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FEDERAL COURT OF AUSTRALIA
FIONA HOWLAND-ROSE & ORS v COMMISSIONER OF TAXATION [2002]
FCA 246
N 101-104 OF 2000
SUMMARY
In accordance with the practice of the Federal Court in certain cases of public interest, I have prepared a brief summary to accompany the Reasons for Judgment that are being delivered today. But the only authoritative pronouncement of my reasons is that contained in the full Reasons for Judgment. This summary is necessarily incomplete.
The background to the proceedings is as follows:
(i) On 5 December 1995, a Prospectus was issued for subscription of so-called syndicate participations in relation to the Budplan Personal Syndicate (“BPS”). Altogether 2371 syndicate participations were taken up. Apparently there was issued contemporaneously a prospectus for the so-called Budplan Company Syndicate, but the present proceedings do not involve the latter syndicate, or any other Budplan fund raising schemes.
(ii) Each syndicate participation was centred upon a nominal sum of $24,000, which was to be wholly but notionally lent to a participant for the purpose of the participant subscribing such sum for research and development into the creation of tea tree oil products.
The principal issue arising in the proceedings related to the tax deductibility or otherwise of the above sum of $24,000, and also interest thereon pursuant to section 51(1) of the Act which accrued over the first two fiscal years, notwithstanding that the activities of the BPS during that period of time were expected to be confined to research and development, and not to extend to subsequently envisaged activities of manufacture and sale. The Court has found that such amounts were not deductible pursuant to section 51(1) for that reason.
The Court has further found that if such amounts were deductible pursuant to section 51(1), contrary to its preferred view, then the same should not be deductible in any event, by reason of the tax avoidance provisions of Part IVA of the Act.
For the purpose of seeking to establish the case for disallowance pursuant to section 51(1), the Commissioner contended that there was such a remote or extremely remote prospect of participants ever deriving any financial return from the Prospectus proposals that deductibility should be denied, irrespective of whether or not deductibility related only to research and development expenditure. The course of the hearing became protracted by a substantial amount of evidence, mainly of an expert nature, bearing upon that issue. My conclusion from that testimony, which has required lengthy recitation in the Judgment, was that it was not to be concluded from the proposals of the Prospectus that the prospects of future manufacture and sale of products, such as to produce financial returns to participants, was in fact remote or extremely remote, if viewed as at the time of issue of the Prospectus. However, that conclusion does not of course bear upon the final result appearing above.
Another issue which was raised by the Commissioner was whether there had occurred effective payment up-front of millions of dollars ostensibly for research and development, pursuant to “round-robins” of bills of exchange which occurred. I have resolved that issue favourably to the taxpayers, though of course such resolution also does not bear upon the final result.
Finally it may be recorded that the Commissioner’s further alternative case based upon s 82KZM of the Act has not been determined, because in the events which happened, the Commissioner should not be permitted to raise the issue after originally abandoning the same at the commencement of the hearing of the proceedings.
