FEDERAL COURT OF AUSTRALIA

 Princi v Commissioner of Taxation [2008] FCA 441

ADMINISTRATIVE LAW – notice of appeal – whether question identified in notice was a question of law - application for leave to amend – amendment would require significant departure from agreed basis of dispute in the Administrative Appeals Tribunal

INCOME TAX – deductions – dominant purpose of scheme to obtain tax benefit

Held:  The applications be dismissed.

Administrative Appeals Tribunal Act 1975 (Cth) ss 43(1), 44(1)

Income Tax Assessment Act 1936 (Cth) ss 169A(3), 170, 175, 177, 177A, 177D, 177D(b), 177D(b)(v), 177F, 177F(1), 177F(3), 177G, 177G(1)

Federal Court Rules O 53

Allan v Transurban City Link Ltd (2001) 208 CLR 167

Australian Securities & Investments Commission v Donald (2003) 136 FCR 7

Australian Securities and Investments Commission v Saxby Bridge Financial Planning Pty Ltd (2003) 133 FCR 290

Australian Telecommunications Corp v Lambroglou (1990) 12 AAR 515

Commissioner of Taxation v Dixon (2006) 155 FCR 101

Commissioner of Taxation v Glennan (1999) 90 FCR 538

Commissioner of Taxation v Perkins (1993) 93 ATC 4524

Commissioner of Taxation v Sleight (2004) 136 FCR 211

Craig v South Australia(1995) 131 ALR 595

Deputy Commissioner of Taxation of the Commonwealth of Australia v Richard Walter Pty Limited (1994) 183 CLR 168

Fabry v Commissioner of Taxation (2003) ATC 4885

Federal Commissioner of Taxation v Peabody(1994) 181 CLR 359

Federal Commissioner of Taxation v Spotless Services Ltd (1996) 186 CLR 404

Fletcher v Commissioner of Taxation (1988) 19 FCR 442

Price Street Professional Centre Pty Ltd v Federal Commissioner of Taxation (2007) 97 ALD 593

Re Princi and Federal Commissioner of Taxation (2007) 66 ATR 133

Sleight v Federal Commissioner of Taxation (2003) 53 ATR 667

Star City Pty Ltd v Commissioner of Taxation [2007] FCA 1701

Stevenson v Commissioner of Taxation (1991) 29 FCR 282

Telstra Corporation Ltd v Warren, Graham [1997] FCA 102

TNT Skypak International (Aust) Pty Ltd v Commissioner of Taxation (Cth) (1988) 19 ATR 1067

Walters and Another v Commissioner of Taxation (2007) 162 FCR 421

Waterford v Commonwealth of Australia (1987) 71 ALR 673

WR Carpenter Holdings Pty Ltd v Federal Commissioner of Taxation (2006) 63 ATR 577

WR Carpenter Holdings Pty Ltd v Federal Commissioner of Taxation (2007) 161 FCR 1

VINCENZO PRINCI, DOMENIC PRINCI, MATE TOLICH AND KEVIN DORN v COMMISSIONER OF TAXATION

WAD 66 OF 2007

PHILLIP SHIELDS AND MARK KHO v COMMISSIONER OF TAXATION

WAD 69 of 2007

KEVIN DORN v COMMISSIONER OF TAXATION

WAD 236 of 2007

MCKERRACHER J

4 APRIL 2008

PERTH

ON APPEAL FROM THE ADMINISTRATIVE APPEALS TRIBUNAL CONSTITUTED BY BRUCE PASCOE (SENIOR MEMBER)

THE COURT ORDERS THAT:

1.                  The application is dismissed. 

2.                  The applicants are to pay the costs of the respondent to be taxed if not agreed.

Note:    Settlement and entry of orders is dealt with in Order 36 of the Federal Court Rules.

ON APPEAL FROM THE ADMINISTRATIVE APPEALS TRIBUNAL CONSTITUTED BY BRUCE PASCOE (SENIOR MEMBER)

THE COURT ORDERS THAT:

1.                  The application is dismissed. 

2.                  The applicants are to pay the costs of the respondent to be taxed if not agreed.

Note:    Settlement and entry of orders is dealt with in Order 36 of the Federal Court Rules.

ON APPEAL FROM THE ADMINISTRATIVE APPEALS TRIBUNAL CONSTITUTED BY BRUCE PASCOE (SENIOR MEMBER)

THE COURT ORDERS THAT:

1.                  The application is dismissed. 

3.                  The applicant is to pay the costs of the respondent to be taxed if not agreed.

Note:    Settlement and entry of orders is dealt with in Order 36 of the Federal Court Rules.

ON APPEAL FROM THE ADMINISTRATIVE APPEALS TRIBUNAL CONSTITUTED BY BRUCE PASCOE (SENIOR MEMBER)

REASONS FOR JUDGMENT

INTRODUCTION

1                     These three ‘appeals’ from decisions of the Administrative Appeals Tribunal (the Tribunal) were, by consent, heard together.  Each of the applicants was an investor in the Northern Rivers Tea Tree Oil Project (the project).  The project was described in detail in Commissioner of Taxation v Sleight (2004) 136 FCR 211.  In Sleight 136 FCR 211, the Full Court held that those parts of the investment by the applicants which did not constitute actual cash outlays did not give rise to allowable tax deductions.  Those investments were part of a scheme.  When viewed objectively, they were made to obtain a tax benefit.

2                     The applicants sought to distinguish their positions from that of Mr Sleight.  They argued in effect before the Tribunal that the facts and conclusions reached in Sleight 136 FCR 211 would not be challenged but should not apply to them as:

·                    in relation to all applicants, expert evidence as to the probable period of years before the investment would be returned to them (the payback period) was much shorter than computed in Sleight 136 FCR 211 in the Full Court.  It followed, the applicants contended that the payback period was much more commercially attractive than that calculated in the Full Court; and

·                    in relation to Messrs Princi, Tolich and Dorn the evidence to be adduced by them as to their specific financial involvement and circumstances also gave rise to a different conclusion from that reached in Sleight 136 FCR 211 in the Full Court; and

·                    in relation to all applicants the Commissioner had not made a valid Pt IVA determination under the Income Tax Assessment Act 1936 (Cth) (the Act) in either of the 1995 and/or 1996 years as he failed to make a declaration prior to issuing an amendment assessment for those years.  Again all applicants argued that the declarations were invalid due to this timing irregularity.

3                     Senior Member Mr B. H. Pascoe in the Tribunal did not accept the argument as to the invalidity of the Commissioner’s determination.  Nor did he accept that any of the remaining evidentiary factors gave rise to conclusions which should differ in any respect from that reached by the Full Court in Sleight 136 FCR 211.  

4                     The difficulty with which the applicants are confronted is that the determination argument aside, the remaining issues advanced by them have sought to agitate once again the factual issues argued in the Tribunal.  They seek a factual or merits review rather than review on a question of law.  The only review open pursuant to these appeals under s 44(1) of the Administrative Appeals Tribunal Act 1975 (Cth) (the AAT Act) is a review on a question of law. 

5                     Hill J observed in Sleight 136 FCR 211, in relation to his ultimate conclusion (at [88]) – a conclusion that departed from that reached by Nicholson J – that reasonable minds may differ in relation to it.  Arguably, that may be said perhaps even more so of the decision which the Tribunal was required by the parties to reach in these applications.  However, the matter was fully argued and determined in the Tribunal.  Once it reached its decision, an error of law was required for the jurisdiction of this Court to be invoked. 

6                     Accordingly, the relevant question of law is to be the subject matter of the appeal itself.  The whole of the decision of the Tribunal is not open to review except to the extent that it is relevant to the questions of law raised (Gummow J in TNT Skypak International (Aust) Pty Ltd v Commissioner of Taxation (Cth) (1988) 19 ATR 1067 at 1071-1072; Australian Securities and Investments Commission v Saxby Bridge Financial Planning Pty Ltd (2003) 133 FCR 290 at [46]; Commissioner of Taxation v Dixon (2006) 155 FCR 101).

7                     In relation to the factual aspects of the grounds of appeal as originally drawn, the Commissioner filed written submissions in opposition to those factual grounds being argued.  On receipt of the Commissioner’s submissions, the applicants sought to substantially amend the grounds of appeal and to restate questions of law.  The proposed amended questions of law and the grounds of appeal were not reduced to written form until well into the hearing but the oral submissions appeared to accept the undoubted correctness of the Commissioner’s legal argument. 

8                     The Commissioner opposed amendments being permitted so late in the hearing and, more importantly, did so also on the basis that the amendment would be inconsistent with the agreement which had been reached between the parties as to the basis upon which the matter would be argued in the Tribunal. 

9                     For reasons set out below, I am persuaded that the amendment should not be permitted.  In particular, it is clear that the applicants did not seek to argue before the Tribunal the issues which would be advanced under the proposed amended appeal.  By the proposed amended appeal, the applicants wish to assert that there was a scheme which was different in substance from that which was considered by the Full Court in Sleight 136 FCR 211.  That was not, in my view, the basis on which the agreement had been reached for argument in the Tribunal.  This conclusion that the proposed amendment would conflict with the agreed basis of proceeding in the Tribunal is not simply a technical point.  If it were more form than substance, allowing the amendment might be the better course.  However it is entirely conceivable as a matter of substance, that other evidence and arguments would have been relied upon in the Tribunal by the Commissioner had the proposed argument been advanced.  Indeed the very argument in support of the proposed amendment implicitly accepts that this would be so.  The fulcrum of the argument is that the Tribunal failed to identify the scheme.  To identify the scheme would have been a process which requires evaluation of the totality of the evidence and arguments at the hearing including the calling of a deal more evidence than the Tribunal heard.  In the absence of the agreement there may be force in the argument but the whole purpose of the agreement was presumably to narrow the issues to avoid the cost involved in such a process.

10                  As to the expert evidence on the payback period, this is clearly a question of fact.  The Tribunal ruled on that evidence.  It rejected the evidence advanced by the applicants.  No question of law arises from that rejection.  In my view, there would be clear prejudice in permitting the amendment. 

11                  While the invalid determination argument is not affected by the agreement in the Tribunal and being a question of law can be pursued in this appeal, it is unnecessary to permit the amendment in relation to the invalid determination as it is provided for in precisely the same terms in the original grounds of appeal.  However, in my view, the invalid determination argument fails for reasons I express below. 

12                  As none of the grounds can succeed, it follows that the appeals must be dismissed. 

13                  Although there was substantial detail and evidence contained in the material filed in support of the consolidated ‘appeals’, in my view, the proper and appropriate disposition of the ‘appeals’ ultimately does not and cannot turn on examination of that extensive material. 

SECTIONS OF THE ACT FALLING FOR CONSIDERATION

14                  These appeals do not raise detailed questions of statutory construction but the sections of the Act (or parts of them) falling for consideration are set out for convenience.

15                  The first, in relation to the determination argument, is s 169A(3):

(3)       In determining whether an assessment is correct, any determination, opinion or judgment of the Commissioner made, held or formed in connection with the consideration of an objection against the assessment shall be deemed to have been made, held or formed when the assessment was made.

16                  Section 170 sets out certain time limits within which the Commissioner may amend assessments which have been made. 

17                  Under s 177A of the Act it is provided by subs 5 that a reference in Pt IVA to a scheme or part of a scheme being entered into or carried out by a person for a particular purpose shall be read as including a reference to the scheme or part of the scheme being entered into or carried out by the person for two or more purposes of which that particular purpose was the dominant purpose.

18                  Relevantly by s 177F(3) it is provided:

(3)       Where the Commissioner has made a determination under subsection (1) or (2A) in respect of a taxpayer in relation to a scheme to which this Part applies, the Commissioner may, in relation to any taxpayer (in this subsection referred to as the relevant taxpayer):

(a)     if, in the opinion of the Commissioner:

(i)      there has been included, or would but for this subsection be included, in the assessable income of the relevant taxpayer of a year of income an amount that would not have been included or would not be included, as the case may be, in the assessable income of the relevant taxpayer of that year of income if the scheme had not been entered into or carried out; and

(ii)      it is fair and reasonable that that amount or a part of that amount should not be included in the assessable income of the relevant taxpayer of that year of income;

determine that that amount or that part of that amount, as the case may be, should not have been included or shall not be included, as the case may be, in the assessable income of the relevant taxpayer of that year of income; or

(b)     if, in the opinion of the Commissioner:

(i)      an amount would have been allowed or would be allowable to the relevant taxpayer as a deduction in relation to a year of income if the scheme had not been entered into or carried out, being an amount that was not allowed or would not, but for this subsection, be allowable, as the case may be, as a deduction to the relevant taxpayer in relation to that year of income; and

(ii)      it is fair and reasonable that that amount or a part of that amount should be allowable as a deduction to the relevant taxpayer in relation to that year of income;

determine that that amount or that part, as the case may be, should have been allowed or shall be allowable, as the case may be, as a deduction to the relevant taxpayer in relation to that year of income.

…

and the Commissioner shall take such action as he considers necessary to give effect to any such determination.

19                  Section 177G of the Act provides that nothing in s 170 prevents the amendment of assessments at any time if the amendment is for the purpose of giving effect to s 177F(3). 

20                  Section 177D provides as follows:

Schemes to which Part applies

(1)       This Part applies to any scheme that has been or is entered into after 27 May 1981, and to any scheme that has been or is carried out or commenced to be carried out after that date (other than a scheme that was entered into on or before that date), whether the scheme has been or is entered into or carried out in Australia or outside Australia or partly in Australia and partly outside Australia, where:

(a)     a taxpayer (in this section referred to as the relevant taxpayer) has obtained, or would but for section 177F obtain, a tax benefit in connection with the scheme; and

(b)     having regard to:

(i)      the manner in which the scheme was entered into or carried out;

(ii)      the form and substance of the scheme;

(iii)     the time at which the scheme was entered into and the length of the period during which the scheme was carried out;

(iv)     the result in relation to the operation of this Act that, but for this Part, would be achieved by the scheme;

(v)     any change in the financial position of the relevant taxpayer that has resulted, will result, or may reasonably be expected to result, from the scheme;

(vi)     any change in the financial position of any person who has, or has had, any connection (whether of a business, family or other nature) with the relevant taxpayer, being a change that has resulted, will result or may reasonably be expected to result, from the scheme;

(vii)    any other consequence for the relevant taxpayer, or for any person referred to in subparagraph (vi), of the scheme having been entered into or carried out; and

(viii)   the nature of any connection (whether of a business, family or other nature) between the relevant taxpayer and any person referred to in subparagraph (vi);

it would be concluded that the person, or one of the persons, who entered into or carried out the scheme or any part of the scheme did so for the purpose of enabling the relevant taxpayer to obtain a tax benefit in connection with the scheme or of enabling the relevant taxpayer and another taxpayer or other taxpayers each to obtain a tax benefit in connection with the scheme (whether or not that person who entered into or carried out the scheme or any part of the scheme is the relevant taxpayer or is the other taxpayer or one of the other taxpayers).

AMBIT OF DISPUTE IN TRIBUNAL

21                  The issue before the Tribunal was defined by an agreement constituted in an exchange of correspondence. 

