the issue of even balance. It is for the tribunal of fact to make that finding, and no error of law is disclosed merely by reason that the finding was made upon primary materials which appeared to be evenly balanced. It is, of course, another matter altogether if it appears that the finding was the result of guesswork or conjecture, but such a conclusion is not to be reached merely because the tribunal had evenly balanced material before it.

67    As it happens, I take the view that this submission on behalf of the Commissioner proceeded at a rather high level of abstraction apropos the actual reasons of the Tribunal in the present case. The case was not one of evenly balanced evidence. All of the evidence, with respect to the actual communications and records of the appellant and the Bank at least, pointed to the conclusion that the transactions of 1997 were loans. The “balance” to which counsel for the Commissioner were apparently referring was not between evidence of that kind and evidence that suggested that the transactions were of some other character. Rather, the so-called “balance” was between the evidence relied upon by the appellant on the one hand, and the omissions which that evidence involved and the commercial improbability of the Bank having been prepared to lend money in the circumstances disclosed only by that evidence, on the other hand. The Tribunal was faced with a situation in which the positive evidence which it had suggested (and, limited though the evidence was, suggested unambiguously) that the transfers were loans, but in which there were quite powerful arguments why that evidence should not be taken at face value.

68    That was a normal fact-finding situation. Any submission that the Tribunal resolved the factual issues that were before it on the basis that the evidence was so evenly balanced that the ultimate finding turned, in effect, on the toss of a coin, or upon speculation or conjecture, would be quite inconsistent with the detailed and careful – and, it must be said, wholly conventional – inferential reasoning which supported its decision in the case. In the light of the material to which I have referred earlier in these reasons, it was reasonably open to the Tribunal to infer that the funds transferred by the Bank to the appellant in 1997 were in the way of loans. It may not be the conclusion that every decision-maker would have reached, but it was open on the evidence, and should not have been disturbed in a proceeding under s 44 of the AAT Act.

69    Although not the subject of his Notice of Contention, the Commissioner sought to uphold the judgment of the primary Judge by reference to what was said to be an error in the approach of the Tribunal, identified by his Honour in the passage which I have set out at para 53 above. As put by the Commissioner in his outline:

[I]t is clear that the Tribunal, rather than identifying whether the appellant had discharged its onus in establishing whether the transfers were loans, approached its task by assuming that the transfers were loans, following which it then addressed each of the features the respondent relied upon as proof the transfers were not loans only for the purpose of explaining why they did not displace the initial assumption.

Had the Tribunal proceeded in this way, it would have amounted to an error of law, since it was the appellant which bore the burden of proving that the Commissioner’s assessments were excessive under s 14ZZK(b)(i) of the Administration Act. However, is the Commissioner’s submission, set out above, a fair characterisation of how the Tribunal proceeded?

70    I do not think so. The Tribunal did not commence by assuming that the 1997 transfers were loans. Rather, it commenced by considering the evidence on which the appellant relied. Indirect though it was, that evidence reasonably provided a basis for the inference that the transfers were indeed loans. In his case against the drawing of such an inference, the Commissioner highlighted, and stressed, all the circumstances that, in his submission, made the inference an improbable one. Necessarily, the Tribunal had to consider those circumstances and their contribution to the resolution of the question that was before it. On one view of it, this gave the Tribunal’s reasons the colourable appearance of dealing mostly with the evidentiary arguments of the Commissioner against an assumed default position that the transfers were loans. But such a view would not withstand examination by someone who had carefully read those reasons with an understanding of the case as a whole. Indeed, I am disposed to view the totality of the reasons as involving a conventional fact-finding exercise, albeit a difficult one, in which the moving party was first required to establish the facts upon which its inferential case was based, and then the weaknesses in that case were investigated by reference to the evidence relied on, and the arguments advanced, by the responding party.

71    It is as clear as may be that the Tribunal was conscious of the appellant’s burden of proof under s 14ZZK of the Administration Act and undertook its fact-finding task accordingly.

The Commissioner’s Notice of Contention

72    With respect to the Notice of Contention filed by the Commissioner, I agree with what has been written by Jagot J, to which I desire to add only the following brief comments on the natural justice point.

73    Although not a court and not bound by the rules of evidence, the Tribunal “is under a duty to observe the requirements of natural justice”: McMullen v Commissioner for Superannuation (1985) 61 ALR 189 at 208. That duty does not necessarily involve the extension of the opportunity of cross-examination to any party against whom evidence is called. But it may, in particular circumstances, do so. Speaking generally of administrative inquiries, in O’Rourke v Miller (1985) 156 CLR 342 at 353, Gibbs CJ said (with the agreement of Mason and Dawson JJ):

It was submitted that the appellant should have been given an opportunity to cross-examine, or at the very least, to confront, the two girls who made the complaints. In support of these submissions we were referred to Barrier Reef Broadcasting Corporation Pty. Ltd. v. Staley (1978) 52 ALRJ 493 and Reg. v. Board of Visitors of Hull Prisoners; Ex parte St. Germain [1979] 1 WLR 1401. Those were cases in which there was a hearing before a tribunal which refused to allow the cross-examination of persons who in the one case had given evidence and in the other had made hearsay statements and the decisions depended, as all cases of this kind do, on the circumstances of the case, the nature of the inquiry, the rules under which the tribunal was acting and the subject-matter being dealt with: see Russell v. Duke of Norfolk [1949] 1 All ER 109. Even when there is a hearing before a tribunal it does not follow that a person affected necessarily has a right to cross-examine witnesses: see National Companies and Securities Commission v. News Corporation Ltd (1984) 156 CLR 296. Natural justice does not require the application of fixed or technical rules; it requires fairness in all the circumstances.

74    The judgment of Wilcox J in Australian Postal Commission v Hayes (1989) 23 FCR 320 has occasionally been taken as providing encouragement for the view that cross-examination of witnesses called to give evidence before the Tribunal must be permitted. The actual question which came before the court in that case was whether a respondent to a claim for compensation had been denied procedural fairness when the Tribunal ruled that a video which it proposed to put to the claimant under cross-examination be played in her evidence-in-chief. There was no suggestion that she would not be cross-examined, but Wilcox J accepted the contention that, by trammelling upon the way in which counsel for the respondent (to the claim) proposed to use the video in cross-examination, the Tribunal had denied it procedural fairness. The case is obviously no authority for the proposition that to admit evidence without the other party having the opportunity to test that evidence by cross-examination must necessarily amount to a denial of procedural fairness.

75    That proposition seemed at times to inform the submissions made on behalf of the Commissioner under this ground of his Notice of Contention. I say that because, during a hearing in which time was conspicuously short, counsel had to be pressed by the court to identify the actual evidence with respect to which it was claimed that their client had a right to cross-examine, or with the strategic place of that evidence in the fact-finding function which was committed to the Tribunal. Only by doing both of these things could we hope to understand whether the Tribunal’s response to the rather unusual circumstances which attended the appellant’s attempts to make its case that the 1997 transfers were loans gave rise to a denial of procedural fairness. Here it must be remembered that the Tribunal neither denied the Commissioner the right to cross-examine any witness nor curtailed the exercise of that right. Rather, what was said to be the Tribunal’s error was to permit the appellant to rely on certain, ex facie legitimate, documents when those involved in creating and/or receiving them were unavailable: in the case of Mr E Binetter because he was dead and in the case of the staff of the Bank because they were in Israel and thus beyond the reach of the compulsive process of the Tribunal (and had refused to come voluntarily to Australia to give evidence).

76    As Jagot J makes clear in her reasons in this appeal, the only real force of the evidence to which the Commissioner objected in the Tribunal was that it brought forward certain documents which were business records on any view. Whether the Tribunal accepted the appellant’s explanations for not having produced – as it happens, for not having been able to produce – the witnesses in question for cross-examination was, I consider, a subject wholly within the discretion of the Tribunal on a question of procedure. I agree with Jagot J, for the reasons she has written as well as for those set out above, that we are not obliged to conclude that the result of the course followed by the Tribunal was a denial of procedural fairness.