1.                  On 1 February 2007 the Australian Government Solicitor for the Commissioner wrote to the solicitors for the applicants saying (in part):

5.         Firstly we understand from our recent discussions (and earlier correspondence) that the position is that for the purpose of the proceedings the Applicants and Respondent agree that the decision of the Full Federal Court in Commissioner of Taxation v Sleight (2004) 136 FCR 211 applies in relation to the Applicants unless the following matter make any difference:

(a)     in relation to all of the Applicants:

so much of the evidence adduced from the expert witnesses (namely Messrs Simpson and Banks) that is admitted into evidence by the Tribunal; and

(b)     in relation to Messrs Domenic Princi, Vincent Princi, Mate Tolich and Kevin Dorn:

so much of the evidence adduced from those applicants, that is admitted into evidence by the Tribunal, as to the amount of money lent by each of them to the Northern Rivers project and the consequent “cash negative” position of each of them in relation to the project as a whole. 

…

7.         Secondly, in respect of the contention that the Part IVA determination is not valid, we understand the following to be the situation:

(a)     the only Applicants that will be making this contention are Messrs Domenic Princi, Vincent Princi, Mate Tolich, Kevin Dorn, Phillip Shields, Graham Saggers, Gary Hopkins, Robert Ong and Elmer Galloway; and

(b)     the only ground for the contention will be that the Respondent did not make a Part IVA determination in either the 1995 and/or the 1996 years prior to issuing an amended assessment for those income years. 

2.                  The solicitors for the applicants by letter dated 8 February 2007 responded to the Australian Government solicitor in the following terms (in part):

5          For the purpose of the various proceedings we agree that the findings of the fact in the decision of Sleight v Commissioner of Taxation (2003) ATC 4801 and Commissioner of Taxation v Sleight [2004] 136 FCR 211 (the decisions) apply to all of the Applicants’ cases unless:

(i)         in relation to all of the Applicants: to the extent that the evidence adduced by the experts Simpson and Banks alters the application of the decisions; and

(ii)        in relation to Messrs Domenic Princi, Vincent Princi, Mate Tolich and Kevin Dorn:  to the extent that the evidence adduced by them alters the application of the decisions …

…

7          With respect to some of the Applicants’ contentions that the Part IVA determination is not valid, the Applicants Messrs Domenic Princi, Vincent Princi, Mate Tolich, Kevin Dorn, Phillip Shield, Graham Saggers, Gary Hopkins, Robert Ong and Elmer Galloway will be contending that the Respondent did not give effect to the Part IVA determination by issuing an amended assessment in accordance with Federal Commissioner of Taxation v Jackson (1990) 21 ATR 1012, and consequently the Respondent cannot rely on Part IVA to support the relevant amended assessments. 

THE DECISION IN SLEIGHT 136 FCR 211

22                  Given the agreed basis on which the application for review before the Tribunal was heard, it is necessary to refer to those portions of the reasons of the Full Court in Sleight 136 FCR 211 going to the nature of the scheme and why a conclusion was reached that the dominant purpose of the scheme was to avoid tax within the meaning of Pt IVA of the Act.  The structure of the project was described by Hill J at [7] to [8] as follows:

The legal structure of the tea tree oil project

7          Mr Sleight was an investment adviser.  Not much was asked in cross-examination as to his activities.  However it would seem that, at least among other products, he sold what may neutrally be described as tax effective income tax schemes. That is to say investment schemes carrying with them tax advantages.  It would seem that Mr Sleight also invested in at least some of the schemes he offered for sale, including what may be referred to as the Northern Rivers Tea Tree scheme (the subject of the present assessments), a similar scheme which was concerned with cotton growing, and a scheme apparently if not identical, then very similar to that discussed by a full Court of this Court in Vincent v Commissioner of Taxation(2002) 124 FCR 350.

8          On 14 June 1995 there was lodged with the Australian Securities and Investments Commission a prospectus inviting applicants to apply for a minimum of two parcels of 500 A class $1 shares in Northern Rivers Land Company Limited (the Land Company).  There was attached to each of the two parcels of shares a right to occupy a farm on land known as Bungawalbin in northern New South Wales.  Acceptance of the invitation required completion of an application to purchase 1000 A class $1 shares.  It was also required that the acceptor apply for a loan and thereafter enter into a loan agreement with Northern Rivers Finance Company Pty Ltd (the Finance Company).  Finally, although this was optional, signature was required of a Loan Indemnity Agreement with the Land Company and the Finance Company.  The application form gave, as will be seen, to the applicant among other options, the option to enter into a management agreement with Northern Rivers Plantation Management Ltd (the Management Company) for the management of the two parcels.

23                  The prospectus was described in detail at [10]-[24].  In summary, it:

·                    Noted that the “investments” were considered “speculative” and advised that ‘independent financial advice should be obtained’.  The issuer of the prospectus was Mobandilla Cotton Management Limited said to be agent for Northern Rivers Plantation Management Ltd (NRPM).  The minimum subscription was 350,000 ‘A’ class shares of $1 each fully paid.  In addition to the right to occupy the two farms one attached to each parcel of shares (ie a minimum of two “farms”), the subscriber had the right, but not the obligation, to have NRPM manage the farms on the terms of a management agreement which was included in the articles of association of Northern Rivers Land Company Ltd (NRLC).

·                    The land in question was, at the time the prospectus was lodged, the subject of a lease of 20 years from the then owner of the land to NRLC.  The lease contained an option for NRLC to acquire the freehold subject to the lease.  That option was proposed to be exercised, once the minimum subscription was reached. 

·                    In consideration of the right to occupy that attached to the A class shares, NRPM was to receive from each holder of 1000 shares an annual administration fee, which in the first year was $1,000 for each 1000 A class shares issued to the holder.  In years two and three the administration fee was to be $800 for the minimum two farms, and thereafter until 2015 the annual administration fee was to be 12.5% of the gross farm income.

·                    None of the investors did other than enter into a management agreement.  That is not surprising, as it would seem to have been difficult, if not legally impossible, to attempt to farm the particular portions which were allocated to the investor under the agreements. 

24                  His Honour continued:

18        The A class shares were to convert to ordinary shares on 1 July 2015.  The consequence would then be that the rights to occupy the individual lots would on that day cease and the land on which the “farms” had been established would belong to the Land Company which would then be able to take over the whole plantation and run it for the benefit of the shareholders/investors.

19        If a member entered into a management agreement with the Management Company certain rights, including the right to terminate the management agreement, were to require a special resolution of the shareholders in the Land Company.  A farmer who had elected to have the Management Company manage his farm was required to pay initially the first years’ management fee of $24,000 per two farms by equal monthly amounts in advance, or prepay the first year management fee at a reduced rate of $21,000. There was also a requirement to pay the Management Company $50 ($25 per farm for the minimum two farms) for the purchase of seed for germination as tea tree seedlings.

20        The member was to be introduced to a financier (the Finance Company) which was to advance to the member 100% of the Year one prepaid management fee ($21,000 for the two parcels of shares) and 75% of the Year one administration fee (this amounted to $750 for the minimum 2 farms).  Interest was to be 18% payable monthly in advance unless the borrower should prepay the first year’s interest in full on application (an amount of $3,045) in which case the interest rate would be 16% per annum.  The rate for the second year was to be 18% per annum payable monthly in advance but to be reduced to 14% if prepaid on or before 30 June 1996.  From year 3 onwards the interest rate was to be 4%.  The first principal repayment was to be made by a borrower on or before 30 September 1995 or 90 days after the granting of the loan which ever was the later.  The amount of the payment was to be approximately 34% of the principal sum or $7,400 for each loan of $21,750.  Further principal repayments were to be made by seven annual instalments of $2,050 unless the borrower entered into an indemnity agreement.

21        Under the indemnity agreement the Management Company agreed to indemnify borrowers against personal liability under their loan agreement.  The indemnity meant that if the borrower chose to prepay the first years’ interest under the loan agreement, he then had the right (for a “once off” cost of $400) to full indemnity for the major portion of his principal and interest payments under the loan agreement.  He or she would thus only be liable to pay the first principal repayment ($7,400) and the prepayment of the year two interest ($2,009) when, under the indemnity agreement the interest would be discounted from year two onwards to 4%.  Repayment of the balance of the principal sum advanced (after the first principal repayment) was to be made by way of 50% of the “net profits of the Member’s business until repaid.”  Likewise interest was to be payable out of the “income of the Member’s business” without recourse to the investor for personal repayment of either principal or interest.  If any amount of principal was outstanding as at 1 July 2015 it was to be paid by the Management Company which indemnified the investor accordingly.    The lender was to look only to the Management Company and not to the investor for repayment of the balance of principal and interest.

22        The Prospectus noted the “Possible Tax Implications” of “a Member Engaging in Business” in a table which indicated what was said to be the position of an investor who purchased the minimum parcel of 1,000 A Class $1 shares, exercised the right to occupy the two portions of land, exercised the right to appoint the Management Company to manage the farm business, exercised all options available in borrowing 100% of the year one management fees and 75% of the Year one administration fees and entered into the Indemnity Agreement.  The table assumes that the investor has a tax rate of 48.4%.  The table shows the following calculation:

BUSINESS EXPENSES                  INVESTOR FUNDS           BORROWED         DEDUCTIBLE

PAYABLE DAY 1

Year 1 Management Fees                                                                $21,000                   $21,000

Year 1 Administration Fee                      $250                                $750                        $1,000

Year 1 Interest                                        $3,045                                                             $3,045

Loan Indemnity Fee                                $400                                                                $400

Seed Purchase                                          $50

PAYABLE 90 DAYS

Principal Repayment                              $7,400                             ($7,400)

PAYABLE 30 JUNE 1996

Year 2 Interest                                        $2,009                                                                    $2,009

TOTALS                                                $13,154                                 $14,350                     $27,454

Tax Refund/Saving ($27,454 x 48.4%)                                                     $13,288

Less Investor Cash                                                                                                             $13,154

Investor’s Net Position (Not Including purchase ofShares)                                       +     $134

23        ... 

24        The prospectus also contained projections of what the promoters thought the results should be (including tax) on certain assumptions.  There was a note to the projections to the effect that agriculture was subject to risk factors which could affect the accuracy of the projections.  The projections assumed inflation of 3% per annum, oil yield of 250 kg per hectare, sales revenue calculated on the price of oil being $65 per kg in the years 1996 and 1997 (which was said to be expected to rise by approximately $3 in subsequent years), and costs of oil production of $1,396 per farm in 1998 with an expected rise of 3% thereafter.  It noted that a plus or minus 4% variation in the seedling price per kg or to the yield per farm would be approximately plus or minus $279,187 assuming 1200 units subscribed and $48,896 assuming 350 units subscribed in the year ending 30 June 1998.  An increase or decrease of 5% in operating and overhead expenses would affect taxable income by plus or minus $167,512 based on 1200 units subscribed and $48,896 based on 350 units subscribed in the year ending 30 June 1998.  The projections showed before tax cash distribution to growers of nothing for the years ended June 1995, 1996 and 1997 and thereafter $645 in the 1998 year, $685 in the 1999 year, $727 in the year 2000 with a total projected through to the year 2015 of $24,201 on the assumption that there were 350 units subscribed for. There were slightly lower figures in the event that 1200 units were subscribed for.  (emphasis added)

25                  At [67] his Honour detailed the applicable law concerning Pt IVA.

26                  His Honour observed at [88]:

The commercial interest in tea trees which the outlays obtained was considerably less certain than the tax benefit. If the investment lived up to the projected figures in the prospectus many years were likely to pass before Mr Sleight and his wife would see their cash returned to them. In fact the prospectus indicated that in the 1999 and 2000 years their share of the proceeds of the sale of oil was only to be $685 and $727 respectively. The prospectus presents detailed calculation of predicted revenue for the first six years of the project, however, continuing these calculations into the future reveals that it would only be at the end of the 17th year that the investor would have earned, in case, the amount that was initially outlaid (excluding the $1,000 for the purchase of the shares) but subject to any dividend from the separate share purchase.

And at [93]-[94] Hill J concluded:

93        It was submitted before his Honour, and before us, that it could not objectively be concluded that Mr Sleight entered into or carried out the scheme for the dominant purpose of obtaining the tax deductions available where the value of the tax deduction fell short of the cash outlay. As already noted, the difficulty of valuing the tax deduction lies in determining what tax rate should be taken as applicable to Mr Sleight’s taxable income.  For the reasons already given, the deductions claimed for the cotton scheme and the Vincent scheme would, necessarily need to be heavily discounted.  With respect to his Honour the projected yields from the tea tree project itself were far from as encouraging as his Honour appears to suggest.  And that is before taking into account any difficulties which the project might in fact encounter.  (emphasis added)

94        While the conclusion is one where minds might differ, I think that it is more likely than not that a reasonable person faced with having to draw the conclusion which s 177D requires would conclude that Mr Sleight entered into or carried out the scheme with the dominant purpose of obtaining the tax benefits available to him given the uncertainty attendant on the other deductions he had claimed and the uncertainty of the investment yields which the project might realise.

THE TRIBUNAL DECISIONS

27                  In the proceedings before the Tribunal each of the applicants applied for review of objection decisions of the Commissioner for the years of income ended 30 June 1995, 1996 and 1997.  In the case of the applicant, Mr Dorn, the application also included review of an objection decision of the Commissioner for the 1998 year of income.  Amended assessments had been issued to disallow deductions claimed for expenses incurred in respect of the planting, cultivation and maintenance of the tea tree farm and the production of tea tree oil. 

28                  The Tribunal also summarised salient features of the project.  It noted that the minimum subscription for the project was $1,000 for 1000 A class shares in NRLC and the right to occupy two farms.  An administration fee of $1,000 was payable by NRLC.  Each participant then entered into an agreement with NRPM the management of the farms and the payment of $21,000 prepaid management fees together with $400 as a loan indemnity fee.  There was a further agreement with Northern Rivers Finance Company Pty Ltd (NRFC).  That agreement provided for the company to lend $21,750.  This was the management fee and 75% of the administration fee to each participant.  As the Tribunal noted, under that agreement the participant paid $3,045 as prepaid interest with a principal repayment of $7,400 on or before 90 days thereafter and a further $2,009 interest in 12 months.  It followed that the effect of that agreement together with the loan indemnity fee to NRPM was that no further recourse was available against the participant for any further payments in respect of that loan.  An additional payment of $50 for the purchase of tea tree seed was also required. 

29                  Each of the applicants entering into the agreements on or immediately prior to 30 June 1995, claimed a deduction in the year ended on that date of $25,445 broken down as:

Management fees                      $21,000

Administration fees                   $  1,000

Interest in advance                    $  3,045

Loan indemnity fee                    $     400

Total                                        $25,445

30                  For the benefit of that deduction, the actual cash outlay by each applicant on or before 30 June 1995 was $3,745.  A further $7,400 was due on or before 30 September 1995 and on or before 30 June 1996 an additional $2,009 was due. 

31                  All applicants entered into identical agreements on or about 30 June 1996.  Rather than simply paying $1,000 they trebled their investment to 3000 shares and six farms.  Mr Dorn, one of the applicants, also made a further investment in June 1997 under a second prospectus which involved virtually identical arrangements.

32                  Therefore, as the Tribunal observed, the applicants sought to distinguish the decision in Sleight 136 FCR 211 on two main grounds.  The first was the particular circumstances relating to their participation in the project.  The second was on the basis of expert evidence introduced in relation to the projected financial return of the project which expert evidence had not been available to the Federal Court. 

33                  As to the first point, the applicants stressed that there was a significant cash flow negative position in each instance resulting from their investment.  It was said that this was primarily brought about by the investment of a further $200,000 allocated as to $50,000 by each of the four applicants. 

34                  The Tribunal observed that those four applicants were the directors and shareholders of an earthmoving contracting company which in the relevant period was profitable.  In addition, they had held a reasonably long association with Mr Sleight whom they described as their financial advisor.  It was said that Mr Sleight had introduced them to several investments since the early 1990s including projects with similar features to that of Northern Rivers.  The $200,000 was described as being a loan to NRLC which was necessary to ensure that the project could continue.  They described this as being a ‘white knight’ investment.  It was something of a rescue made at the request of Mr Sleight.  The applicants were imprecise as to the specific reason for the loan but it appears the Tribunal formed a view that it was necessary to allow NRLC to achieve the minimum subscription of $350,000 in shares required under the prospectus.  The applicants said that the $200,000 was a loan and that they expected it to be repaid within three to six months as shares were sold to new investors.  As security for the loan, the four applicants were issued with 200,000 A class shares in NRLC.  In addition, interest at the rate of $350 per month for each $10,000 outstanding was expected.  On this premise it was assumed that a total of $38,400.88 would be received by way of interest. 

35                  The Tribunal observed that other than in respect of the application for the 200,000 shares there was no other documentary evidence relating to the loan.  The applicants stressed before the Tribunal that it would be pointless to each risk $50,000 investment purely for the purpose of obtaining tax deductions.  However the Tribunal noted that the $200,000 was an investment in the purchase of shares in NRLC.  There was no associated interest in the farming of tea trees or the production of oil as was said to be the principal purpose of the normal participation in the project. 

36                  The applicants emphasised that there could be no project unless the advances were such that it must follow that making the advance in order to enable the project to proceed necessarily had the same purpose as the project. 

37                  The Tribunal concluded that it was difficult to accept that the dominant motive of the applicants in 1996 and in the case of Mr Dorn in 1997 was to invest in a commercial venture rather than the obtaining of a tax deduction when their previous $50,000 investment was still at risk without any sign of promised repayments.  The Tribunal was reluctant to accept the applicants were ‘fully open and frank’ regarding their motives and understanding of that $200,000 investment.  The Tribunal concluded that the $200,000 was a separate and unrelated investment to the project transactions.  It concluded that it was simply an intended short term loan to the promoter of the project at a high interest rate and while it may have allowed the project to achieve its minimum subscription and to proceed under the prospectus, it should not be taken into account as part of the applicants’ expenditure in relation to the deduction claimed.  That being so, the Tribunal concluded that it could not distinguish the applicants’ position from that found by the Full Court in Sleight 136 FCR 211. 

38                  Similarly, in relation to Mr Dorn being ‘cash flow negative’ concerning the investment in the project, he argued in the context of his income tax return for the year ended 30 June 1996 that there was a net loss disclosed so that he derived no benefit from his claim for deductions in respect of the project.  The Tribunal observed that Mr Dorn acknowledged that the loss arose from deductions claimed in respect of investments in three other similar projects in addition to the project.  In those circumstances the Tribunal could not distinguish the position of Mr Dorn from the findings of Hill J in Sleight 136 FCR 211 at [87]-[88] of his Honour’s judgment.  In particular, the Tribunal noted that at least two of the other investments were Main Camp Tea Tree Oil and Active Cattle Management.  Those investments were amongst those referred to by Hill J. 

39                  The second issue said to distinguish all the applicants from the findings relating to Mr Sleight related to the projected financial returns of the project.  Evidence was given for the applicants by Mr Simpson who expressed the opinion that the internal rate of return over 20 years of the project would be 16.82% which he considered to be favourable when compared to other agricultural projects and favourable, indeed, with any other form of investment. 

40                  The Commissioner’s expert on this topic was Mr Banks.  The Tribunal concluded that Mr Banks had impressive credentials from a long career of assessing financial returns of projects in a wide range of activities.  He did not seek to provide an opinion confined to agricultural aspects of the project.  Mr Banks was not persuaded by Mr Simpson’s analysis and noted that the report of Mr Simpson adopted relatively high yields and prices as an average over 20 years.  Adopting a best case and worst case scenario, Mr Banks produced an internal rate of return of 1.55%.  His ultimate conclusion was that the payback period allowing for risk was unlikely to be less than 20 years.  

41                  The Tribunal noted that Mr Simpson, on the basis of the prospectus assumption as to yield said that the investment would be paid back in seven to eight years.  Mr Banks considered that basis and that assumption to be unreasonably optimistic. 

42                  The Tribunal, while preferring the approach and the conclusion of Mr Banks, nevertheless indicated that it was unnecessary to make any positive finding as to what the financial returns for the project would be from the information available to investors in 1995, 1996 or 1997 because of the conclusions of Hill J in Sleight 136 FCR 211 at [88].

43                  The applicants argued that there was a miscalculation in his Honour’s computation that the investment would not be returned until the 17^th year mark. 

44                  Whether or not that is so, the Tribunal concluded that it did not accept Mr Simpson’s evidence of recovery within seven to eight years given the uncertainty of the projected returns and the assumption that maximum yields and prices would continue every year of the project. 

45                  The Tribunal also considered the invalid determination argument.  In this regard the argument was to the effect that the formal determination by the Commissioner pursuant to s 177F of the Act was made after the date of issue of the relevant amended assessments.  The Tribunal noted that the amended assessments were therefore not issued to give effect to such determination so that the Commissioner could not rely on Pt IVA of the Act in relation to such assessments.  It was argued that the time limit had expired to make a fresh determination and to give effect to such determination in amended assessments. 

46                  The Tribunal observed that in each of the decisions on the objections to the relevant amended assessments, the Commissioner relied on Pt IVA as a ground for disallowing the objections.  The Tribunal concluded that the positive statements as to that ground was a determination for the purposes of s 177F which by virtue of s 169A(3) is deemed to have been made when the amended assessments were made.  Such amended assessments were, the Tribunal concluded, issued within the time limits permitted by s 170. 

47                  The Tribunal also concluded that even if it could be said that no such determination had been made, the determination could be made by the Tribunal.  The Tribunal observed that it had the powers and discretions conferred by the Act on the Commissioner and when it reviewed an objection decision, made a correct or preferable decision on that objection.  As a consequence, any determination made by the Tribunal in its decision was made by s 169A.  The Tribunal referred to Fletcher v Commissioner of Taxation (1988) 19 FCR 442 where no determination under s 177F had been made by the Commissioner. 

48                  The Tribunal remitted the matter to the Commissioner with a direction to issue amended assessments to allow a deduction in each of the relevant years only for so much of the claimed deduction as represented the non-capital cash outlays of the applicants.  The Tribunal also made a determination under s 177F that the excess sum beyond such amounts was not an allowable deduction and remitted the matter to the Commissioner with a direction to issue amended assessments for the purpose of giving effect to that decision. 

49                  In relation to the application for review by Mr Dorn for the income tax assessment for year ended 30 June 1998, the Tribunal applied the same reasoning and reached the same conclusions and in effect made the same substantive directions. 

50                  In relation to Messrs Shields and Kho who pursued applications for review of the Commissioner’s decision to disallow objections to amended assessments of income tax in relation to the years ended 30 June 1995, 1996 and 1997, again the Tribunal applied the reasoning which appeared in the principal decision of Re Princi and Federal Commissioner of Taxation (2007) 66 ATR 133, (other than those reasons which related to the specific investment of $200,000 to which Messrs Fields and Kho were not parties). 

51                  A month later the Kho decision was given on 13 April 2007.  The Tribunal reached the same decision for the same reasons. 

THE APPEAL GROUNDS

52                  In the Princi appeal in relation to the four applicants who advanced the $200,000, the questions of law which are said to be raised on the appeal are:

2.1       Whether a reasonable person would conclude, having regard to the eight matters under section 177D(b) of the Income Tax Assessment Act 1936 (Act), that the dominant purpose of the applicants in entering into and carrying out the scheme being the Northern Rivers Tea Tree Project (Project) was to obtain a tax benefit;

2.2       Wether (sic) the applicants’ investment of $200,000 in “A” class shares under the Project prospectus formed part of the scheme for the purposes of section 177A of the Act and section 177D(b) of the Act;

2.3       If, a reasonable person could conclude that having regard to the eight matters under section 177D(b) of the Act that the dominant purpose of the Applicants in entering into and carrying out the scheme was to obtain a tax benefit, whether the Respondent made a valid determination under section 177F(1) of the Act;

2.4       Whether the Respondent deemed to have made a valid determination under section 177F(1) of the Act given the operation of section 169A(3) of the Act;

2.5       Whether any determination made by the Tribunal in its decision is a determination referred to in section 169A(3) of the Act;

2.6       Whether the Tribunal in making a determination pursuant to s 177F(1) of the Act is subject to the same time limits imposed on the Respondent pursuant sections 170 and 177G of the Act. 

53                  The grounds advanced in support of those question of law were said to be as follows:

4.1       The Tribunal erred in law in failing to distinguish Full Federal Court decision in Commissioner of Taxation v Sleight (2004) 136 FCR 211 based on:

4.1.1    the Applicants’ materially different factual circumstances and in particular to the undisputed fact that due to their collective investment of $200,000 “A” class shares under the Project prospectus each of the Applicants were significantly cashflow negative as a consequence of their participation in the Project even after taking into account the tax benefit derived from their participation in the Project;

4.1.2    the payback period from an investment in the Project in light of the expert evidence (s 177D(b)(v));

4.2       The Tribunal erred in law in concluding that the $200,000 investment by the Applicants in “A” class shares under the Project was a separate and unrelated investment to the scheme and therefore not relevant to the consideration of the Applicants’ dominant purpose for investing in the scheme;

4.3       The Tribunal erred in law concluding that the significant net loss position of Kevin Dorn for the year ended 30 June 1996, prior to his investment in the scheme, did not distinguish his position from the position of the taxpayer in Commissioner of Taxation v Sleight (2004) 136 FCR 211;

4.4       The Tribunal erred in law in concluding that the expert evidence and in particular the evidence that the payback period for an investment in the Project based on the prospectus forecast was 7-8 years (not 17 years as found by the Full Court in Sleight) did not distinguish the
Applicants’ position from the position of the taxpayer in Commissioner of Taxation v Sleight (2004) 136 FCR 211;

4.5       The Tribunal erred in law in finding that a valid determination was made by the Respondent under section 177F of the Act by simply referring to Part IVA in its Notice of Decision on Objection;

4.6       The Tribunal erred in law in finding that a valid determination was deemed to have been made under section 169A(3) of the Act at the time the relevant amended assessment was made;

4.7       The Tribunal erred in law in finding that any determination made by the Tribunal in its decision is a determination referred to in section 169A(3) of the Act;

4.8       The Tribunal erred in law in finding that in making a determination pursuant to section 177F(1) of the Act the Tribunal is not subject to the same time limits imposed on the Respondent pursuant to sections 170 and 177G of the Act.

54                  Those grounds relating to the rate of return and to the validity of the determination were also raised by all other applicants.

THE COURT’S JURISDICTION

55                  Before commenting on the submissions made for the applicants in support of those grounds of appeal, it is necessary to consider the fundamental jurisdictional question.

56                  The appeal to the Court from the Tribunal is confined to a question of law.  The right of appeal is provided for by s 44(1) of the AAT Act which provides:

(1)       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. 

57                  An appeal on a question of law is the sole basis under which the appeal from the Tribunal proceeds under s 44(1) of the AAT Act. 

58                  When the Court hears an ‘appeal’ under s 44 it is in fact exercising its original jurisdiction.  The proceedings are commenced by an applicant rather than an appellant and O 53 of the Federal Court Rules sets out the procedure which is applicable.  The High Court has observed (Allan v Transurban City Link Ltd (2001) 208 CLR 167) that s 44 is a law supported by s 76(ii) and s 77(i) of the Constitution. 

59                  Brennan J in Waterford v Commonwealth of Australia (1987) 71 ALR 673 at 689 observed:

The error of law which an appellant must rely on to succeed must arise on the facts as the AAT has found them to be or it must vitiate the findings made or it must have led the AAT to omit to make a finding it was legally required to make.  There is no error of law simply in making a wrong finding of fact. 

60                  That said, a number of authorities emphasise that as the Tribunal is an administrative body, its decisions should not be too closely scrutinised for the purpose of searching for errors of law in what may simply be imprecise language.  The decision-maker’s reasons are entitled to a beneficial construction rather than to be scrutinised upon overzealous judicial review by seeking to discern whether some inadequacy may be gleaned from the way in which the reasons are expressed.  Additionally, it is well settled that the Court will be slow to find error in matters where the decision is made by a body with special experience or knowledge and the opinion considered in the light of other evidence is not manifestly unreasonable:  Telstra Corporation Ltd v Warren, Graham [1997] FCA 102per Tamberlin J.

61                  It has been repeatedly observed and was reinforced by Saxby Bridge 133 FCR 290 that it is necessary to state with precision questions which are pure questions of law.  In that decision of the Full Court, Branson J observed that the argument of the appeal was conducted by reference to the grounds rather than by reference to the questions of law stated in the notice of appeal but it was the questions of law that are the subject matter of the appeal.  The notice of appeal in that case had been drawn ‘in disregard of the distinction between the questions of law to be raised on the appeal and the grounds relied on in support’ of the orders sought. 

62                  In my view, the applicants have, in effect, in their grounds of appeal (before any proposed amendment), sought to re-agitate the same issues of fact which were before the Tribunal in the proceedings the subject of the appeal.  That is not an avenue that is open under s 44(1) of the AAT Act. 

63                  So it is that in decisions such as Walters and Another v Commissioner of Taxation (2007) 162 FCR 421 at [59]-[60], Greenwood J said:

59        The Tribunal found [44] that the scheme comprised the series of transactions that preceded the ultimate sale of the share in each case, “that is, all of the dealings up to but not including the actual sale of the shares to the in-laws”.  Thus, the scheme was found, on the facts, to comprise the sequence of steps “taken together” [44] ... 

60        Those findings were open on the evidence and are consistent with authority concerning the scope of the term ‘scheme’ (Federal Commissioner of Taxation v Spotless Services Ltd (1996) 186 CLR 404 at 425, McHugh J; Federal Commissioner of Taxation v Peabody (1994) 181 CLR 359 at 383, Mason CJ, Brennan, Deane, Dawson, Toohey, Gaudron and McHugh JJ; Federal Commissioner of Taxation v Hart (2004) 217 CLR 216 at [9], Gleeson CJ and McHugh J, [43] Gummow and Hayne JJ, [85] Callinan J). 

64                  This conclusion was followed by Gordon J in Star City Pty Ltd v Commissioner of Taxation [2007] FCA 1701. 

65                  Even where questions of law said to be raised on appeal are appropriate questions of law for review for the purpose of s 44(1) of the AAT Act, if they can not be answered without the Court reaching different conclusions on questions of fact from those reached in the Tribunal they will not be questions of law.  As the High Court observed in Craig v South Australia (1995) 131 ALR 595 at 607, almost any question that arises for determination by a judge can be ‘dressed in the garb of a question of law’. 