Disposition of the Appeal

77    I would allow the appeal, set aside the orders made by the primary Judge on 17 July 2012, order that the Commissioner’s appeal from the Tribunal be dismissed, and order that the Commissioner pay the appellant’s costs both before his Honour and on appeal.

Associate:

Dated:    5 March 2013

REASONS FOR JUDGMENT

JAGOT J:

78    This is a difficult case.

79    One reason it is difficult is that, after a hearing over nine days and through a meticulous analysis of some 77 pages of the whole of the material before it, the Administrative Appeals Tribunal (the Tribunal) reached a conclusion which seems inherently implausible – that the appellant, Rawson Finances Pty Ltd (Rawson) had proved on the balance of probabilities that in 1997 an Israeli bank lent $4.75 million to an Australian company with an issued share capital of $2.00 without having any form of security or guarantee and thereafter took no step to require the payment of interest on the outstanding loan amounts of about $1.75 million over two periods of more than three years each between 2001 and 2009, the loans ultimately having been fully repaid by December 2009. This conclusion was reached despite: – (i) the lack of any loan agreements, (ii) the lack of any witness who had any involvement in the establishment of the loans being called to give evidence, (iii) the evidence that Israeli banking practices usually would require security for such loans, (iv) Rawson’s lack of financial capacity at the time of the loans to repay the money, and (v) the lack of any action taken by the bank despite Rawson having failed to pay interest for some seven and a half years in total out of the 12 years over which the loans existed.

80    By contrast, after a hearing confined to a question of law on an appeal under s 44(1) of the Administrative Appeals Tribunal Act 1975 (Cth) (the AAT Act), the primary judge concluded that it was not open on the evidence for the Tribunal to conclude that the funds transferred by the Israeli bank to Rawson in 1997 were by way of a loan because, in the circumstances of this case, the transfer of funds “may be equally explicable” as a transfer through the Israeli bank of Rawson’s own money and, indeed, an analysis of the evidence made it far more likely that this was so than the conclusion reached by the Tribunal. The primary judge’s conclusion that it was far more likely on the evidence that the funds transferred were not a loan to Rawson, given the circumstances to which brief reference has been made above and which the Tribunal itself considered warranted the characterisation of the funds transfer as at least “unusual”, has the advantages of immediate plausibility and apparent common sense. The primary judge’s conclusion, in contrast to that of the Tribunal:

    explains the otherwise apparently inexplicable (that any bank was willing to lend a company with no assets and no apparent means of repayment $4.75 million without any security and was content to take no action whatsoever when the asserted borrower failed to pay interest for more than seven years in total);

    recognises that the respondent in this appeal, the Commissioner of Taxation (the Commissioner) has no means of compelling the Israeli bank to produce the whole of its records to the Commissioner;

    recognises that the Commissioner has no means of testing the assertions of the fund transfers relating to a “loan” in documents in circumstances where no officer of the Israeli bank was willing to give evidence and no person associated with Rawson who had any involvement in the establishment of the loans was available to give evidence; and

    recognises that the kind of documents of the bank and Rawson which were located and put before the Tribunal were not only an incomplete record which may well not disclose the whole of the dealings between Rawson and the bank relevant to the question whether the funds were transferred by way of a loan or otherwise but also were, as the Commissioner put it, precisely the type of documents that would be brought into existence if a company such as Rawson wished it to appear that it was obtaining loan funds when in reality it was moving into Australia its own funds or funds it already controlled overseas for the purpose of avoiding incurring a tax liability on those funds as part of its assessable income.

81    Another difficulty is that the primary judge found that the Tribunal’s finding was “not open on the evidence” (Commissioner of Taxation v Rawson Finances Pty Ltd [2012] FCA 753 at [18]) and there was “no evidence before the Tribunal” of any obligation of repayment on Rawson’s part, such an obligation being the essence of a loan (at [21]). In this appeal from the primary judge’s decision, however, the Commissioner disavowed any suggestion that there was no evidence before the Tribunal that the funds transferred were loans to Rawson (that is, were subject to a repayment obligation) but said that the primary judge had to be understood as saying only that there was no direct evidence of that fact. The Commissioner’s case in defence of the appeal was that the primary judge was correct to conclude that the Tribunal’s finding was not open on the evidence. The Commissioner also contended that the primary judge’s decision should be sustained on other grounds, including an alleged denial of procedural fairness in the conduct of the hearing before the Tribunal.

82    Putting these difficulties to one side the issues in this appeal remain whether Rawson is right in its contention that the primary judge erred in concluding that the Tribunal’s ultimate finding of the existence of loans was not open on the evidence and/or not supported by any evidence and, if so, whether any of the Commissioner’s contentions seeking to sustain the primary judge’s decision on other grounds should be upheld. All issues are to be determined within the confines set by s 44(1) of the AAT Act pursuant to which a “party to a proceeding before the Tribunal may appeal to the Federal Court of Australia, on a question of law, from any decision of the Tribunal in that proceeding”.

THE NO EVIDENCE/NOT OPEN ISSUES

83    Whether a fact is supported by any evidence is a question of law; so too is the question as to what amounts to material that could support a factual finding (Australian Broadcasting Tribunal v Bond (1990) 170 CLR 321 at 355, Kostas v HIA Insurance Services Pty Ltd (2010) 241 CLR 390; [2010] HCA 32 at [91]). The latter is a question of law because, before a fact may be found, “there is the preliminary question whether the evidence reasonably admits of different conclusions” (Australian Broadcasting Tribunal v Bond at 355 citing Commissioner of Taxation (Cth) v Broken Hill South Ltd (1941) 65 CLR 150 at 155, 157 and 160). As the reasons in Commissioner of Taxation (Cth) v Broken Hill South Ltd at 155, 157 and 160 disclose if there is some evidence which reasonably admits of different conclusions as to the existence of a fact or not, the finding of that fact or the failure to find that fact does not involve a question of law. Hence, it is only whether the evidence could have supported the factual finding which constitutes a question of law. By contrast, the question whether evidence should or should not have led to a finding of fact is not a question of law. In the present context “evidence”, a term used in civil litigation, means the whole of the material before the Tribunal.

84    The distinction between evidence or material which could support a factual finding and evidence or material which should or should not have supported such a finding is fundamental to the exercise of jurisdiction which is limited to questions of law. When courts refer to there being “no probative” evidence to support a finding or a finding not being “reasonably open” or “open” on the evidence (as in Australian Broadcasting Tribunal v Bond at 359-360) or it being necessary that a finding be based on “some probative material or logical grounds” and that a finding not be “completely arbitrary” (as in Australian Broadcasting Tribunal v Bond at 366 and 367, Kostas v HIA Insurance Services Pty Ltd at [16], Minister for Immigration and Multicultural Affairs v Eshetu (1999) 197 CLR 611; [1999] HCA 21 at [145] and Minister for Immigration and Multicultural and Indigenous Affairs v SGLB (2004) 78 ALD 224; [2004] HCA 32 at [38]) the courts are not inviting consideration of whether a finding should or should not have been made. They are considering the anterior question whether the evidence reasonably admitted the making of the finding; that is, whether the evidence could support the finding. Hence, if there is no probative evidence of a fact and no logical grounds to support the fact, the finding of that fact will involve error of law. But where there is some probative evidence of a fact and some logical ground to support the fact, the finding of that fact will not involve error of law. The formula “some probative material or logical grounds” does not convert questions of fact into questions of law.

85    Insofar as the requirement for “logical grounds” is concerned, the discussion in Tisdall v Webber (2011) 193 FCR 260; [2011] FCAFC 76 (Tisdall v Webber) is instructive. As Buchanan J noted at [125], citing Minister for Immigration and Multicultural Affairs v Al-Miahi (2001) 65 ALD 141; [2001] FCA 744 at [34] there is a difference between a finding not reasonably open on the evidence and a finding reached on other than logical grounds. The former involves a finding not supported by some evidence and is always an error of law; the latter involves mere faulty reasoning and is not generally characterised as an error of law. Buchanan J then observed at [126] that “[i]n a case of suggested illogicality, or of faulty inferential reasoning, the decisive test is not whether there was an error in logic or reasoning but whether there was no foundation for the conclusion reached”, citing Minister for Immigration and Citizenship v SZMDS (2010) 240 CLR 611; [2010] HCA 16 (SZMDS) at [130], [131] and [135], in particular, the statement of Crennan and Bell JJ at [131] that:

…the test for illogicality or irrationality must be to ask whether logical or rational or reasonable minds might adopt different reasoning or might differ in any decision or finding to be made on evidence upon which the decision is based. If probative evidence can give rise to different processes of reasoning and if logical or rational or reasonable minds might differ in respect of the conclusions to be drawn from that evidence, a decision cannot be said by a reviewing court to be illogical or irrational or unreasonable, simply because one conclusion has been preferred to another possible conclusion.

86    This is no more than recognition of the fundamental principle concerning the limits of judicial review described by Menzies J in Parramatta City Council v Pestell (1972) 128 CLR 305 at 323 that:

There is, however, a world of difference between justifiable opinion and sound opinion. The former is one open to a reasonable man; the latter is one that is not merely defensible – it is right.

87    Buchanan J also identified another important principle in Tisdall v Webber at [129]-[130] in respect of the process by which a justifiable, even if not sound, opinion may be reached. His Honour referred to the statement of Middleton J in Bell IXL Investments Ltd v Life Therapeutics Ltd (2008) 68 ACSR 154; [2008] FCA 1457 at [14] as a “fundamental principle which is authoritatively established but which is not always observed” (at [130]). Middleton J had said:

In considering the material before the Court, the trier of fact must be careful to distinguish between inference and conjecture. A conjecture may be plausible, but it is effectively still a mere guess. An inference is a deduction from the evidence, and if reasonable can be treated as part of the legal proof to be considered in making a factual determination in any particular proceeding. Whilst sometimes it may be difficult to distinguish between conjecture and inference, nevertheless the distinction is an important one.

88    One more observation should be made about the distinction between inference and mere conjecture before moving to the circumstances of the present case. As stated in Heydon JD, Cross on Evidence (8th ed, LexisNexis Butterworths, 2010) at [1110] “[n]o useful purpose is served by comparing the merits of direct and circumstantial evidence”. Each type of evidence, if relevant, is admissible. In other words, permissible inference may be based on direct evidence or circumstantial evidence. The mere fact that evidence is circumstantial rather than direct does not convert permissible inference based on that evidence into impermissible conjecture. This was exposed by the discussion in Seltsam Pty Ltd v McGuiness (2000) 49 NSWLR 262; [2000] NSWCA 29. Spigelman CJ, at [80]-[91], there dealt with the common law test of the balance of probabilities. The following propositions emerge:

1.    “The common law test of balance of probabilities is not satisfied by evidence which fails to do more than establish a possibility” (at [81]).

2.    “It is often difficult to distinguish between permissible inference and conjecture. Characterisation of a reasoning process as one or the other occurs on a continuum in which there is no bright line division. Nevertheless, the distinction exists” (at [84]).

3.    As stated in Carr v Baker (1936) 36 SR (NSW) 301 at 306 (at [86]):

The existence of a fact may be inferred from other facts when those facts make it reasonably probable that it exists; if they go no further than to show that it is possible that it may exist, then its existence does not go beyond mere conjecture. Conjecture may range from the barely possible to the quite possible.

4.    And as stated in Caswell v Powell Duffryn Associated Collieries Ltd [1940] AC 152 at 169-170 (at [87]):

Inference must be carefully distinguished from conjecture or speculation. There can be no inference unless there are objective facts from which to infer the other facts which it is sought to establish. In some case the other facts can be inferred with as much practical certainty as if they had been actually observed. In other cases the inference does not go beyond reasonable probability. But if there are no positive proved facts from which the inference can be made, the method of inference fails and what is left is mere speculation or conjecture.

5.    “Proof on the balance of probabilities, indeed on the beyond reasonable doubt standard, may be established on the basis of circumstantial evidence” (at [90]).

6.    Any fact “can be established by a process of inference which combines primary facts like “strands in a cable” rather than “links in a chain”, to use Wigmore's simile: Wigmore on Evidence, 3rd ed (1981) vol 9 at 412-444 [2497] referred to in Shepherd v The Queen (1990) 170 CLR 573 at 579” (at [91]).

89    These observations are relevant to the present case because under s 14ZZK(b)(i) of the Taxation Administration Act 1953 (Cth) (the TA Act) Rawson, as the applicant, had the burden of proving that the Commissioner’s assessments were “excessive”. By s 14ZZA of the TA Act the provisions of the AAT Act applied to Rawson’s application for review of the Commissioner’s decisions disallowing Rawson’s objections to the assessments “subject to the modifications” set out in Div 4 of Pt IVC of the TA Act which include s 14ZZK(b)(i).

90    Section 14ZZK is a modification of the AAT Act because, but for that provision, an applicant would not have the “burden of proving that… the assessment is excessive”. There are no equivalent provisions in the AAT Act and it is well established that as the Tribunal may “exercise all the powers and discretions that are conferred by any relevant enactment on the person who made the decision” (s 43(1) of the AAT Act), an applicant for review is not subject to any burden of proof, the Tribunal’s obligation being whether the decision under review is the correct or preferable decision on the basis of the available material (Bushell v Repatriation Commission (1992) 175 CLR 408 at 424-425).

91    The only basis upon which Rawson sought to discharge its burden of proof was that the funds transferred to Rawson by the Israeli bank in 1997, the Mercantile Discount Bank (MDB), were not assessable income because they were loans which Rawson was obliged to and did repay and on which Rawson had paid interest. Accordingly, the ultimate issue between Rawson and the Commissioner in the proceedings before the Tribunal was whether, on the whole of the material, Rawson had discharged its burden of proving that the funds transferred were loans. If they were loans, it followed that the assessments were excessive. If they were not loans, it followed that Rawson had not discharged its onus of proof.

92    The Tribunal, as noted, set aside the Commissioner’s decisions. In so doing, the Tribunal concluded that Rawson had discharged the burden of proving that the disputed assessments were excessive. The Commissioner, pursuant to s 44(1) of the AAT Act, appealed to this Court on questions of law from the Tribunal’s decision. Although the Commissioner identified 12 questions of law said to arise from and vitiate the Tribunal’s decision, it is apparent that two only of the questions provide the foundation of the primary judge’s decision, being questions 1 and 3 as follows:

1.    Whether the Tribunal in reviewing the objection decisions in respect of assessments made under section 167 of the Income Tax Assessment Act 1936 misunderstood and/or misapplied s 14ZZK(b)(i) of the Taxation Administration Act 1953.

…

3.    Whether the Tribunal made findings of fact that were not supported by admissible, relevant or probative evidence.

93    Two of the primary judge’s key conclusions indicate that his Honour considered that the Tribunal had made findings that were not open on the evidence and, perhaps, misunderstood the operation of s 14ZZK(b)(i) of the TA Act. At [18] and [19] the primary judge said:

18. My difficulty with the Tribunal’s approach lies at the anterior stage of finding that Rawson’s receipt of the funds in 1997 was to be properly characterised as loans from MDB. In my view, that finding was not open on the evidence led and, in consequence, Rawson failed to discharge the onus it carried. My view in this regard, and the reasons for it, are amplified below.

19. The Tribunal’s error seems to me to be a product of the way in which the Tribunal approached the issue. It seems to have reasoned from a position that Rawson’s contention that the funds transferred to it in Australia in 1997 were by way of loans from MDB should be accepted unless the “unusual” features and circumstances of the loans “contradicted” or “cast doubt” on their “reality” in fact. It concluded that the “unusual” features and circumstances did not contradict or cast doubt on that characterisation, but it did not consider whether there was any other alternative explication consistent with those “unusual” features and circumstances; it should have.