66                  Another example of this practice, in Price Street Professional Centre Pty Ltd v Federal Commissioner of Taxation (2007) 97 ALD 593 at [75]-[79], Greenwood J said

75        Although the question of law to be determined before the primary judge must be stated separately from the grounds of appeal, the subject matter of the appeal as a question of law is a function of the symmetry between the question raised and the ground relied upon to demonstrate the error made.  The parties conducted the appeal before the primary judge on the footing that the question of law was whether the Tribunal had misdirected itself by applying the wrong test in determining whether a loss on sale of an asset was a loss or outgoing within the scope of s 51(1) of the Income Tax Assessment Act 1936 (‘the 1936 Act). 

76        That question, so framed, by paragraph 2(a) of the notice of appeal before the primary judge was to be answered having regard to the contended ground that the tribunal should have found something on the facts, namely, it ‘should have found that the facts before it constituted business activities under the relevant provisions of the 1936 Act and that accordingly the losses were deductible under s 51(1)’ (Ground 4(a)).

77        The error on the part of the tribunal therefore was said to be that having regard to the matrix of fact, the tribunal should have found that the appellant was engaged in business activities, receipts from which would result in derived assessable income and thus a loss or outgoing as part of that activity, is a deductible loss for the purposes of s 51(1) of the 1936 Act. 

78        There is no symmetry between the question of law framed by paragraph 2(a) and the ground of challenge at paragraph 4(a) relied upon to support that question as the subject matter of the appeal.  It might be different if the question of law raised by paragraph 2(a) was to be determined having regard to a ground that the tribunal, in determining whether a loss as found, in the circumstances found, was within the scope of s 51(1), erred by departing from the recognised approach to the construction of the provision or by formulating and applying a test inconsistent with authority, that is, the wrong test. 

79        A question of law formulated in terms of paragraph 2(a), that is to be determined on a ground that is an invitation to the court (and thus the primary judge) to reconsider the principal evidence (or any evidence) and determine what the Tribunal ‘should have found’ simply invites a factual inquiry.

67                  Section 177D of the Act stipulates when Pt IVA of the Act will apply to a ‘scheme’.  The eight categories set out in s 177D(b) ‘are posited as objective facts’ (emphasis added):  see also Federal Commissioner of Taxation v Peabody (1994) 181 CLR 359 at 382.  The conclusion reached having regard to all those matters set out in par (b) must be the conclusion of a reasonable person having regard, as objective facts, to the matters answering the description in subs (b):  Federal Commissioner of Taxation v Spotless Services Ltd (1996) 186 CLR 404 at 422. 

The grounds considered in light of these principles

68                  Applying these principles, ground 4.1.1 relates to a suggested failure on the part of the Tribunal to take into account the factual distinction in relation to the advance of the funds of $200,000 and to draw a conclusion that that factual distinction precluded the applicants from having the requisite dominant purpose.  The Tribunal examined this issue and reached a different conclusion on the facts from that argued by the applicants.  Similarly with ground 4.1.2, considering the payback period, the ground of complaint is the failure on the part of the Tribunal to prefer the evidence for the applicants as distinct from the evidence of Mr Banks.  This is not referable to any question of law. 

69                  In relation to ground 4.2, it is clear that the Tribunal needed to reach a conclusion as to what constituted the scheme.  To do so is an essential ingredient of s 177D of the Act.  The Tribunal summarised the scheme as it perceived it to be and did so, in accordance with the agreement by the parties, in a way which was entirely consistent with the summary given by the Full Court in Sleight 136 FCR 211.  No legal error arises.

70                  Ground 4.3 relates to Mr Dorn.  As the Full Court did in Sleight 136 FCR 211, the Tribunal was entitled to find that Mr Dorn’s other tax losses were attributable to similar investments in three other ‘tax driven’ projects.  But again, this is a question of fact and is not referable to any question of law. 

71                  Ground 4.4, in dealing with the payback period, complained about the Tribunal’s conclusion in relation to the expert evidence.  Mr Banks concluded that the payback period allowing for risk was unlikely to be less than 20 years.  It is clear that the Tribunal did not accept Mr Simpson’s evidence of recovery within seven to eight years.  It is also clear that was a view it was entitled to take.  It is a decision on a question of fact or opinion, not on a question of law. 

AMENDMENT

72                  In recognition of the difficulty posed by the formulation of the initial questions of law and grounds of appeal, the applicants sought to amend their notice of appeal.  The minute of this amendment was not produced until well into the applicants’ argument but senior counsel for the applicants proceeded with argument on the first day of the hearing on the assumption that the matter could be approached in terms of the legal argument to which the proposed minute of amended notice of appeal was directed.

73                  The Commissioner opposed the amendment being granted on two primary grounds.  The first was the lack of notice of the proposed amendment and second, that the argument on which the minute of amended notice of appeal depended, required a departure from the agreed terms on which the application for review was heard before the Tribunal. 

74                  The lack of notice was taken into account in permitting the Commissioner a substantial period to respond to the new proposed notice of appeal.  Written submissions were filed in response by the Commissioner.  That ground alone, in the absence of specific prejudice, would not have been sufficient to preclude amendment. 

75                  The main problem, however, was that the proposed minute which was created in response to the Commissioner’s critical objection that no question of law was raised, took a course which, in my view, departs from the agreed basis of the hearing before the Tribunal. 

76                  The minute of amended notice of appeal (relevantly) was in these terms:

2.1       A Tribunal errs in respect of a question of law when it fails to address the correct legal question before it, in this matter being whether the Applicants’ investment of $200,000 in “A” class shares in the Project formed part of the scheme for the purposes of section 177A of the Act and section 177D(b) of the Act.

2.2       A Tribunal errs in respect of a question of law when it fails to make findings of and in respect to material facts; in this matter being whether the Applicants’ investment of $200,000 in “A” class shares in the Project formed part of the scheme for the purposes of section 177A of the Act and section 177D(b) of the Act.

2.3       In the alternative to 2.1; whether the Applicants’ investment of $200,000 in “A” class shares in the Project did not form part of the scheme for the purposes of section 177A of the Act and section 177D(b) of the Act.

2.4       That the Tribunal having found as a fact that, accepting the assumptions in the Prospectus, an investment in the Project pursuant to the Prospectus would have been paid back in 7-8 years, did not then address, as it was required as a matter of law to do the relevance of this fact to the matters set out in s.177D(b) of the Act.

2.5       Whether the Respondent is deemed to have made a valid determination under section 177F(1) of the Act given the operation of section 169A(3) of the Act.

2.6       Whether any determination made by the Tribunal in its decision is a determination referred to in section 169A(3) of the Act.

2.7       Whether the Tribunal in making a determination pursuant to section 177F(1) of the Act is subject to the same time limits imposed on the Respondent pursuant to sections 170 and 177G of the Act.

4.1       The Tribunal did not address the question of whether the Applicants’ investment of $200,000 in “A” class shares under the Project prospectus formed part of the scheme for the purposes of section 177A of the Act and section 177D(b) of the Act.

4.2       Alternatively to 4.1, the Tribunal did not express its reasons in respect of the question of whether the Applicants’ investment of $200,000 in “A” class shares under the Project formed part of the scheme for the purposes of section 177A of the Act and section 177D(b) of the Act with clarity such that the Tribunal erred in law; the Tribunal being under a legal obligation to express its reasons with sufficient particularity such that the Applicants’ can determine from the reasons what the Tribunal concluded the relevant scheme was.

4.3       The Tribunal failed to determine the question of whether the Applicants’ investment of $200,000 in “A” class shares under the Project formed part of the scheme for the purposes of section 177A of the Act and section 177D(b) of the Act.

4.4 [sic] The only true conclusion which the Tribunal could have reached as to what was the scheme for the purposes of section 177A of the Act and section 177D(b) of the Act, having regard to the totality of the evidence before it was that the scheme included as a part the Applicants’ investment of $200,000  in “A” class shares under the Project.

4.5       The conclusion which the Tribunal reached (if it did) that the scheme for the purposes of section 177A of the Act and section 177D(b) of the Act, did not include as a part of the Applicants’ investment of $200,000 in “A” class shares under the Project was perverse.

4.6       The conclusion which the Tribunal reached (if it did) that the scheme for the purposes of section 177A of the Act and section 177D(b) of the Act, did not include as a part of the Applicants’ investment of $200,000 “A” class shares under the Project was one that no reasonable person could have made.

4.7       Identification of what constitutes the scheme for the purpose of Part IVA of the Act is a question of law.

4.8       An error in respect of the identification of the scheme for the purpose of Part IVA of the Act is an error in respect of a question of law.

4.9       That the Tribunal having found as a fact that, accepting the assumptions in the Prospectus, an investment in the Project pursuant to the Prospectus would have been paid back in 7-8 years, did not then address, as it was required as a matter of law to do, the relevance of this fact to the matters set out in s.177D(b) of the Act, rather it erroneously concluded that this finding of fact did not differentiate the facts of this matter from those in Sleight and thereby failed to undertake the process required by the Act to make the determination required by s.177D having regard to the matters required by s.177D(b). 

77                  Although the Commissioner’s grounds of objection were lengthy, in substance they were that the parties had agreed to the relevant scheme as being that identified in Sleight 136 FCR 211.

78                  The Commissioner contended that the Tribunal cannot commit an error of law where the issue was never raised for adjudication before the Tribunal whether by agreement between the parties or otherwise: Commissioner of Taxation v Perkins (1993) 93 ATC 4524 at 4525.9-4526 and Commissioner of Taxation v Glennan (1999) 90 FCR 538 at [80]-[83].  The issue which ground 2.1 of the proposed minute seeks to ventilate is an issue which was not raised by agreement between the parties or otherwise. 

79                  It is not uncommon for parties to litigation, including tax litigation, to limit the issues in respect of which the dispute will take place.  Indeed that is one of the functions of pleadings where they are used.  This is sensible in terms of saving time and costs to all concerned.  But no argument was advanced before the Tribunal, nor was it open, on the terms of the agreement reached, that the loan of $200,000 or any of the loans of $50,000 formed part of the actual scheme.  Indeed the issue of what constituted the scheme was never raised by the applicants in the Tribunal as an issue of the proceedings.  The only issue insofar as the $200,000 was concerned was whether that investment put the applicants in a position different from Mr Sleight as held in Sleight 136 FCR 211. 

80                  In the course of the hearing and in the course of subsequent written submissions I was taken to extracts from the transcript which supported this construction of the agreement between the parties.  For example, on the third page of the transcript of the hearing before the Tribunal, counsel who then appeared for the applicants said:

… they are massively cash flow negative as a consequence of their investment because they invested $200,000 in the project and took shares up in the project which were not deductible and their cash investment into the project or the tax benefits, should I say, pale into insignificance in the proportion to the amount of cash they invested.  We say this is a critical objective fact and our submission would be that a [sic - no] reasonable person would conclude in those factual circumstances that the applicant’s dominant purpose for participating in the project was to obtain the rather measly tax benefits that they obtained in comparison to their cash outflow.  …

81                  Written submissions on behalf of the applicants before the Tribunal were equally consistent with this approach:

At par 18.1:

The fact that all applicants were sufficiently cash flow negative as a consequence of their participation in the project.  In the case of Dorn, he derived no tax benefit whatsoever as a consequence of the investment in the 1996 and 1997 years.  This fact alone strongly militates against any finding that Part IVA can apply to the applicants.  Put simply, it makes no sense in the Applicants’ circumstances, to participate in the scheme for the dominant purpose of obtaining tax benefits.  The significance in the Full Court in Sleight of the cash flow affect and the tax savings versus the cash contributed to the Project is borne out Hill J’s judgment.

At par 19:

A reasonable person, in light of the evidence of the “White Knight” cash advance … could only agree with the evidence of Vincent Princi that “he would have been a “bloody idiot” to participate, as he did, in the North Rivers Project for the dominant purpose of obtaining tax deductions.”

At par 47:

After consideration of all of the evidence and the facts and circumstances of these particular Applicants and having regard to the eight factors in section 177D(b) of the 1936 Act, a reasonable person would not conclude for dominant purpose of the Applicants or any other person who entered into or carried out the Projects was to obtain taxation benefits for the Applicants.

82                  There is no doubt that the $200,000 loan was considered and was taken into account by the Tribunal.  It was taken into account on the issue of determining whether it affected the conclusion as to dominant purpose identified in Sleight 136 FCR 211 and for the purpose of s 177D(b) of the Act.  But it was not put up on the basis that it changed the scheme which was defined in Sleight 136 FCR 211. 

83                  These difficulties affect grounds 2.2 and 2.3 of the minute of amended notice in the same way.

84                  As to ground 2.4, in my view, this does not set out a question of law in the sense required by the AAT Act.  In Australian Telecommunications Corp v Lambroglou (1990) 12 AAR 515 Ryan J, in commenting that O 53 r 2 and r 3 of the Federal Court Rules were mandatory, observed that if the question properly analysed is not a question of law, no amount of formulary like ‘erred in law’ could make it into a question of law.  There is comment earlier in these reasons about an attempt to make what is really a question of fact sound like a question of law.  In this case what is really being argued is that the Tribunal preferred the wrong expert.  It is not enough simply to rely on the content of the prospectus.  The Tribunal reached the conclusion in the same way as the Full Court did in Sleight 136 FCR 211 that the project was not commercial.  In order to do that, it rejected the evidence of the applicants’ expert, Mr Simpson and justified its conclusion for doing so on several plausible bases. 

85                  As to the time within which the investment may be recouped, the appropriate test for the purpose of s 177D(b)(v) is the change of financial position that ‘may reasonably be expected’.  It is an objective test.  Were it otherwise, it would be completely irrelevant that the content of a prospectus in terms of reasonable expectations for the purpose of the paragraph concerned was totally inflated.  If the appropriate test was simply to look at what was stated by the promoter in the prospectus, there would be no element of objective assessment for the purpose of s 177D(b)(v).  This would defeat the obvious purpose of the enquiry set up by s 177D(b)(v). 

86                  In my view a proper construction of the evidence of Mr Banks insofar as any acceptance of a seven to eight year period was simply that he acknowledged that, on the Simpson/prospectus model with overly optimistic predictions and errors, the payback period would be seven to eight years.  That is just mathematics.  His evidence, reasonably clearly, was that the realistic payback period was substantially more and possibly in excess of 20 years. 

87         MCKERRACHER J

4 APRIL 2008

PERTH

ON APPEAL FROM THE ADMINISTRATIVE APPEALS TRIBUNAL CONSTITUTED BY BRUCE PASCOE (SENIOR MEMBER)

THE COURT ORDERS THAT:

1.                  The application is dismissed. 

2.                  The applicants are to pay the costs of the respondent to be taxed if not agreed.

Note:    Settlement and entry of orders is dealt with in Order 36 of the Federal Court Rules.

ON APPEAL FROM THE ADMINISTRATIVE APPEALS TRIBUNAL CONSTITUTED BY BRUCE PASCOE (SENIOR MEMBER)

THE COURT ORDERS THAT:

1.                  The application is dismissed. 

2.                  The applicants are to pay the costs of the respondent to be taxed if not agreed.

Note:    Settlement and entry of orders is dealt with in Order 36 of the Federal Court Rules.

ON APPEAL FROM THE ADMINISTRATIVE APPEALS TRIBUNAL CONSTITUTED BY BRUCE PASCOE (SENIOR MEMBER)

THE COURT ORDERS THAT:

1.                  The application is dismissed. 

3.                  The applicant is to pay the costs of the respondent to be taxed if not agreed.

Note:    Settlement and entry of orders is dealt with in Order 36 of the Federal Court Rules.

ON APPEAL FROM THE ADMINISTRATIVE APPEALS TRIBUNAL CONSTITUTED BY BRUCE PASCOE (SENIOR MEMBER)

REASONS FOR JUDGMENT

INTRODUCTION

1                     These three ‘appeals’ from decisions of the Administrative Appeals Tribunal (the Tribunal) were, by consent, heard together.  Each of the applicants was an investor in the Northern Rivers Tea Tree Oil Project (the project).  The project was described in detail in Commissioner of Taxation v Sleight (2004) 136 FCR 211.  In Sleight 136 FCR 211, the Full Court held that those parts of the investment by the applicants which did not constitute actual cash outlays did not give rise to allowable tax deductions.  Those investments were part of a scheme.  When viewed objectively, they were made to obtain a tax benefit.

2                     The applicants sought to distinguish their positions from that of Mr Sleight.  They argued in effect before the Tribunal that the facts and conclusions reached in Sleight 136 FCR 211 would not be challenged but should not apply to them as:

·                    in relation to all applicants, expert evidence as to the probable period of years before the investment would be returned to them (the payback period) was much shorter than computed in Sleight 136 FCR 211 in the Full Court.  It followed, the applicants contended that the payback period was much more commercially attractive than that calculated in the Full Court; and

·                    in relation to Messrs Princi, Tolich and Dorn the evidence to be adduced by them as to their specific financial involvement and circumstances also gave rise to a different conclusion from that reached in Sleight 136 FCR 211 in the Full Court; and

·                    in relation to all applicants the Commissioner had not made a valid Pt IVA determination under the Income Tax Assessment Act 1936 (Cth) (the Act) in either of the 1995 and/or 1996 years as he failed to make a declaration prior to issuing an amendment assessment for those years.  Again all applicants argued that the declarations were invalid due to this timing irregularity.

3                     Senior Member Mr B. H. Pascoe in the Tribunal did not accept the argument as to the invalidity of the Commissioner’s determination.  Nor did he accept that any of the remaining evidentiary factors gave rise to conclusions which should differ in any respect from that reached by the Full Court in Sleight 136 FCR 211.  

4                     The difficulty with which the applicants are confronted is that the determination argument aside, the remaining issues advanced by them have sought to agitate once again the factual issues argued in the Tribunal.  They seek a factual or merits review rather than review on a question of law.  The only review open pursuant to these appeals under s 44(1) of the Administrative Appeals Tribunal Act 1975 (Cth) (the AAT Act) is a review on a question of law. 

5                     Hill J observed in Sleight 136 FCR 211, in relation to his ultimate conclusion (at [88]) – a conclusion that departed from that reached by Nicholson J – that reasonable minds may differ in relation to it.  Arguably, that may be said perhaps even more so of the decision which the Tribunal was required by the parties to reach in these applications.  However, the matter was fully argued and determined in the Tribunal.  Once it reached its decision, an error of law was required for the jurisdiction of this Court to be invoked. 

6                     Accordingly, the relevant question of law is to be the subject matter of the appeal itself.  The whole of the decision of the Tribunal is not open to review except to the extent that it is relevant to the questions of law raised (Gummow J in TNT Skypak International (Aust) Pty Ltd v Commissioner of Taxation (Cth) (1988) 19 ATR 1067 at 1071-1072; Australian Securities and Investments Commission v Saxby Bridge Financial Planning Pty Ltd (2003) 133 FCR 290 at [46]; Commissioner of Taxation v Dixon (2006) 155 FCR 101).

7                     In relation to the factual aspects of the grounds of appeal as originally drawn, the Commissioner filed written submissions in opposition to those factual grounds being argued.  On receipt of the Commissioner’s submissions, the applicants sought to substantially amend the grounds of appeal and to restate questions of law.  The proposed amended questions of law and the grounds of appeal were not reduced to written form until well into the hearing but the oral submissions appeared to accept the undoubted correctness of the Commissioner’s legal argument. 

8                     The Commissioner opposed amendments being permitted so late in the hearing and, more importantly, did so also on the basis that the amendment would be inconsistent with the agreement which had been reached between the parties as to the basis upon which the matter would be argued in the Tribunal. 

9                     For reasons set out below, I am persuaded that the amendment should not be permitted.  In particular, it is clear that the applicants did not seek to argue before the Tribunal the issues which would be advanced under the proposed amended appeal.  By the proposed amended appeal, the applicants wish to assert that there was a scheme which was different in substance from that which was considered by the Full Court in Sleight 136 FCR 211.  That was not, in my view, the basis on which the agreement had been reached for argument in the Tribunal.  This conclusion that the proposed amendment would conflict with the agreed basis of proceeding in the Tribunal is not simply a technical point.  If it were more form than substance, allowing the amendment might be the better course.  However it is entirely conceivable as a matter of substance, that other evidence and arguments would have been relied upon in the Tribunal by the Commissioner had the proposed argument been advanced.  Indeed the very argument in support of the proposed amendment implicitly accepts that this would be so.  The fulcrum of the argument is that the Tribunal failed to identify the scheme.  To identify the scheme would have been a process which requires evaluation of the totality of the evidence and arguments at the hearing including the calling of a deal more evidence than the Tribunal heard.  In the absence of the agreement there may be force in the argument but the whole purpose of the agreement was presumably to narrow the issues to avoid the cost involved in such a process.

10                  As to the expert evidence on the payback period, this is clearly a question of fact.  The Tribunal ruled on that evidence.  It rejected the evidence advanced by the applicants.  No question of law arises from that rejection.  In my view, there would be clear prejudice in permitting the amendment. 

11                  While the invalid determination argument is not affected by the agreement in the Tribunal and being a question of law can be pursued in this appeal, it is unnecessary to permit the amendment in relation to the invalid determination as it is provided for in precisely the same terms in the original grounds of appeal.  However, in my view, the invalid determination argument fails for reasons I express below. 

12                  As none of the grounds can succeed, it follows that the appeals must be dismissed. 

13                  Although there was substantial detail and evidence contained in the material filed in support of the consolidated ‘appeals’, in my view, the proper and appropriate disposition of the ‘appeals’ ultimately does not and cannot turn on examination of that extensive material. 

SECTIONS OF THE ACT FALLING FOR CONSIDERATION

14                  These appeals do not raise detailed questions of statutory construction but the sections of the Act (or parts of them) falling for consideration are set out for convenience.

15                  The first, in relation to the determination argument, is s 169A(3):

(3)       In determining whether an assessment is correct, any determination, opinion or judgment of the Commissioner made, held or formed in connection with the consideration of an objection against the assessment shall be deemed to have been made, held or formed when the assessment was made.

16                  Section 170 sets out certain time limits within which the Commissioner may amend assessments which have been made. 

17                  Under s 177A of the Act it is provided by subs 5 that a reference in Pt IVA to a scheme or part of a scheme being entered into or carried out by a person for a particular purpose shall be read as including a reference to the scheme or part of the scheme being entered into or carried out by the person for two or more purposes of which that particular purpose was the dominant purpose.

18                  Relevantly by s 177F(3) it is provided:

(3)       Where the Commissioner has made a determination under subsection (1) or (2A) in respect of a taxpayer in relation to a scheme to which this Part applies, the Commissioner may, in relation to any taxpayer (in this subsection referred to as the relevant taxpayer):

(a)     if, in the opinion of the Commissioner:

(i)      there has been included, or would but for this subsection be included, in the assessable income of the relevant taxpayer of a year of income an amount that would not have been included or would not be included, as the case may be, in the assessable income of the relevant taxpayer of that year of income if the scheme had not been entered into or carried out; and

(ii)      it is fair and reasonable that that amount or a part of that amount should not be included in the assessable income of the relevant taxpayer of that year of income;

determine that that amount or that part of that amount, as the case may be, should not have been included or shall not be included, as the case may be, in the assessable income of the relevant taxpayer of that year of income; or

(b)     if, in the opinion of the Commissioner:

(i)      an amount would have been allowed or would be allowable to the relevant taxpayer as a deduction in relation to a year of income if the scheme had not been entered into or carried out, being an amount that was not allowed or would not, but for this subsection, be allowable, as the case may be, as a deduction to the relevant taxpayer in relation to that year of income; and

(ii)      it is fair and reasonable that that amount or a part of that amount should be allowable as a deduction to the relevant taxpayer in relation to that year of income;

determine that that amount or that part, as the case may be, should have been allowed or shall be allowable, as the case may be, as a deduction to the relevant taxpayer in relation to that year of income.

…

and the Commissioner shall take such action as he considers necessary to give effect to any such determination.

19                  Section 177G of the Act provides that nothing in s 170 prevents the amendment of assessments at any time if the amendment is for the purpose of giving effect to s 177F(3). 

20                  Section 177D provides as follows:

Schemes to which Part applies

(1)       This Part applies to any scheme that has been or is entered into after 27 May 1981, and to any scheme that has been or is carried out or commenced to be carried out after that date (other than a scheme that was entered into on or before that date), whether the scheme has been or is entered into or carried out in Australia or outside Australia or partly in Australia and partly outside Australia, where:

(a)     a taxpayer (in this section referred to as the relevant taxpayer) has obtained, or would but for section 177F obtain, a tax benefit in connection with the scheme; and

(b)     having regard to:

(i)      the manner in which the scheme was entered into or carried out;

(ii)      the form and substance of the scheme;

(iii)     the time at which the scheme was entered into and the length of the period during which the scheme was carried out;

(iv)     the result in relation to the operation of this Act that, but for this Part, would be achieved by the scheme;

(v)     any change in the financial position of the relevant taxpayer that has resulted, will result, or may reasonably be expected to result, from the scheme;

(vi)     any change in the financial position of any person who has, or has had, any connection (whether of a business, family or other nature) with the relevant taxpayer, being a change that has resulted, will result or may reasonably be expected to result, from the scheme;

(vii)    any other consequence for the relevant taxpayer, or for any person referred to in subparagraph (vi), of the scheme having been entered into or carried out; and

(viii)   the nature of any connection (whether of a business, family or other nature) between the relevant taxpayer and any person referred to in subparagraph (vi);

it would be concluded that the person, or one of the persons, who entered into or carried out the scheme or any part of the scheme did so for the purpose of enabling the relevant taxpayer to obtain a tax benefit in connection with the scheme or of enabling the relevant taxpayer and another taxpayer or other taxpayers each to obtain a tax benefit in connection with the scheme (whether or not that person who entered into or carried out the scheme or any part of the scheme is the relevant taxpayer or is the other taxpayer or one of the other taxpayers).

AMBIT OF DISPUTE IN TRIBUNAL

21                  The issue before the Tribunal was defined by an agreement constituted in an exchange of correspondence. 

1.                  On 1 February 2007 the Australian Government Solicitor for the Commissioner wrote to the solicitors for the applicants saying (in part):

5.         Firstly we understand from our recent discussions (and earlier correspondence) that the position is that for the purpose of the proceedings the Applicants and Respondent agree that the decision of the Full Federal Court in Commissioner of Taxation v Sleight (2004) 136 FCR 211 applies in relation to the Applicants unless the following matter make any difference:

(a)     in relation to all of the Applicants:

so much of the evidence adduced from the expert witnesses (namely Messrs Simpson and Banks) that is admitted into evidence by the Tribunal; and

(b)     in relation to Messrs Domenic Princi, Vincent Princi, Mate Tolich and Kevin Dorn:

so much of the evidence adduced from those applicants, that is admitted into evidence by the Tribunal, as to the amount of money lent by each of them to the Northern Rivers project and the consequent “cash negative” position of each of them in relation to the project as a whole. 

…

7.         Secondly, in respect of the contention that the Part IVA determination is not valid, we understand the following to be the situation:

(a)     the only Applicants that will be making this contention are Messrs Domenic Princi, Vincent Princi, Mate Tolich, Kevin Dorn, Phillip Shields, Graham Saggers, Gary Hopkins, Robert Ong and Elmer Galloway; and

(b)     the only ground for the contention will be that the Respondent did not make a Part IVA determination in either the 1995 and/or the 1996 years prior to issuing an amended assessment for those income years. 

2.                  The solicitors for the applicants by letter dated 8 February 2007 responded to the Australian Government solicitor in the following terms (in part):

5          For the purpose of the various proceedings we agree that the findings of the fact in the decision of Sleight v Commissioner of Taxation (2003) ATC 4801 and Commissioner of Taxation v Sleight [2004] 136 FCR 211 (the decisions) apply to all of the Applicants’ cases unless:

(i)         in relation to all of the Applicants: to the extent that the evidence adduced by the experts Simpson and Banks alters the application of the decisions; and

(ii)        in relation to Messrs Domenic Princi, Vincent Princi, Mate Tolich and Kevin Dorn:  to the extent that the evidence adduced by them alters the application of the decisions …

…

7          With respect to some of the Applicants’ contentions that the Part IVA determination is not valid, the Applicants Messrs Domenic Princi, Vincent Princi, Mate Tolich, Kevin Dorn, Phillip Shield, Graham Saggers, Gary Hopkins, Robert Ong and Elmer Galloway will be contending that the Respondent did not give effect to the Part IVA determination by issuing an amended assessment in accordance with Federal Commissioner of Taxation v Jackson (1990) 21 ATR 1012, and consequently the Respondent cannot rely on Part IVA to support the relevant amended assessments. 

THE DECISION IN SLEIGHT 136 FCR 211

22                  Given the agreed basis on which the application for review before the Tribunal was heard, it is necessary to refer to those portions of the reasons of the Full Court in Sleight 136 FCR 211 going to the nature of the scheme and why a conclusion was reached that the dominant purpose of the scheme was to avoid tax within the meaning of Pt IVA of the Act.  The structure of the project was described by Hill J at [7] to [8] as follows:

The legal structure of the tea tree oil project

7          Mr Sleight was an investment adviser.  Not much was asked in cross-examination as to his activities.  However it would seem that, at least among other products, he sold what may neutrally be described as tax effective income tax schemes. That is to say investment schemes carrying with them tax advantages.  It would seem that Mr Sleight also invested in at least some of the schemes he offered for sale, including what may be referred to as the Northern Rivers Tea Tree scheme (the subject of the present assessments), a similar scheme which was concerned with cotton growing, and a scheme apparently if not identical, then very similar to that discussed by a full Court of this Court in Vincent v Commissioner of Taxation(2002) 124 FCR 350.

8          On 14 June 1995 there was lodged with the Australian Securities and Investments Commission a prospectus inviting applicants to apply for a minimum of two parcels of 500 A class $1 shares in Northern Rivers Land Company Limited (the Land Company).  There was attached to each of the two parcels of shares a right to occupy a farm on land known as Bungawalbin in northern New South Wales.  Acceptance of the invitation required completion of an application to purchase 1000 A class $1 shares.  It was also required that the acceptor apply for a loan and thereafter enter into a loan agreement with Northern Rivers Finance Company Pty Ltd (the Finance Company).  Finally, although this was optional, signature was required of a Loan Indemnity Agreement with the Land Company and the Finance Company.  The application form gave, as will be seen, to the applicant among other options, the option to enter into a management agreement with Northern Rivers Plantation Management Ltd (the Management Company) for the management of the two parcels.