94    The primary judge otherwise observed that:

(1)    “The essence of a loan of money from A to B is a corresponding contemporaneous obligation on the part of B to repay the money transferred from A to B: Commissioner of Taxation v Radilo Enterprises Pty Ltd (1997) 72 FCR 300 at 313 per Sackville and Lehane JJ; Commissioner of Taxation v Firth (2002) 120 FCR 450 at [73] per Sackville and Finn JJ. Absent that obligation, the transfer of the money from A to B is something else – a gift, a payment by direction, a payment or repayment of an anterior obligation – but it is not a loan. The obligation of repayment is not proved by subsequent payment of the same amount, let alone a different amount, from B to A; that may be explicable by reference to another obligation or circumstance having nothing to do with the original payment from A to B. Rather, the obligation of repayment is proved by the terms of the contract under which the money was transferred from A to B” (at [20]).

(2)    “In the present case, there was no evidence before the Tribunal of any such contract nor, otherwise, of any obligation on the part of Rawson to repay the amounts it received through MDB in 1997. In certain circumstances this may not be fatal to proving that the funds transferred were subject to an obligation to repay and were therefore by way of loan; but that will not always be the case. For example, where, as here, the alleged lender refrains from giving evidence that the transfers of funds were by way of loans, or subject to an obligation on the part of the recipient of the funds to repay them, such a conclusion may not be open to be inferred if other objective features or circumstances suggest an alternative explanation” (at [21]).

(3)    “The transfer of funds to Rawson in Australia in 1997 may be equally explicable as a transfer of funds from Rawson’s bank account or accounts with MDB in Israel (through the instrumentality of MDB), to Rawson’s bank account in Australia” (at [22]).

(4)    “Where, it may be asked, did the funds in Rawson’s accounts with MDB in Israel come from if they did not come from loans by MDB. That is a matter for Rawson to establish and unless it can show, by reference to that source or otherwise, that they did not have the character of income, it will not have discharged the onus it carries to show that the assessments are excessive” (at [23]).

(5)    “On the basis of my conclusion that Rawson has not established that the transfer of funds to its Australian bank account in 1997 were loans made to it by MDB, Rawson has not discharged the onus of showing the assessments to be excessive and the Commissioner’s appeal must succeed. First, the alleged interest payments will not be an allowable deduction in calculating Rawson’s taxable income for the 1997 to 2008 income years, not because they are not interest on loans, but because they do not represent a cost of borrowing funds for use in Rawson’s business of lending money to affiliated companies; they are not a working expense. Second, if Rawson’s receipt of funds into an Australian bank account in 1997 are not loans from MDB then, in the absence of Rawson showing that they are something else which does not have the character of income, the assessments for the 1997 and 1998 years of income will not be shown to be excessive” (at [25]).

95    The primary judge identified six propositions at [24] said to make it “more likely” that the funds transferred were not loans, being:

(1)    There was no evidence that the transfer of funds to Rawson’s Australian account aggregating in total AUD 4.75 million, a substantial sum of money, carried with it any obligation of repayment to MDB; no agreement, either in writing or oral, imposing an obligation of repayment of Rawson was adduced in evidence.

(2)    The alleged lender, MDB, was not prepared to have any of its officers give evidence in those terms, apart from furnishing representatives of Rawson with documents which went into evidence through such representatives but did not establish any obligation of repayment on Rawson’s part. It is odd that a bank which was willing to allegedly lend Rawson a substantial sum of money, unsecured and in circumstances where Rawson did not have any resources to meet its obligations on the alleged borrowing, was not prepared to have one or more of its officers corroborate the alleged character of the transactions. That oddity evaporates under the alternative explication.

(3)    There was no evidence that Rawson or any other entity, affiliated or not, gave security for the transfer of funds to Rawson’s Australian bank account, whether by way of charge, lien, set-off or surety. That is entirely consistent with the alternative explication of the funds being Rawson’s funds, and not MDB’s funds, before they arrived in Australia.

(4)    Rawson had no assets in Australia nor any apparent capacity to repay the alleged loans, but that is irrelevant under the alternative explication.

(5)    No withholding tax was withheld from the alleged interest payments, at least until the transactions fell under the scrutiny of the Commissioner, and even then there was no evidence of such withholding. But there is no liability to withhold under the alternative explication.

(6)    That the alternative explication is more likely “the reality and substance” of the fact is a view to which one is impelled by the irregular making of such payments without any protest or action on the part of MDB for such delay or non-payment. Non-payment of alleged interest over the twelve year period of the loans for separate periods of four years and three and a half years respectively without any protest or action on the part of MDB is explicable if the remittances are no more than transfers from one Rawson bank account to other Rawson bank accounts.

96    Proposition (1), involving the existence of an obligation to repay, being the essence of a loan, was in dispute between the parties.

97    As to proposition (2) it is true that no officer of MDB was willing to give oral evidence in the proceeding. One officer, Israel Zamir, provided a statutory declaration which the Tribunal admitted into evidence despite the Commissioner’s objection which annexed documents identified as coming from MDB’s records, referred to the funds transfers as loans and explained the various account numbers on the MDB documents in the context of MDB’s accounting systems. The admission of this statutory declaration forms a key part of the Commissioner’s contention of denial of procedural fairness in that Mr Zamir was not able to be cross-examined on any part of his declaration.

98    Proposition (3), concerning the lack of any security, was common ground.

99    Proposition (4), concerning Rawson’s lack of assets and ability to repay, was also common ground. However, Rawson noted the existence of other evidence which the Tribunal accepted (Areffco and Commissioner of Taxation [2011] AATA 628 at [11]) to the effect that although Rawson had no assets, the principal of Rawson, Erwin Binetter, by 1997 had control of total assets (via various corporations) of about $41 million and net assets of about $26 million, and that the funds transferred by MDB to Rawson in 1997 had been lent by Rawson to related companies in Australia which did have assets (also accepted by the Tribunal at [35]). In this appeal, the Commissioner did not take issue with the Tribunal’s findings at [11] and [35].

100    Proposition (5), as to Rawson not paying withholding tax, was agreed by the parties to be an error by the primary judge. Rawson did pay withholding tax.

101    Proposition (6), as to Rawson’s failure to pay interests on the loans over extended periods without any protest of MDB being apparent, was not in dispute.

102    The Commissioner’s acknowledgment that the primary judge’s references to there being “no evidence” to support the Tribunal’s findings of loans (at [21] and [24(1)]) must be understood as there having been no “direct evidence” of the existence of any obligation to repay the funds must be correct. Leaving aside the Commissioner’s contention of denial of procedural fairness by the admission of certain documents, including Mr Zamir’s statutory declaration, the material before the Tribunal included material from which the existence of an obligation to repay could have been inferred by the Tribunal, putting to one side for the moment whether this inference based on this material was reasonably open in the sense of being based on some logical grounds or mere conjecture as to a possibility. This material included:

    all of the documents attached to Mr Zamir’s affidavit said to be sourced from MDB and otherwise obtained by Rawson from MDB as a result of requests and described by the Tribunal at [28] of its reasons;

    certain documents Rawson located described at [29] of the Tribunal’s reasons;

    the evidence of Andrew Binetter, Erwin Binetter’s son, that in 2009 Rawson made the final repayment of the loan to MDB and, at that time (when Andrew Binetter had been in effective control of Rawson’s affairs for about five years following the decline in health of his father, Erwin Binetter), he was not told by anyone at MDB that MDB was holding or had access to any bank account with a deposit that was securing the loan to Rawson.

103    Given these matters the relevant question of law cannot be that the Tribunal’s finding of the existence of loans was based on no evidence or, putting it the other way, was not based on “some evidence”. It follows that, leaving aside the Commissioner’s notice of contention, the only ground pressed by the Commissioner is that the finding was not reasonably open – not because the finding was supported by no evidence but because the finding was not reasonably open having been reached by an illogical or irrational process of reasoning. In other words, irrespective of the Commissioner’s assertion in its notice of appeal that “the Tribunal made findings of fact that were not supported by admissible, relevant or probative evidence” the Commissioner’s case, in truth, was one of “suggested illogicality, or of faulty inferential reasoning” (Tisdall v Webber at [126]). As such, the test for error of law is whether the material before the Tribunal could “give rise to different processes of reasoning and if logical or rational or reasonable minds might differ in respect of the conclusions to be drawn from that evidence” (SZMDS at [131]). If the material could do so then the Tribunal did not err in law. At worst the Tribunal made an unsound decision. An unsound decision, which is nevertheless justifiable, does not give rise to any question of law. In determining whether the Tribunal’s decision was merely unsound or unjustifiable the distinction between inference and conjecture is relevant. Inference requires the existence of objective facts from which other facts which it is sought to establish may be deduced. The objective facts may involve direct or circumstantial evidence. But one way or another, whether the objective facts be direct or circumstantial or a combination of both, there must be such objective facts from which the relevant fact might rationally be inferred.