23                  The prospectus was described in detail at [10]-[24].  In summary, it:

·                    Noted that the “investments” were considered “speculative” and advised that ‘independent financial advice should be obtained’.  The issuer of the prospectus was Mobandilla Cotton Management Limited said to be agent for Northern Rivers Plantation Management Ltd (NRPM).  The minimum subscription was 350,000 ‘A’ class shares of $1 each fully paid.  In addition to the right to occupy the two farms one attached to each parcel of shares (ie a minimum of two “farms”), the subscriber had the right, but not the obligation, to have NRPM manage the farms on the terms of a management agreement which was included in the articles of association of Northern Rivers Land Company Ltd (NRLC).

·                    The land in question was, at the time the prospectus was lodged, the subject of a lease of 20 years from the then owner of the land to NRLC.  The lease contained an option for NRLC to acquire the freehold subject to the lease.  That option was proposed to be exercised, once the minimum subscription was reached. 

·                    In consideration of the right to occupy that attached to the A class shares, NRPM was to receive from each holder of 1000 shares an annual administration fee, which in the first year was $1,000 for each 1000 A class shares issued to the holder.  In years two and three the administration fee was to be $800 for the minimum two farms, and thereafter until 2015 the annual administration fee was to be 12.5% of the gross farm income.

·                    None of the investors did other than enter into a management agreement.  That is not surprising, as it would seem to have been difficult, if not legally impossible, to attempt to farm the particular portions which were allocated to the investor under the agreements. 

24                  His Honour continued:

18        The A class shares were to convert to ordinary shares on 1 July 2015.  The consequence would then be that the rights to occupy the individual lots would on that day cease and the land on which the “farms” had been established would belong to the Land Company which would then be able to take over the whole plantation and run it for the benefit of the shareholders/investors.

19        If a member entered into a management agreement with the Management Company certain rights, including the right to terminate the management agreement, were to require a special resolution of the shareholders in the Land Company.  A farmer who had elected to have the Management Company manage his farm was required to pay initially the first years’ management fee of $24,000 per two farms by equal monthly amounts in advance, or prepay the first year management fee at a reduced rate of $21,000. There was also a requirement to pay the Management Company $50 ($25 per farm for the minimum two farms) for the purchase of seed for germination as tea tree seedlings.

20        The member was to be introduced to a financier (the Finance Company) which was to advance to the member 100% of the Year one prepaid management fee ($21,000 for the two parcels of shares) and 75% of the Year one administration fee (this amounted to $750 for the minimum 2 farms).  Interest was to be 18% payable monthly in advance unless the borrower should prepay the first year’s interest in full on application (an amount of $3,045) in which case the interest rate would be 16% per annum.  The rate for the second year was to be 18% per annum payable monthly in advance but to be reduced to 14% if prepaid on or before 30 June 1996.  From year 3 onwards the interest rate was to be 4%.  The first principal repayment was to be made by a borrower on or before 30 September 1995 or 90 days after the granting of the loan which ever was the later.  The amount of the payment was to be approximately 34% of the principal sum or $7,400 for each loan of $21,750.  Further principal repayments were to be made by seven annual instalments of $2,050 unless the borrower entered into an indemnity agreement.

21        Under the indemnity agreement the Management Company agreed to indemnify borrowers against personal liability under their loan agreement.  The indemnity meant that if the borrower chose to prepay the first years’ interest under the loan agreement, he then had the right (for a “once off” cost of $400) to full indemnity for the major portion of his principal and interest payments under the loan agreement.  He or she would thus only be liable to pay the first principal repayment ($7,400) and the prepayment of the year two interest ($2,009) when, under the indemnity agreement the interest would be discounted from year two onwards to 4%.  Repayment of the balance of the principal sum advanced (after the first principal repayment) was to be made by way of 50% of the “net profits of the Member’s business until repaid.”  Likewise interest was to be payable out of the “income of the Member’s business” without recourse to the investor for personal repayment of either principal or interest.  If any amount of principal was outstanding as at 1 July 2015 it was to be paid by the Management Company which indemnified the investor accordingly.    The lender was to look only to the Management Company and not to the investor for repayment of the balance of principal and interest.

22        The Prospectus noted the “Possible Tax Implications” of “a Member Engaging in Business” in a table which indicated what was said to be the position of an investor who purchased the minimum parcel of 1,000 A Class $1 shares, exercised the right to occupy the two portions of land, exercised the right to appoint the Management Company to manage the farm business, exercised all options available in borrowing 100% of the year one management fees and 75% of the Year one administration fees and entered into the Indemnity Agreement.  The table assumes that the investor has a tax rate of 48.4%.  The table shows the following calculation:

BUSINESS EXPENSES                  INVESTOR FUNDS           BORROWED         DEDUCTIBLE

PAYABLE DAY 1

Year 1 Management Fees                                                                $21,000                   $21,000

Year 1 Administration Fee                      $250                                $750                        $1,000

Year 1 Interest                                        $3,045                                                             $3,045

Loan Indemnity Fee                                $400                                                                $400

Seed Purchase                                          $50

PAYABLE 90 DAYS

Principal Repayment                              $7,400                             ($7,400)

PAYABLE 30 JUNE 1996

Year 2 Interest                                        $2,009                                                                    $2,009

TOTALS                                                $13,154                                 $14,350                     $27,454

Tax Refund/Saving ($27,454 x 48.4%)                                                     $13,288

Less Investor Cash                                                                                                             $13,154

Investor’s Net Position (Not Including purchase ofShares)                                       +     $134

23        ... 

24        The prospectus also contained projections of what the promoters thought the results should be (including tax) on certain assumptions.  There was a note to the projections to the effect that agriculture was subject to risk factors which could affect the accuracy of the projections.  The projections assumed inflation of 3% per annum, oil yield of 250 kg per hectare, sales revenue calculated on the price of oil being $65 per kg in the years 1996 and 1997 (which was said to be expected to rise by approximately $3 in subsequent years), and costs of oil production of $1,396 per farm in 1998 with an expected rise of 3% thereafter.  It noted that a plus or minus 4% variation in the seedling price per kg or to the yield per farm would be approximately plus or minus $279,187 assuming 1200 units subscribed and $48,896 assuming 350 units subscribed in the year ending 30 June 1998.  An increase or decrease of 5% in operating and overhead expenses would affect taxable income by plus or minus $167,512 based on 1200 units subscribed and $48,896 based on 350 units subscribed in the year ending 30 June 1998.  The projections showed before tax cash distribution to growers of nothing for the years ended June 1995, 1996 and 1997 and thereafter $645 in the 1998 year, $685 in the 1999 year, $727 in the year 2000 with a total projected through to the year 2015 of $24,201 on the assumption that there were 350 units subscribed for. There were slightly lower figures in the event that 1200 units were subscribed for.  (emphasis added)

25                  At [67] his Honour detailed the applicable law concerning Pt IVA.

26                  His Honour observed at [88]:

The commercial interest in tea trees which the outlays obtained was considerably less certain than the tax benefit. If the investment lived up to the projected figures in the prospectus many years were likely to pass before Mr Sleight and his wife would see their cash returned to them. In fact the prospectus indicated that in the 1999 and 2000 years their share of the proceeds of the sale of oil was only to be $685 and $727 respectively. The prospectus presents detailed calculation of predicted revenue for the first six years of the project, however, continuing these calculations into the future reveals that it would only be at the end of the 17th year that the investor would have earned, in case, the amount that was initially outlaid (excluding the $1,000 for the purchase of the shares) but subject to any dividend from the separate share purchase.

And at [93]-[94] Hill J concluded:

93        It was submitted before his Honour, and before us, that it could not objectively be concluded that Mr Sleight entered into or carried out the scheme for the dominant purpose of obtaining the tax deductions available where the value of the tax deduction fell short of the cash outlay. As already noted, the difficulty of valuing the tax deduction lies in determining what tax rate should be taken as applicable to Mr Sleight’s taxable income.  For the reasons already given, the deductions claimed for the cotton scheme and the Vincent scheme would, necessarily need to be heavily discounted.  With respect to his Honour the projected yields from the tea tree project itself were far from as encouraging as his Honour appears to suggest.  And that is before taking into account any difficulties which the project might in fact encounter.  (emphasis added)

94        While the conclusion is one where minds might differ, I think that it is more likely than not that a reasonable person faced with having to draw the conclusion which s 177D requires would conclude that Mr Sleight entered into or carried out the scheme with the dominant purpose of obtaining the tax benefits available to him given the uncertainty attendant on the other deductions he had claimed and the uncertainty of the investment yields which the project might realise.

THE TRIBUNAL DECISIONS

27                  In the proceedings before the Tribunal each of the applicants applied for review of objection decisions of the Commissioner for the years of income ended 30 June 1995, 1996 and 1997.  In the case of the applicant, Mr Dorn, the application also included review of an objection decision of the Commissioner for the 1998 year of income.  Amended assessments had been issued to disallow deductions claimed for expenses incurred in respect of the planting, cultivation and maintenance of the tea tree farm and the production of tea tree oil. 

28                  The Tribunal also summarised salient features of the project.  It noted that the minimum subscription for the project was $1,000 for 1000 A class shares in NRLC and the right to occupy two farms.  An administration fee of $1,000 was payable by NRLC.  Each participant then entered into an agreement with NRPM the management of the farms and the payment of $21,000 prepaid management fees together with $400 as a loan indemnity fee.  There was a further agreement with Northern Rivers Finance Company Pty Ltd (NRFC).  That agreement provided for the company to lend $21,750.  This was the management fee and 75% of the administration fee to each participant.  As the Tribunal noted, under that agreement the participant paid $3,045 as prepaid interest with a principal repayment of $7,400 on or before 90 days thereafter and a further $2,009 interest in 12 months.  It followed that the effect of that agreement together with the loan indemnity fee to NRPM was that no further recourse was available against the participant for any further payments in respect of that loan.  An additional payment of $50 for the purchase of tea tree seed was also required. 

29                  Each of the applicants entering into the agreements on or immediately prior to 30 June 1995, claimed a deduction in the year ended on that date of $25,445 broken down as:

Management fees                      $21,000

Administration fees                   $  1,000

Interest in advance                    $  3,045

Loan indemnity fee                    $     400

Total                                        $25,445

30                  For the benefit of that deduction, the actual cash outlay by each applicant on or before 30 June 1995 was $3,745.  A further $7,400 was due on or before 30 September 1995 and on or before 30 June 1996 an additional $2,009 was due. 

31                  All applicants entered into identical agreements on or about 30 June 1996.  Rather than simply paying $1,000 they trebled their investment to 3000 shares and six farms.  Mr Dorn, one of the applicants, also made a further investment in June 1997 under a second prospectus which involved virtually identical arrangements.

32                  Therefore, as the Tribunal observed, the applicants sought to distinguish the decision in Sleight 136 FCR 211 on two main grounds.  The first was the particular circumstances relating to their participation in the project.  The second was on the basis of expert evidence introduced in relation to the projected financial return of the project which expert evidence had not been available to the Federal Court. 

33                  As to the first point, the applicants stressed that there was a significant cash flow negative position in each instance resulting from their investment.  It was said that this was primarily brought about by the investment of a further $200,000 allocated as to $50,000 by each of the four applicants. 

34                  The Tribunal observed that those four applicants were the directors and shareholders of an earthmoving contracting company which in the relevant period was profitable.  In addition, they had held a reasonably long association with Mr Sleight whom they described as their financial advisor.  It was said that Mr Sleight had introduced them to several investments since the early 1990s including projects with similar features to that of Northern Rivers.  The $200,000 was described as being a loan to NRLC which was necessary to ensure that the project could continue.  They described this as being a ‘white knight’ investment.  It was something of a rescue made at the request of Mr Sleight.  The applicants were imprecise as to the specific reason for the loan but it appears the Tribunal formed a view that it was necessary to allow NRLC to achieve the minimum subscription of $350,000 in shares required under the prospectus.  The applicants said that the $200,000 was a loan and that they expected it to be repaid within three to six months as shares were sold to new investors.  As security for the loan, the four applicants were issued with 200,000 A class shares in NRLC.  In addition, interest at the rate of $350 per month for each $10,000 outstanding was expected.  On this premise it was assumed that a total of $38,400.88 would be received by way of interest. 

35                  The Tribunal observed that other than in respect of the application for the 200,000 shares there was no other documentary evidence relating to the loan.  The applicants stressed before the Tribunal that it would be pointless to each risk $50,000 investment purely for the purpose of obtaining tax deductions.  However the Tribunal noted that the $200,000 was an investment in the purchase of shares in NRLC.  There was no associated interest in the farming of tea trees or the production of oil as was said to be the principal purpose of the normal participation in the project. 

36                  The applicants emphasised that there could be no project unless the advances were such that it must follow that making the advance in order to enable the project to proceed necessarily had the same purpose as the project. 

37                  The Tribunal concluded that it was difficult to accept that the dominant motive of the applicants in 1996 and in the case of Mr Dorn in 1997 was to invest in a commercial venture rather than the obtaining of a tax deduction when their previous $50,000 investment was still at risk without any sign of promised repayments.  The Tribunal was reluctant to accept the applicants were ‘fully open and frank’ regarding their motives and understanding of that $200,000 investment.  The Tribunal concluded that the $200,000 was a separate and unrelated investment to the project transactions.  It concluded that it was simply an intended short term loan to the promoter of the project at a high interest rate and while it may have allowed the project to achieve its minimum subscription and to proceed under the prospectus, it should not be taken into account as part of the applicants’ expenditure in relation to the deduction claimed.  That being so, the Tribunal concluded that it could not distinguish the applicants’ position from that found by the Full Court in Sleight 136 FCR 211. 

38                  Similarly, in relation to Mr Dorn being ‘cash flow negative’ concerning the investment in the project, he argued in the context of his income tax return for the year ended 30 June 1996 that there was a net loss disclosed so that he derived no benefit from his claim for deductions in respect of the project.  The Tribunal observed that Mr Dorn acknowledged that the loss arose from deductions claimed in respect of investments in three other similar projects in addition to the project.  In those circumstances the Tribunal could not distinguish the position of Mr Dorn from the findings of Hill J in Sleight 136 FCR 211 at [87]-[88] of his Honour’s judgment.  In particular, the Tribunal noted that at least two of the other investments were Main Camp Tea Tree Oil and Active Cattle Management.  Those investments were amongst those referred to by Hill J. 

39                  The second issue said to distinguish all the applicants from the findings relating to Mr Sleight related to the projected financial returns of the project.  Evidence was given for the applicants by Mr Simpson who expressed the opinion that the internal rate of return over 20 years of the project would be 16.82% which he considered to be favourable when compared to other agricultural projects and favourable, indeed, with any other form of investment. 

40                  The Commissioner’s expert on this topic was Mr Banks.  The Tribunal concluded that Mr Banks had impressive credentials from a long career of assessing financial returns of projects in a wide range of activities.  He did not seek to provide an opinion confined to agricultural aspects of the project.  Mr Banks was not persuaded by Mr Simpson’s analysis and noted that the report of Mr Simpson adopted relatively high yields and prices as an average over 20 years.  Adopting a best case and worst case scenario, Mr Banks produced an internal rate of return of 1.55%.  His ultimate conclusion was that the payback period allowing for risk was unlikely to be less than 20 years.  

41                  The Tribunal noted that Mr Simpson, on the basis of the prospectus assumption as to yield said that the investment would be paid back in seven to eight years.  Mr Banks considered that basis and that assumption to be unreasonably optimistic. 

42                  The Tribunal, while preferring the approach and the conclusion of Mr Banks, nevertheless indicated that it was unnecessary to make any positive finding as to what the financial returns for the project would be from the information available to investors in 1995, 1996 or 1997 because of the conclusions of Hill J in Sleight 136 FCR 211 at [88].

43                  The applicants argued that there was a miscalculation in his Honour’s computation that the investment would not be returned until the 17^th year mark. 

44                  Whether or not that is so, the Tribunal concluded that it did not accept Mr Simpson’s evidence of recovery within seven to eight years given the uncertainty of the projected returns and the assumption that maximum yields and prices would continue every year of the project. 

45                  The Tribunal also considered the invalid determination argument.  In this regard the argument was to the effect that the formal determination by the Commissioner pursuant to s 177F of the Act was made after the date of issue of the relevant amended assessments.  The Tribunal noted that the amended assessments were therefore not issued to give effect to such determination so that the Commissioner could not rely on Pt IVA of the Act in relation to such assessments.  It was argued that the time limit had expired to make a fresh determination and to give effect to such determination in amended assessments. 

46                  The Tribunal observed that in each of the decisions on the objections to the relevant amended assessments, the Commissioner relied on Pt IVA as a ground for disallowing the objections.  The Tribunal concluded that the positive statements as to that ground was a determination for the purposes of s 177F which by virtue of s 169A(3) is deemed to have been made when the amended assessments were made.  Such amended assessments were, the Tribunal concluded, issued within the time limits permitted by s 170. 

47                  The Tribunal also concluded that even if it could be said that no such determination had been made, the determination could be made by the Tribunal.  The Tribunal observed that it had the powers and discretions conferred by the Act on the Commissioner and when it reviewed an objection decision, made a correct or preferable decision on that objection.  As a consequence, any determination made by the Tribunal in its decision was made by s 169A.  The Tribunal referred to Fletcher v Commissioner of Taxation (1988) 19 FCR 442 where no determination under s 177F had been made by the Commissioner. 

48                  The Tribunal remitted the matter to the Commissioner with a direction to issue amended assessments to allow a deduction in each of the relevant years only for so much of the claimed deduction as represented the non-capital cash outlays of the applicants.  The Tribunal also made a determination under s 177F that the excess sum beyond such amounts was not an allowable deduction and remitted the matter to the Commissioner with a direction to issue amended assessments for the purpose of giving effect to that decision. 

49                  In relation to the application for review by Mr Dorn for the income tax assessment for year ended 30 June 1998, the Tribunal applied the same reasoning and reached the same conclusions and in effect made the same substantive directions. 

50                  In relation to Messrs Shields and Kho who pursued applications for review of the Commissioner’s decision to disallow objections to amended assessments of income tax in relation to the years ended 30 June 1995, 1996 and 1997, again the Tribunal applied the reasoning which appeared in the principal decision of Re Princi and Federal Commissioner of Taxation (2007) 66 ATR 133, (other than those reasons which related to the specific investment of $200,000 to which Messrs Fields and Kho were not parties). 

51                  A month later the Kho decision was given on 13 April 2007.  The Tribunal reached the same decision for the same reasons. 

THE APPEAL GROUNDS

52                  In the Princi appeal in relation to the four applicants who advanced the $200,000, the questions of law which are said to be raised on the appeal are:

2.1       Whether a reasonable person would conclude, having regard to the eight matters under section 177D(b) of the Income Tax Assessment Act 1936 (Act), that the dominant purpose of the applicants in entering into and carrying out the scheme being the Northern Rivers Tea Tree Project (Project) was to obtain a tax benefit;

2.2       Wether (sic) the applicants’ investment of $200,000 in “A” class shares under the Project prospectus formed part of the scheme for the purposes of section 177A of the Act and section 177D(b) of the Act;

2.3       If, a reasonable person could conclude that having regard to the eight matters under section 177D(b) of the Act that the dominant purpose of the Applicants in entering into and carrying out the scheme was to obtain a tax benefit, whether the Respondent made a valid determination under section 177F(1) of the Act;

2.4       Whether the Respondent deemed to have made a valid determination under section 177F(1) of the Act given the operation of section 169A(3) of the Act;

2.5       Whether any determination made by the Tribunal in its decision is a determination referred to in section 169A(3) of the Act;

2.6       Whether the Tribunal in making a determination pursuant to s 177F(1) of the Act is subject to the same time limits imposed on the Respondent pursuant sections 170 and 177G of the Act. 

53                  The grounds advanced in support of those question of law were said to be as follows:

4.1       The Tribunal erred in law in failing to distinguish Full Federal Court decision in Commissioner of Taxation v Sleight (2004) 136 FCR 211 based on:

4.1.1    the Applicants’ materially different factual circumstances and in particular to the undisputed fact that due to their collective investment of $200,000 “A” class shares under the Project prospectus each of the Applicants were significantly cashflow negative as a consequence of their participation in the Project even after taking into account the tax benefit derived from their participation in the Project;

4.1.2    the payback period from an investment in the Project in light of the expert evidence (s 177D(b)(v));

4.2       The Tribunal erred in law in concluding that the $200,000 investment by the Applicants in “A” class shares under the Project was a separate and unrelated investment to the scheme and therefore not relevant to the consideration of the Applicants’ dominant purpose for investing in the scheme;

4.3       The Tribunal erred in law concluding that the significant net loss position of Kevin Dorn for the year ended 30 June 1996, prior to his investment in the scheme, did not distinguish his position from the position of the taxpayer in Commissioner of Taxation v Sleight (2004) 136 FCR 211;

4.4       The Tribunal erred in law in concluding that the expert evidence and in particular the evidence that the payback period for an investment in the Project based on the prospectus forecast was 7-8 years (not 17 years as found by the Full Court in Sleight) did not distinguish the
Applicants’ position from the position of the taxpayer in Commissioner of Taxation v Sleight (2004) 136 FCR 211;

4.5       The Tribunal erred in law in finding that a valid determination was made by the Respondent under section 177F of the Act by simply referring to Part IVA in its Notice of Decision on Objection;

4.6       The Tribunal erred in law in finding that a valid determination was deemed to have been made under section 169A(3) of the Act at the time the relevant amended assessment was made;

4.7       The Tribunal erred in law in finding that any determination made by the Tribunal in its decision is a determination referred to in section 169A(3) of the Act;

4.8       The Tribunal erred in law in finding that in making a determination pursuant to section 177F(1) of the Act the Tribunal is not subject to the same time limits imposed on the Respondent pursuant to sections 170 and 177G of the Act.

54                  Those grounds relating to the rate of return and to the validity of the determination were also raised by all other applicants.

THE COURT’S JURISDICTION

55                  Before commenting on the submissions made for the applicants in support of those grounds of appeal, it is necessary to consider the fundamental jurisdictional question.

56                  The appeal to the Court from the Tribunal is confined to a question of law.  The right of appeal is provided for by s 44(1) of the AAT Act which provides:

(1)       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. 

57                  An appeal on a question of law is the sole basis under which the appeal from the Tribunal proceeds under s 44(1) of the AAT Act. 

58                  When the Court hears an ‘appeal’ under s 44 it is in fact exercising its original jurisdiction.  The proceedings are commenced by an applicant rather than an appellant and O 53 of the Federal Court Rules sets out the procedure which is applicable.  The High Court has observed (Allan v Transurban City Link Ltd (2001) 208 CLR 167) that s 44 is a law supported by s 76(ii) and s 77(i) of the Constitution. 

59                  Brennan J in Waterford v Commonwealth of Australia (1987) 71 ALR 673 at 689 observed:

The error of law which an appellant must rely on to succeed must arise on the facts as the AAT has found them to be or it must vitiate the findings made or it must have led the AAT to omit to make a finding it was legally required to make.  There is no error of law simply in making a wrong finding of fact. 

60                  That said, a number of authorities emphasise that as the Tribunal is an administrative body, its decisions should not be too closely scrutinised for the purpose of searching for errors of law in what may simply be imprecise language.  The decision-maker’s reasons are entitled to a beneficial construction rather than to be scrutinised upon overzealous judicial review by seeking to discern whether some inadequacy may be gleaned from the way in which the reasons are expressed.  Additionally, it is well settled that the Court will be slow to find error in matters where the decision is made by a body with special experience or knowledge and the opinion considered in the light of other evidence is not manifestly unreasonable:  Telstra Corporation Ltd v Warren, Graham [1997] FCA 102per Tamberlin J.

61                  It has been repeatedly observed and was reinforced by Saxby Bridge 133 FCR 290 that it is necessary to state with precision questions which are pure questions of law.  In that decision of the Full Court, Branson J observed that the argument of the appeal was conducted by reference to the grounds rather than by reference to the questions of law stated in the notice of appeal but it was the questions of law that are the subject matter of the appeal.  The notice of appeal in that case had been drawn ‘in disregard of the distinction between the questions of law to be raised on the appeal and the grounds relied on in support’ of the orders sought. 

62                  In my view, the applicants have, in effect, in their grounds of appeal (before any proposed amendment), sought to re-agitate the same issues of fact which were before the Tribunal in the proceedings the subject of the appeal.  That is not an avenue that is open under s 44(1) of the AAT Act. 

63                  So it is that in decisions such as Walters and Another v Commissioner of Taxation (2007) 162 FCR 421 at [59]-[60], Greenwood J said:

59        The Tribunal found [44] that the scheme comprised the series of transactions that preceded the ultimate sale of the share in each case, “that is, all of the dealings up to but not including the actual sale of the shares to the in-laws”.  Thus, the scheme was found, on the facts, to comprise the sequence of steps “taken together” [44] ... 

60        Those findings were open on the evidence and are consistent with authority concerning the scope of the term ‘scheme’ (Federal Commissioner of Taxation v Spotless Services Ltd (1996) 186 CLR 404 at 425, McHugh J; Federal Commissioner of Taxation v Peabody (1994) 181 CLR 359 at 383, Mason CJ, Brennan, Deane, Dawson, Toohey, Gaudron and McHugh JJ; Federal Commissioner of Taxation v Hart (2004) 217 CLR 216 at [9], Gleeson CJ and McHugh J, [43] Gummow and Hayne JJ, [85] Callinan J). 

64                  This conclusion was followed by Gordon J in Star City Pty Ltd v Commissioner of Taxation [2007] FCA 1701. 

65                  Even where questions of law said to be raised on appeal are appropriate questions of law for review for the purpose of s 44(1) of the AAT Act, if they can not be answered without the Court reaching different conclusions on questions of fact from those reached in the Tribunal they will not be questions of law.  As the High Court observed in Craig v South Australia (1995) 131 ALR 595 at 607, almost any question that arises for determination by a judge can be ‘dressed in the garb of a question of law’. 

66                  Another example of this practice, in Price Street Professional Centre Pty Ltd v Federal Commissioner of Taxation (2007) 97 ALD 593 at [75]-[79], Greenwood J said

75        Although the question of law to be determined before the primary judge must be stated separately from the grounds of appeal, the subject matter of the appeal as a question of law is a function of the symmetry between the question raised and the ground relied upon to demonstrate the error made.  The parties conducted the appeal before the primary judge on the footing that the question of law was whether the Tribunal had misdirected itself by applying the wrong test in determining whether a loss on sale of an asset was a loss or outgoing within the scope of s 51(1) of the Income Tax Assessment Act 1936 (‘the 1936 Act). 

76        That question, so framed, by paragraph 2(a) of the notice of appeal before the primary judge was to be answered having regard to the contended ground that the tribunal should have found something on the facts, namely, it ‘should have found that the facts before it constituted business activities under the relevant provisions of the 1936 Act and that accordingly the losses were deductible under s 51(1)’ (Ground 4(a)).

77        The error on the part of the tribunal therefore was said to be that having regard to the matrix of fact, the tribunal should have found that the appellant was engaged in business activities, receipts from which would result in derived assessable income and thus a loss or outgoing as part of that activity, is a deductible loss for the purposes of s 51(1) of the 1936 Act. 

78        There is no symmetry between the question of law framed by paragraph 2(a) and the ground of challenge at paragraph 4(a) relied upon to support that question as the subject matter of the appeal.  It might be different if the question of law raised by paragraph 2(a) was to be determined having regard to a ground that the tribunal, in determining whether a loss as found, in the circumstances found, was within the scope of s 51(1), erred by departing from the recognised approach to the construction of the provision or by formulating and applying a test inconsistent with authority, that is, the wrong test. 

79        A question of law formulated in terms of paragraph 2(a), that is to be determined on a ground that is an invitation to the court (and thus the primary judge) to reconsider the principal evidence (or any evidence) and determine what the Tribunal ‘should have found’ simply invites a factual inquiry.

67                  Section 177D of the Act stipulates when Pt IVA of the Act will apply to a ‘scheme’.  The eight categories set out in s 177D(b) ‘are posited as objective facts’ (emphasis added):  see also Federal Commissioner of Taxation v Peabody (1994) 181 CLR 359 at 382.  The conclusion reached having regard to all those matters set out in par (b) must be the conclusion of a reasonable person having regard, as objective facts, to the matters answering the description in subs (b):  Federal Commissioner of Taxation v Spotless Services Ltd (1996) 186 CLR 404 at 422. 

The grounds considered in light of these principles

68                  Applying these principles, ground 4.1.1 relates to a suggested failure on the part of the Tribunal to take into account the factual distinction in relation to the advance of the funds of $200,000 and to draw a conclusion that that factual distinction precluded the applicants from having the requisite dominant purpose.  The Tribunal examined this issue and reached a different conclusion on the facts from that argued by the applicants.  Similarly with ground 4.1.2, considering the payback period, the ground of complaint is the failure on the part of the Tribunal to prefer the evidence for the applicants as distinct from the evidence of Mr Banks.  This is not referable to any question of law. 

69                  In relation to ground 4.2, it is clear that the Tribunal needed to reach a conclusion as to what constituted the scheme.  To do so is an essential ingredient of s 177D of the Act.  The Tribunal summarised the scheme as it perceived it to be and did so, in accordance with the agreement by the parties, in a way which was entirely consistent with the summary given by the Full Court in Sleight 136 FCR 211.  No legal error arises.

70                  Ground 4.3 relates to Mr Dorn.  As the Full Court did in Sleight 136 FCR 211, the Tribunal was entitled to find that Mr Dorn’s other tax losses were attributable to similar investments in three other ‘tax driven’ projects.  But again, this is a question of fact and is not referable to any question of law. 

71                  Ground 4.4, in dealing with the payback period, complained about the Tribunal’s conclusion in relation to the expert evidence.  Mr Banks concluded that the payback period allowing for risk was unlikely to be less than 20 years.  It is clear that the Tribunal did not accept Mr Simpson’s evidence of recovery within seven to eight years.  It is also clear that was a view it was entitled to take.  It is a decision on a question of fact or opinion, not on a question of law. 