104    Once this is recognised it is apparent that there was one objective fact which was, as the Commissioner put it, equally consistent with either the existence of loans or the existence of some other arrangement not involving loans. The objective fact is that of the payment of funds by MDB to Rawson in three tranches ($3 million in June 1997, $1 million in July 1997 and $0.75 million in December 1997). As the Tribunal found there can be no doubt that these payments were made. But the making of such payments was the starting premise of both Rawson and the Commissioner. That fact could not support a finding as to the character of the payments, the ultimate issue, one way or another. If the Tribunal had used the fact of payment as a fact supporting an inference as to their character, rather than the foundation of the dispute between the parties, then I would accept that the Tribunal had engaged in a form of faulty reasoning about which logical or rational or reasonable minds could not differ. From the primary judge’s observation at [19] there is a suggestion that his Honour might have concluded that the Tribunal did engage in some form of impermissible reasoning of this kind.

105    If this be so then, with respect to the primary judge, I am unable to agree. On a fair reading of the Tribunal’s reasons as a whole it is apparent that the Tribunal appreciated that the issue in dispute was the character of the funds transfers to Rawson and that the fact of the transfers was the predicate of the competing cases of Rawson and the Commissioner about that character. Hence, the Tribunal said that:

    “The reality of the recorded liability, and the character of the asserted interest expenses, are the principal matters for decision in these proceedings” (at [1]).

    “The Commissioner’s contention that [Rawson] had not actually borrowed any funds from MDB implies that the three 1997 fund transfers involved money [Rawson] was not obliged to repay” (at [6]).

    The payments were “asserted” loans or borrowings (at [25], [27], [29], [33], [35], [47], [50], [53], [71], [91], [92], [93], [94], [97], [98], [101], [102], [104], [105], [106], [114], [116], [117], [138], [140], [154], [174], [187], [202], [205], [226], [231], and [233].

106    Against these references it is apparent that the Tribunal’s consideration of the possible existence of overseas assets (at [140]-[175] and [203]-[231]) does not indicate that the Tribunal used the mere fact of the funds transfers as evidence supporting Rawson’s, as opposed to the Commissioner’s, case. The Tribunal’s consideration in this regard includes the answer to the question posed at [226] “whether on the available evidence, including any inferences that can and should be drawn from the absence of evidence that it was within [Rawson’s] power to produce …[Rawson] has satisfied the Tribunal of the reality of the contentious loans”. The question itself is inconsistent with the Tribunal having irrationally treated the loans as real unless contradicted by proof otherwise. The answer the Tribunal gave at [227], that this “inevitably involves testing the hypothesis, of some other explanation for the contentious loans, against the available evidence”, which was said by the Commissioner to be indicative of error and may have founded the primary judge’s observation at [19], when considered in context, is nothing more than the Tribunal dealing with a specific argument the Commissioner put about what Rawson had to prove in order to discharge its burden of proof.

107    The Commissioner put, as the Tribunal recorded at [210], the proposition that Rawson could only discharge its burden of proof by showing that:

(i) it obtained the contentious funds as loans from MDB, (ii) there was no security for the loan, (iii) the only security for the loans were personal guarantees by [Erwin Binetter] and (iv) MDB did not provide the funds as a result of any kind of “back to back” dealings with other banks or as a result of some kind of security having been provided by some entity related to [Rawson]. The Commissioner characterised this fourth matter as one that was a crucial matter for [Rawson] to prove. Moreover, it was something that [Rawson] could not prove by merely partial disclosure of its dealings with MDB, and by inference from loan dealings involving other [Erwin Binetter] related entities.

108    It was in the context of this submission that the Tribunal considered the hypotheses which the Commissioner proposed of overseas security and/or some back-to-back arrangement. At [220] the Tribunal rejected the Commissioner’s submission that Rawson had to prove “as independent matters additional to the reality of the loan transaction and liabilities, that there was no security for the loans, or no security other than a personal guarantee” and that there was no back-to-back arrangement. The Tribunal was correct to reject this aspect of the Commissioner’s case. The fact that the Tribunal dealt with this aspect of its case on the merits, however, is not indicative of error. It follows that the Tribunal’s statement at [231] also has to be seen in this context. The Tribunal said:

Notwithstanding the Commissioner’s various submissions, [Rawson’s] evidence satisfies me that it had no asset, nor did it ever assume any liability, consistent with any kind of “back to back” arrangement. Consequently, whilst I do not consider that [Rawson’s] evidence had to go so far as positively disproving even the possibility of such an arrangement, I am satisfied that [Rawson’s] evidence does discharge its onus of proving that the contentious loans were real and that its asserted liabilities for repayment and interest reflect the intended and enforceable reality of the transactions with MDB.

109    Given the argument of the Commissioner with which the Tribunal was dealing, I see no error in the way in which the Tribunal dealt with the Commissioner’s hypothesis nor any basis upon which to conclude that the consideration of the Commissioner’s hypothesis somehow infected the Tribunal’s consideration of the ultimate question whether Rawson had discharged its burden of proof.

110    It is also in this part of the case that the Tribunal, at [215], said this:

These generalities, which simply recognise the process of fair decision making, have a particular emphasis in Tribunal proceedings. That emphasis is provided by AAT s 33(1AA) which obliges a decision maker to assist the Tribunal in reaching its decision in the proceedings. Since the essence of the Tribunal’s function is to arrive at the correct or preferable decision, and since decision makers also have an obligation to provide reasons for the reviewable decision, it is an inescapable consequence that a decision maker must endeavour to provide the Tribunal with an exposition of the rational basis for the Tribunal’s decision. In proceedings of the present kind the applicant taxpayer must discharge the burden imposed by s 14ZZK, but this burden in no sense relieves the Commissioner of the obligations imposed by AAT s 33(1AA). Nor do those obligations cast on the Commissioner any kind of onus in relation to the original decision. What they do is to highlight that the review process includes being satisfied, having regard to the applicant’s onus of proof, that there is a proper basis for deciding that the facts, as found by the Tribunal, give rise to the amount of the liability in the impugned decision.

111    These observations seemed to me to give rise to a concern supporting the primary judge’s observation at [19]. But for s 14ZZK(b)(i) of the TA Act the last sentence of [215] would be orthodox. In the face of s 14ZZK(b)(i), however, the last sentence cannot stand. The review process in a case to which s 14ZZK(b)(i) applies does not necessarily include the Tribunal in reaching any state of satisfaction that there is a proper basis for deciding that the facts as found by the Tribunal give rise to the amount of the liability in the impugned decision. The only state of satisfaction that the Tribunal is required to reach in a review subject to s 14ZZK(b)(i) is whether on the facts as found the applicant has proved that the assessment is excessive. If that state of satisfaction cannot be reached, the application for review must be dismissed irrespective of the Tribunal being satisfied or not satisfied that the facts as found by the Tribunal give rise to the amount of the liability in the impugned decision.

112    The two tasks (on the one hand, being satisfied on the facts as found that the applicant has proved that the assessment is excessive and, on the other hand, being satisfied on the facts as found as to the amount of the liability in the impugned decision) are conceptually different. The statute consigns the first task only to the Tribunal. It may be accepted that, in performing the first task, the Tribunal may consider and/or resolve the second task. No doubt in a case where the Tribunal can satisfy itself, in accordance with the second task, that the facts as found by the Tribunal give rise to the amount of the liability in the impugned decision the Tribunal can also discharge the first task with a high degree of confidence and conclude that the applicant has not proved that the assessment was excessive. Provided the Tribunal’s consideration of the second task does not distract it from the task which the statute requires to be performed there will be no question of law capable of vitiating the Tribunal’s decision. But the second task cannot be substituted for the first task. There may well be cases where the Tribunal cannot satisfy itself on the facts as found that the amount of the liability is the amount in the impugned decision and yet the applicant also cannot satisfy the Tribunal that the amount is excessive. In such a case, the application must be dismissed by reason of s 14ZZK(b)(i) of the TA Act.

113    Section 33(1AA) of the AAT Act does not support the Tribunal’s comments at [215]. Section 33(1AA) provides that in “a proceeding before the Tribunal for a review of a decision, the person who made the decision must use his or her best endeavours to assist the Tribunal to make its decision in relation to the proceeding”. Section 33(1AA) is to be applied “subject to” s 14ZZK(b)(i) of the TA Act, as s 14ZZA of the TA Act makes clear. So applied the obligation of the Commissioner in such a case is to assist the Tribunal to decide whether or not the applicant has proved that the assessments are excessive. That is the only decision the Tribunal is called upon to make by law.

114    Bailey v Commissioner of Taxation (1977) 136 CLR 214, cited by the Tribunal at [214], also does not support the Tribunal’s approach. True it is that “the process of assessment requires the application of the Act to the facts as known to and accepted by the Commissioner” and those facts “disclose a taxable income” (at 217) and that “the relevant facts in the appeal include the view of the facts on which the Commissioner has based his assessment, the manner in which he has arrived at his assessment” (at 221). But those observations are not the same as any characterisation of the Tribunal’s functions as including the reaching of a state of satisfaction that the facts found provide a proper basis for the amount of the assessment in dispute.

115    The Tribunal also referred to its own decision in Re Sharkey and Commissioner of Taxation (2007) 95 ALD 509; [2007] AATA 1435 (Sharkey) at [212] and [213]. Sharkey, however, states at [19] that the “fact that s 14ZZK expressly imposes a burden of proof on an applicant implies that the tribunal must satisfy itself that the burden has been discharged”. Other than that no recourse to the concept of an implied obligation on the Tribunal is required given the statutory provisions, this is correct. Other observations in Sharkey which follow disclose the same cause for concern. The Tribunal at [22] said:

But the practical reality in most cases is more likely to be that proper consideration of all of the material will lead the tribunal to a state of comfortable satisfaction that a particular outcome is either ‘correct or preferable’ in all the circumstances. Comfortable satisfaction that a different result is ‘preferable’ will justify the tribunal in regarding an applicant for review as having discharged the burden imposed by s 14ZZK(b) of the Taxation Administration Act — of showing that the taxation decision ‘should not have been made or should have been made differently’.

116    These observations seem to me to confuse the Tribunal’s general obligation as a merits decision-maker which may by s 43(1) of the AAT Act “exercise all the powers and discretions that are conferred by any relevant enactment on the person who made the decision” (a power which has been held to oblige the Tribunal to make the correct or preferable decision on the available material) with the Tribunal’s duty to apply s 43(1) subject to the modification imposed by, relevantly in this case, s 14ZZK(b)(i) of the TA Act. In a case where s 14ZZK(b)(i) of the TA Act applies the correct or preferable decision is to set aside the decision under review if the applicant has discharged the burden of proving that the assessment is excessive and to dismiss the review application if the applicant has not discharged that burden. The fact that the Tribunal cannot be satisfied that the Commissioner’s assessments represent the correct or preferable decision does not mean that the applicant must succeed and the Commissioner fail. This would involve not only the casting of an onus of proof on the Commissioner but would also relieve the applicant of the applicant’s burden of proof. Both would be impermissible.

117    The Commissioner, however, did not focus on the statements at [215] as a source of error by the Tribunal. Nor, in all of the circumstances, could the Commissioner do so. The observations at [215] were part of the Tribunal’s consideration of the competing submissions which were put to it about how Rawson’s burden of proof might be discharged (and as recorded by the Tribunal at [210] and [211]). The conclusion the Tribunal reached at [220], that Rawson did not have to prove the lack of overseas security or a back-to-back arrangement, was right. But for this conclusion, the observations at [215] were immaterial to the way in which the Tribunal in fact reached a positive state of satisfaction to the relevant standard of the balance of probabilities that it was more likely than not that the asserted loans in fact bore this character. So much is clear from the immediately subsequent observations of the Tribunal at [216] that:

An inference must be rational and logical. It must also be based on some positive fact that “provides a reason, special to the particular case under consideration, for thinking it likely that in that actual case a specific event happened or a specific state of affairs existed”: Jones v Dunkel [1959] HCA 8; (1959) 101 CLR 298 at 305 per Kitto J - cited and applied in Jackson v Lithgow City Council [2008] NSWCA 312 at [10] -[12]. A forensically permissible inference is “a reasonable conclusion drawn as a matter of strict logical deduction from known or assumed facts. It must be something which follows from given premises as certainly or probably true, and the mere possibility of truth is not sufficient to justify an inference to that effect”: Gurnett v Macquarie Stevedoring Company Pty Ltd (1955) 55 SR (NSW) 243 at 248; Morley v Australian Securities and Investments Commission (2010) ALR 205 at [631].

118    The difficulty for the Commissioner is that the essential submission made is that all of the evidence was “equally consistent” with the Commissioner’s contentions, with the unusual aspects of the transactions being “tellingly inconsistent” with Rawson’s contentions.

119    However, the very concept of “equal consistency” involves considerations of weight. The weight to be given to evidence is a matter for the Tribunal alone. The Tribunal was entitled to weight the evidence as it saw fit provided that in so doing it did not lose sight of the decision it had to make (whether on the whole of the evidence Rawson had discharged the burden of proving the assessments were excessive) and reached conclusions that were reasonably open on the evidence. Despite my concern about the Tribunal’s observations at [215], the Tribunal did not lose sight of the decisions it had to make. Moreover, there was material from which, contrary to the Commissioner’s submissions and primary judge’s conclusion, a justifiable, even if not sound, inference could be drawn that the funds transfers represented genuine loans.

120    For example, let it be assumed that all of the documents said to have been produced by MDB and by Rawson referring to the funds transfers as “loans” were, as the Commissioner put it, precisely the kind of documents that a person intent on executing some other form of arrangement not being a loan would bring into existence. On that assumption, made in favour of the Commissioner, those documents themselves could not rationally support an inference of the funds transfers having the character of a loan as opposed to the character of some other arrangement not being a loan. But the documents were not the only material before the Tribunal. The Tribunal also had before it unchallenged evidence that MDB was one of Israel’s seven largest banks and wholly owned by Israel’s third largest bank since 1993, the latter being a publicly listed company. Further, that all banks in Israel are licensed and supervised by the Bank of Israel including in respect of credit approval procedures which are supervised by the Bank of Israel via an audit process of compliance with mandatory guidelines. At [222] the Tribunal referred to evidence that MDB was a major and reputable Israeli bank. The Commissioner challenged this finding as not open on the evidence. Yet that finding plainly was open given the unchallenged evidence just described. MDB was clearly a major Israeli bank and an inference was open on the evidence that it was “reputable”.

121    In addition to this evidence the Tribunal had before it the evidence of Andrew Binetter. True it is that, as the Commissioner stressed, Andrew Binetter was not involved in the establishment of the transactions between Rawson and MDB in 1997. But Andrew Binetter had been responsible for Rawson’s affairs since 2004 including by way of what was said to be the final repayment of the alleged loans to MDB in 2009. Andrew Binetter was cross-examined. The Commissioner made submissions adverse to his credit (for example, as recorded by the Tribunal at [183]). The Tribunal rejected the attack on Andrew Binetter’s credit at [187]. At [187] the Tribunal said:

Finally there is [Andrew Binetter’s] evidence that, after the final payment to MDB, no information was conveyed to him by the bank suggesting that it had released any security following repayment of the loan. It is difficult to conceive a persuasive basis on which this, or the other evidence to which I have just referred, could be mistaken or relevantly unreliable. I accept that [Andrew Binetter] gave this evidence honestly. It is evidence which I regard, for the reasons I have principally alluded to in paragraphs 104, 105, 174 and 175, as persuasive of the reality of the asserted loan liability.

122    It may be accepted that Andrew Binetter’s evidence, as accepted by the Tribunal, was not necessarily decisive of the ultimate issue. First, the Tribunal could have made a different credit finding. But credit, as is often said, is quintessentially a matter for the arbiter of fact. Second, the Tribunal could have seen the evidence as equivocal about the character of the funds transfers rather than persuasive of their character as loans. The relevant matter, however, is that reasonable and rational minds could differ about the relevance of Andrew Binetter’s evidence. The Tribunal’s process of reasoning was not necessarily sound, in the sense of what the primary judge clearly considered to be correct or preferable, but it was justifiable. It was reasoning from facts as found which a reasonable and rational person in the position of the Tribunal could engage in. Whether or not it led to the correct or preferable decision on the material is neither here nor there. That was a matter for the Tribunal alone provided its decision was reasonably open. Even on the basis of the status of MDB and the Andrew Binetter’s evidence about repayment alone, the Tribunal’s decision was reasonably open.

123    In any event, there was other evidence which was rationally capable of supporting the Tribunal’s decision. Again, this evidence did not necessarily lead to an outcome in Rawson’s favour. Another Tribunal, differently constituted, could well have reached a different view about the facts the evidence permitted to be found and their relevance to the ultimate issue. But the facts as this Tribunal found and the inferences it drew based in part thereon were justifiable in the sense of reasonably open. Andrew Binetter, who had been involved in running Rawson’s affairs since 2004, gave evidence that he had no knowledge of any offshore assets which might have served as security for the asserted loans. The Tribunal accepted this evidence (at [186]). The Tribunal’s assessment of the relevance of Andrew Binetter’s evidence at [176]-[187] was not irrational. It was not the assessment for which the Commissioner contended and no doubt a different assessment would also have been rational. But the assessment of the weight of the evidence was a matter for the Tribunal and it assessed Andrew Binetter’s evidence as supporting a positive state of satisfaction that the burden of proof had been discharged.

124    There was also the evidence of Margaret Binetter, Erwin Binetter’s wife. Margaret Binetter gave evidence and was cross-examined. Again, it readily may be acknowledged that it would have been rational for the Tribunal to have treated Margaret Binetter’s evidence as having no real weight because she had effectively said that her husband did not discuss business issues with her. But she had been married to Erwin Binetter since 1954. She thought her husband would have told her of any overseas assets and she was not aware of any such assets. Just as it would have been rational to give this evidence little if any weight it also was rational for the Tribunal to consider it to be “compelling” (at [150]) especially given Erwin Binetter’s deteriorating medical condition. The reasoning of the Tribunal, while not spelt out in terms is clear. If a life partner is old and declining it might be expected that one partner would disclose to the other (or, in the case of Andrew Binetter, to his son who was going to take over the responsibilities of the company) the existence of all assets including offshore assets. But Margaret Binetter and her son said they knew nothing about any offshore assets and the Tribunal, as it was entitled to do, believed them. This was a rational and hence justifiable process of reasoning.

125    For these reasons, I respectfully disagree with the primary judge. I am satisfied that Rawson has established that the Tribunal’s decision was reasonably open on the material before it.

126    The remaining issues are those in the Commissioner’s notice of contention.

COMMISSIONER’S NOTICE OF CONTENTION

127    Apart from the alleged denial of procedural fairness none of the Commissioner’s contentions as to why the appeal should nevertheless be dismissed were developed in a meaningful way.

128    As to ground 1, the Tribunal’s observation at [208] that there was no factual basis for treating the funds as assessable income is part of the Tribunal’s analysis leading to the rejection of the Commissioner’s contention that Rawson had to disprove alternatives to the transactions representing loans in order to discharge the burden of proof. The primary judge was right at [17] of his reasons to see [208] as representing the Tribunal’s view on the basis that Rawson had otherwise proved the funds transfers to be loans. Read in context, the Tribunal’s statements at [208] do not involve any improper reversal of the burden of proof.

129    As to ground 2, that the Tribunal’s decision was perverse, irrational, and/or so unreasonable that no reasonable decision-maker could have made it, the above analysis leads to the contrary conclusion. It is easy to see why the primary judge thought that the more likely result on the evidence was that Rawson had not discharged its onus of proof. But for the reasons given I do not agree that the decision the Tribunal reached was not reasonably open.

130    The matters referred to in ground 3 are relevant considerations. However, the identification of alleged discrepancies was a matter for the Tribunal as the finder of fact. Further, the lack of security or an explanation as to why MDB did not pursue Rawson during the period it failed to pay interest are matters which the Tribunal did consider but weighed in the balance as not decisive against Rawson. Accordingly, it cannot be said that the Tribunal failed to consider any of these matters.

131    Ground 4 identifies matters which the Tribunal would be entitled to take into account but I do not accept that the Tribunal was bound to do so. The Commissioner’s contention overlooks the basic proposition that the “ground of failure to take into account a relevant consideration can only be made out if a decision maker fails to take into account a consideration which he is bound to take into account in making that decision”, a matter to be determined by implication from the “subject-matter, scope and purpose” of the statute if not expressly identified (Minister for Aboriginal Affairs v Peko-Wallsend Ltd (1986) 162 CLR 24 at 39-40). Given the only question was the status of the funds transferred as loans or not, the correct amount of the interest payments required, the total of unpaid interest and that the unpaid interest was material in amount were not matters that the Tribunal was bound to consider by implication from the subject-matter, scope and purpose of the TA Act or AAT Act.

132    Despite being characterised as errors of law, ground 5 involves complaints about the way in which the Tribunal weighed material capable of supporting the Commissioner’s case. The complaints may or may not be well-founded as matter of the merits but do not involve any question of law capable of vitiating the Tribunal’s decision in and of themselves. To the extent that ground 5 raises an issue that the Tribunal erred by adopting an illogical or irrational process of reasoning the discussion above explains why the contention cannot be accepted even if the Commissioner’s assertions in ground 5 are correct.

133    Ground 6 is the procedural fairness ground. The entirety of the Commissioner’s case on this contention is confounded by the course of the hearing before the Tribunal. As the transcript shows the Tribunal gave a ruling on certain issues on the common basis that it was likely that this ruling would resolve other objections on evidence of the Commissioner including the Commissioner’s objections to the evidence referred to in ground 6. The ruling was that the disputed evidence should be admitted. The Tribunal gave comprehensive reasons in support of its ruling including that, in the case of Mr Zamir, his location outside of the jurisdiction and unwillingness to make himself available meant that he was in substance unavailable to give evidence, as were certain other persons who had made out of court representations which Rawson had notified the Commissioner that Rawson wished to rely on as admissible hearsay in reliance on the same type of considerations that underpin s 67 of the Evidence Act 1995 (Cth) (the giving of notice of an intention to adduce hearsay evidence) despite the Tribunal not being subject to the rules of evidence (s 33(1)(c) of the AAT Act provides that “the Tribunal is not bound by the rules of evidence but may inform itself on any matter in such manner as it thinks appropriate”). However, in so ruling the Tribunal was at pains to point out that the Commissioner had liberty to raise any concern about the admissibility of the other evidence again when the Tribunal came to deal with it. The Commissioner did not raise any further issue about the admissibility of the disputed material. That being so the Commissioner cannot now assert a denial of procedural fairness. This conclusion applies not only generally but also to the Commissioner’s particular assertion that some material was served late so the Commissioner did not have a proper opportunity to deal with it. Not having raised any further complaint about the admission of the material after the Tribunal’s initial ruling the Commissioner cannot complain now of lateness and prejudice.

134    Even if it were open to the Commissioner to assert a denial of procedural fairness there are problems with the Commissioner’s case. Insofar as admissibility of the evidence is concerned, many of the disputed documents (including Mr Zamir’s statutory declaration) formed part of the so-called T-documents that the Commissioner provided to the Tribunal as required by s 37(1)(b) of the AAT Act which provides that the decision-maker must lodge with the Tribunal copies of “every other document or part of a document that is in the person's possession or under the person's control and is relevant to the review of the decision by the Tribunal”. Mr Zamir’s declaration was such a document and thus was necessarily admissible in the proceedings before the Tribunal under s 37(1)(b)(1) of the AAT Act. It follows that, as with all such documents, the real complaint of the Commissioner (relied on in the alternative) is not the admission of Mr Zamir’s statutory declaration into evidence but the use which the Tribunal made of it. As the Commissioner put it, the denial of procedural fairness resulted from the fact that, first, the Commissioner could not “test or respond to” the documents (specifically the documents annexed to Mr Zamir’s declaration said to be sourced from MDB and otherwise obtained by Rawson from MDB and certain accounting records of its own which Rawson found) because there was no witness from MDB and Rawson’s then accountant, Mr Szanto, also was not called to give evidence and, second, the Tribunal placed significant reliance on the documents in inferring the “reality of the loans”.

135    However, and for example, the use the Tribunal made of Mr Zamir’s statutory declaration exposes why such use could not be said to have denied the Commissioner procedural fairness. The Tribunal found Mr Zamir’s statutory declaration to be significant for four reasons. None of the reasons concern the content of any assertion made by Mr Zamir other than the bald fact that the documents annexed came from MDB (a fact not in issue). At [132] the Tribunal said:

I regard Mr [Zamir’s] statutory declaration as significant for four principal reasons. First, the objective details of MDB’s loan records which he describes are consistent with such apparently contemporaneous records as have been produced. Second, it is consistent with what I regard as the probable reality of the fund movements – having regard to [Rawson’s] date of incorporation, reputed activities and interest income. Third, it is consistent with the objective evidence of fund movements and [Rawson’s] evidence disavowing knowledge of any relevant overseas assets. Finally, the formality of the statutory declaration, and the persistent approaches that produced its execution, provide a degree of comfort about the reliability and significance of the information [Andrew Binetter] attributes to [Mr Zamir] – that there was no record of any relevant security deposit held by MDB.

136    Each aspect of significance concerns factual inferences supported by other evidence which were either not in dispute (the objective evidence of fund movements) or proved on other evidence (Rawson’s date of incorporation, reputed activities and interest income, as well as the formality of the statutory declaration, and the persistent approaches that produced its execution). Otherwise Mr Zamir’s statutory declaration confirmed the relation between the account numbers relating to Rawson assigned by MDB and what they meant in terms of MDB’s accounting systems. As the Tribunal noted at [134]:

I accept the generality of the Commissioner’s submission about the need for appropriate scepticism in attaching any weight to the information proffered by, or attributed to, [Mr Zamir]. But I do not consider that appropriate scepticism detracts from the conclusions I have formed about the significance of his evidence – conclusions I have formed after, and not before, having regard to the Commissioner’s submissions. Much of the information attributable to Mr [Mr Zamir] is consistent with other evidence, or derives from MDB’s regular administrative systems.

137    Some scepticism was appropriate given that Mr Zamir was not available for cross-examination. But Andrew Binetter was available and so were the documents, incomplete though they be, from MDB’s records. In these circumstances it cannot be said that the Tribunal denied the Commissioner procedural fairness. This was not a case where the Tribunal’s process was unfair. The decision in Australian Postal Commission v Hayes (1989) 23 FCR 320 provides no meaningful analogy. Nor does the decision in Young v Coupe [2004] NSWSC 546. As the reasons in Re Saviero Barbaro and Minister for Immigration and Ethnic Affairs (1980) 3 ALD 1 at 5 disclose the opportunity for a party to test the evidence against that party’s case must be “appropriate in the circumstances”. There is no rule that procedural fairness dictates the rejection or giving of no weight to evidence which cannot be tested by cross-examination. The use which the Tribunal made of Mr Zamir’s evidence was not procedurally unfair in the circumstances.

138    The same considerations apply to all of the other assertions of procedural unfairness by the Commissioner. Mr Szanto, the accountant, had prepared the accounting records some 10 to 14 years before the hearing and was now elderly and in ill health. The Commissioner accepted that the records were records of Rawson just as the Commissioner accepted that MDB’s records were records of MDB. The Commissioner disavowed any suggestion that the records were other than contemporaneous with the activities to which they related. The Commissioner’s case was that these were precisely the type of records one would create at the time if wishing to bring one’s own offshore funds into Australia whilst avoiding taxation obligations on income. But, even if the proceeding before the Tribunal had been subject to the rules of evidence, it is difficult to see any basis upon which these documents could have been concluded to be other than business records of MDB and Rawson respectively. As business records, they were admissible. As business records, the Tribunal was entitled to give them the weight it saw fit including in respect of the reality of the loans. The fact that another Tribunal, differently constituted, might well have chosen to give these documents less or even no weight in all of the circumstances is immaterial. But the fact that the asserted loans had many unusual features, which the Tribunal recognised, did not demand a different approach by the Tribunal from that which it took. The Commissioner’s submissions assert this to be so but fail to identify any legal principle by which it should be concluded that the Tribunal, in using the documents as it did, denied the Commissioner procedural fairness.

139    Otherwise, Emil Binetter was aged, frail and in poor health. He was effectively unavailable to give evidence. Elie Septon was not in the jurisdiction and was unwilling to give evidence and thus was also effectively unavailable. Rawson’s former accountant, Mr Szanto, was also elderly and in poor health and effectively unable to give evidence. There was no procedural unfairness in the Tribunal admitting the hearsay evidence of Emil Binetter and Mr Septon and making what use it could of Rawson’s accounting information, unexplained as it was by Mr Szanto. As Rawson put it, the real complaint of the Commissioner is that the Tribunal did not draw the inferences that the Commissioner wanted including, for example, that any evidence Mr Zamir, Mr Septon and Mr Szanto might give would not assist Rawson’s case that the funds transferred were loans. The Tribunal was not bound to draw any such inference and the fact it did not do so does not indicate irrationality or want of logic. Nor does it result in any denial of procedural fairness.

140    The Commissioner said that the use the Tribunal made of the documents, in effect, placed Rawson in “an unassailable position” by reason of “inferences drawn from material which was unchallengeable and untestable”. But as the Tribunal’s reasons disclose, it did not consider Rawson’s position unassailable at all. Indeed, the problem with the Tribunal’s decision that the primary judge found was that the evidentiary foundation for Rawson’s position was so weak that no result other than that Rawson failed to discharge its burden of proof was reasonably open. All of the facts on which the primary judge relied to reach this view (other than one incorrect fact about withholding tax) were found by the Tribunal. The Tribunal was well aware that the asserted loans had numerous characteristics which provided support to the Commissioner’s case that the funds transfers should not be accepted to be loans at all. Plainly, it would have been open to the Tribunal on the evidence to accept the Commissioner’s case that on the whole of the material Rawson had not discharged the burden of proof. Indeed, as noted, that result might well be seen as “sound” and not merely “justifiable” given the primary facts as found by the Tribunal about the lack of security, the lack of any loan agreement, the lack of capacity of Rawson to repay the asserted loans, the failure by MDB to take action during lengthy periods of default in interest payments, the likelihood of MDB holding more documents that might cast a different light on the funds transfers, and the circumstance that no-one from MDB or from Rawson gave evidence who was involved in creating the loans. Nevertheless, for the reasons given the Tribunal’s conclusion was justifiable having regard to the whole of the material including the documents and the evidence of Andrew Binetter and Margaret Binetter. The conclusion, moreover, did not involve any denial of procedural fairness to the Commissioner.

CONCLUSIONS

141    For these reasons Rawson’s appeal must succeed. Orders should be made accordingly.

Associate:

Dated:    5 March 2013

REASONS FOR JUDGMENT

Nicholas J

142    I agree that the appeal should be allowed for the reasons given by Jagot J. I agree with the orders proposed by Jessup J.

Associate:

Dated:    5 March 2013