AMENDMENT

72                  In recognition of the difficulty posed by the formulation of the initial questions of law and grounds of appeal, the applicants sought to amend their notice of appeal.  The minute of this amendment was not produced until well into the applicants’ argument but senior counsel for the applicants proceeded with argument on the first day of the hearing on the assumption that the matter could be approached in terms of the legal argument to which the proposed minute of amended notice of appeal was directed.

73                  The Commissioner opposed the amendment being granted on two primary grounds.  The first was the lack of notice of the proposed amendment and second, that the argument on which the minute of amended notice of appeal depended, required a departure from the agreed terms on which the application for review was heard before the Tribunal. 

74                  The lack of notice was taken into account in permitting the Commissioner a substantial period to respond to the new proposed notice of appeal.  Written submissions were filed in response by the Commissioner.  That ground alone, in the absence of specific prejudice, would not have been sufficient to preclude amendment. 

75                  The main problem, however, was that the proposed minute which was created in response to the Commissioner’s critical objection that no question of law was raised, took a course which, in my view, departs from the agreed basis of the hearing before the Tribunal. 

76                  The minute of amended notice of appeal (relevantly) was in these terms:

2.1       A Tribunal errs in respect of a question of law when it fails to address the correct legal question before it, in this matter being whether the Applicants’ investment of $200,000 in “A” class shares in the Project formed part of the scheme for the purposes of section 177A of the Act and section 177D(b) of the Act.

2.2       A Tribunal errs in respect of a question of law when it fails to make findings of and in respect to material facts; in this matter being whether the Applicants’ investment of $200,000 in “A” class shares in the Project formed part of the scheme for the purposes of section 177A of the Act and section 177D(b) of the Act.

2.3       In the alternative to 2.1; whether the Applicants’ investment of $200,000 in “A” class shares in the Project did not form part of the scheme for the purposes of section 177A of the Act and section 177D(b) of the Act.

2.4       That the Tribunal having found as a fact that, accepting the assumptions in the Prospectus, an investment in the Project pursuant to the Prospectus would have been paid back in 7-8 years, did not then address, as it was required as a matter of law to do the relevance of this fact to the matters set out in s.177D(b) of the Act.

2.5       Whether the Respondent is deemed to have made a valid determination under section 177F(1) of the Act given the operation of section 169A(3) of the Act.

2.6       Whether any determination made by the Tribunal in its decision is a determination referred to in section 169A(3) of the Act.

2.7       Whether the Tribunal in making a determination pursuant to section 177F(1) of the Act is subject to the same time limits imposed on the Respondent pursuant to sections 170 and 177G of the Act.

4.1       The Tribunal did not address the question of whether the Applicants’ investment of $200,000 in “A” class shares under the Project prospectus formed part of the scheme for the purposes of section 177A of the Act and section 177D(b) of the Act.

4.2       Alternatively to 4.1, the Tribunal did not express its reasons in respect of the question of whether the Applicants’ investment of $200,000 in “A” class shares under the Project formed part of the scheme for the purposes of section 177A of the Act and section 177D(b) of the Act with clarity such that the Tribunal erred in law; the Tribunal being under a legal obligation to express its reasons with sufficient particularity such that the Applicants’ can determine from the reasons what the Tribunal concluded the relevant scheme was.

4.3       The Tribunal failed to determine the question of whether the Applicants’ investment of $200,000 in “A” class shares under the Project formed part of the scheme for the purposes of section 177A of the Act and section 177D(b) of the Act.

4.4 [sic] The only true conclusion which the Tribunal could have reached as to what was the scheme for the purposes of section 177A of the Act and section 177D(b) of the Act, having regard to the totality of the evidence before it was that the scheme included as a part the Applicants’ investment of $200,000  in “A” class shares under the Project.

4.5       The conclusion which the Tribunal reached (if it did) that the scheme for the purposes of section 177A of the Act and section 177D(b) of the Act, did not include as a part of the Applicants’ investment of $200,000 in “A” class shares under the Project was perverse.

4.6       The conclusion which the Tribunal reached (if it did) that the scheme for the purposes of section 177A of the Act and section 177D(b) of the Act, did not include as a part of the Applicants’ investment of $200,000 “A” class shares under the Project was one that no reasonable person could have made.

4.7       Identification of what constitutes the scheme for the purpose of Part IVA of the Act is a question of law.

4.8       An error in respect of the identification of the scheme for the purpose of Part IVA of the Act is an error in respect of a question of law.

4.9       That the Tribunal having found as a fact that, accepting the assumptions in the Prospectus, an investment in the Project pursuant to the Prospectus would have been paid back in 7-8 years, did not then address, as it was required as a matter of law to do, the relevance of this fact to the matters set out in s.177D(b) of the Act, rather it erroneously concluded that this finding of fact did not differentiate the facts of this matter from those in Sleight and thereby failed to undertake the process required by the Act to make the determination required by s.177D having regard to the matters required by s.177D(b). 

77                  Although the Commissioner’s grounds of objection were lengthy, in substance they were that the parties had agreed to the relevant scheme as being that identified in Sleight 136 FCR 211.

78                  The Commissioner contended that the Tribunal cannot commit an error of law where the issue was never raised for adjudication before the Tribunal whether by agreement between the parties or otherwise: Commissioner of Taxation v Perkins (1993) 93 ATC 4524 at 4525.9-4526 and Commissioner of Taxation v Glennan (1999) 90 FCR 538 at [80]-[83].  The issue which ground 2.1 of the proposed minute seeks to ventilate is an issue which was not raised by agreement between the parties or otherwise. 

79                  It is not uncommon for parties to litigation, including tax litigation, to limit the issues in respect of which the dispute will take place.  Indeed that is one of the functions of pleadings where they are used.  This is sensible in terms of saving time and costs to all concerned.  But no argument was advanced before the Tribunal, nor was it open, on the terms of the agreement reached, that the loan of $200,000 or any of the loans of $50,000 formed part of the actual scheme.  Indeed the issue of what constituted the scheme was never raised by the applicants in the Tribunal as an issue of the proceedings.  The only issue insofar as the $200,000 was concerned was whether that investment put the applicants in a position different from Mr Sleight as held in Sleight 136 FCR 211. 

80                  In the course of the hearing and in the course of subsequent written submissions I was taken to extracts from the transcript which supported this construction of the agreement between the parties.  For example, on the third page of the transcript of the hearing before the Tribunal, counsel who then appeared for the applicants said:

… they are massively cash flow negative as a consequence of their investment because they invested $200,000 in the project and took shares up in the project which were not deductible and their cash investment into the project or the tax benefits, should I say, pale into insignificance in the proportion to the amount of cash they invested.  We say this is a critical objective fact and our submission would be that a [sic - no] reasonable person would conclude in those factual circumstances that the applicant’s dominant purpose for participating in the project was to obtain the rather measly tax benefits that they obtained in comparison to their cash outflow.  …

81                  Written submissions on behalf of the applicants before the Tribunal were equally consistent with this approach:

At par 18.1:

The fact that all applicants were sufficiently cash flow negative as a consequence of their participation in the project.  In the case of Dorn, he derived no tax benefit whatsoever as a consequence of the investment in the 1996 and 1997 years.  This fact alone strongly militates against any finding that Part IVA can apply to the applicants.  Put simply, it makes no sense in the Applicants’ circumstances, to participate in the scheme for the dominant purpose of obtaining tax benefits.  The significance in the Full Court in Sleight of the cash flow affect and the tax savings versus the cash contributed to the Project is borne out Hill J’s judgment.

At par 19:

A reasonable person, in light of the evidence of the “White Knight” cash advance … could only agree with the evidence of Vincent Princi that “he would have been a “bloody idiot” to participate, as he did, in the North Rivers Project for the dominant purpose of obtaining tax deductions.”

At par 47:

After consideration of all of the evidence and the facts and circumstances of these particular Applicants and having regard to the eight factors in section 177D(b) of the 1936 Act, a reasonable person would not conclude for dominant purpose of the Applicants or any other person who entered into or carried out the Projects was to obtain taxation benefits for the Applicants.

82                  There is no doubt that the $200,000 loan was considered and was taken into account by the Tribunal.  It was taken into account on the issue of determining whether it affected the conclusion as to dominant purpose identified in Sleight 136 FCR 211 and for the purpose of s 177D(b) of the Act.  But it was not put up on the basis that it changed the scheme which was defined in Sleight 136 FCR 211. 

83                  These difficulties affect grounds 2.2 and 2.3 of the minute of amended notice in the same way.

84                  As to ground 2.4, in my view, this does not set out a question of law in the sense required by the AAT Act.  In Australian Telecommunications Corp v Lambroglou (1990) 12 AAR 515 Ryan J, in commenting that O 53 r 2 and r 3 of the Federal Court Rules were mandatory, observed that if the question properly analysed is not a question of law, no amount of formulary like ‘erred in law’ could make it into a question of law.  There is comment earlier in these reasons about an attempt to make what is really a question of fact sound like a question of law.  In this case what is really being argued is that the Tribunal preferred the wrong expert.  It is not enough simply to rely on the content of the prospectus.  The Tribunal reached the conclusion in the same way as the Full Court did in Sleight 136 FCR 211 that the project was not commercial.  In order to do that, it rejected the evidence of the applicants’ expert, Mr Simpson and justified its conclusion for doing so on several plausible bases. 

85                  As to the time within which the investment may be recouped, the appropriate test for the purpose of s 177D(b)(v) is the change of financial position that ‘may reasonably be expected’.  It is an objective test.  Were it otherwise, it would be completely irrelevant that the content of a prospectus in terms of reasonable expectations for the purpose of the paragraph concerned was totally inflated.  If the appropriate test was simply to look at what was stated by the promoter in the prospectus, there would be no element of objective assessment for the purpose of s 177D(b)(v).  This would defeat the obvious purpose of the enquiry set up by s 177D(b)(v). 

86                  In my view a proper construction of the evidence of Mr Banks insofar as any acceptance of a seven to eight year period was simply that he acknowledged that, on the Simpson/prospectus model with overly optimistic predictions and errors, the payback period would be seven to eight years.  That is just mathematics.  His evidence, reasonably clearly, was that the realistic payback period was substantially more and possibly in excess of 20 years. 

87                  For those reasons I do not consider it is open to the applicants to amend their notice(s) of appeal in the manner foreshadowed by the minute and I refuse the application to amend. 

THE s 177f ARGUMENT

88                  That leaves open only the s 177F argument dealing with the Commissioner’s determination.  In the original questions of law this issue is embodied in cll 2.4, 2.5 and 2.6, the numbering changed slightly under the minute of amended notice of appeal but otherwise the questions and the arguments remain the same. 

89                  The applicants point out that the required determination of the Commissioner for the purpose of enlivening Pt IVA of the Act was not made at the time of the issuing of the notice of amended assessment disallowing the deductions made by the applicants in relation to the projects.  This is common ground.  For this reason it is contended that the Commissioner can not rely on Pt IVA of the Act to uphold the respective amended assessments. 

90                  The applicants contend that by simply making a reference to Pt IVA in the objection decision, the Commissioner did not make a ‘determination, [or express an] opinion or judgment’ under s 169A(3) of the Act. 

91                  It follows, according to the applicants, that s 169A(3) of the Act has no operation in relation to s 177F in this instance and cannot assist the Commissioner.  The other way this is put is that if the determination, opinion or judgment is made or held at an earlier date, referring to that particular determination, opinion or judgment at a later date is merely a reference not a determination in itself. 

92                  This argument may derive from the observation of Brennan J in Deputy Commissioner of Taxation of the Commonwealth of Australia v Richard Walter Pty Limited (1995) 183 CLR 168, at 202-203, where his Honour said:

Part IVA does not itself stamp the character of assessable income on income derived by a taxpayer. It is not self-executing; it must be applied by the Commissioner. The starting point for Pt IVA is the existence of a tax benefit acquired by operation of the general provisions of the Act and the power conferred by Pt IVA is a power to alter the amount of assessable income or allowable deductions otherwise ascertained. The exercise of the Pt IVA power is therefore properly to be regarded as part of the process of assessment. It is not open to the Commissioner to defend an assessment merely by asserting its conformity with an antecedent determination. The antecedent determination, being itself part of the process of assessment, must itself be supported as a valid exercise of power or be validated by s 175 as a bona fide attempt to exercise the power.

93                  In Sleight v Federal Commissioner of Taxation (2003) 53 ATR 667, Nicholson J rejected a similar argument.  At [150] his Honour said:

Further, it is argued the second determination was made after the issue of the amended assessment but before the receipt of the applicant's objections. It is submitted that because that determination was not carried into effect by the issue of a further amended assessment, it cannot be used to defend the assessments the subject of these proceedings (FCT v Jackson (1990) 27 FCR 1 at 17; 21 ATR 1012 at 1026-27; 90 ATC 4990 at 5003 per Hill J; DCT v Richard Walter Pty Ltd (1995) 183 CLR 168 at 202-203; 29 ATR 644 at 664-65; 95 ATC 4067 at 4083-84 per Brennan J).

94                  At [154] Nicholson J continued:

Further the making of the determinations is part of the process of making the assessment … and not liable to challenge in this proceeding save in respect of matters going to substantive liability: Richard Walter at CLR 178, 203; ATR 647, 665; ATC 4070, 4083-84. Accordingly any deficiency is validated by s 175: Richard Walter at CLR 182, 187-88; 193-95, 196-97, 198-99, 209-211, 222-23, 240-42; ATR 650, 654-55, 658-65, 669-71, 679, 692-93; ATC 4072, 4075, 4078-79, 4080-82, 4087-88, 4095, 4104-4105. No argument was made that this case was one falling within the conditions delineated in R v Hickman; Ex parte Fox and Clinton (1945) 70 CLR 598; 19 ALJ 246.

95                  The issue of the determination was not specifically dealt with by the Full Court in Sleight 136 FCR 211 but nevertheless Hill J (with whom Hely and Carr JJ concurred) observed at [107] that defects in the making of an assessment including a Pt IVA determination are not open to challenge by the taxpayer.  For this conclusion Hill J relied on the conclusive nature of s 175 and s 177 of the Act and also referred to WR Carpenter Holdings Pty Ltd v Federal Commissioner of Taxation (2006) 63 ATR 577 which was approved on appeal WR Carpenter Holdings Pty Ltd v Federal Commissioner of Taxation (2007) 161 FCR 1. 

96                  The case advanced by the applicants is based on the irregularity in relation to timing.  There is no assertion that there was lack of bona fides in the Hickman sense.  Further, it is not suggested (nor would it necessarily be relevant) that the irregularity in the timing, in itself, caused the applicants to suffer any prejudice or that there has been any procedural unfairness arising from the defect in the procedure which the Commissioner followed.  The applicants objected to the application of Pt IVA in their objections and those objections, including the application of Pt IVA were duly considered by the Commissioner in making the objection decision.  The applicants then received a full hearing on that topic before the Tribunal in the application for review. 

97                  I would not, therefore, uphold any appeal on the basis of grounds 4.5 and 4.6.

98                  I turn to grounds 4.7 and 4.8.  In relation to these grounds, the applicants argue that the Tribunal erred in law in finding that in making a determination under s 177F(1) of the Act the Tribunal itself had the power to make such a determination and was not subject to the same time limits imposed on the Commissioner under s 170 and s 177G of the Act.  Given my conclusion on the validity of the Commissioner’s determination, these grounds fall away but for completeness, I will address them. 

99                  According to the applicants’ argument, the making of an assessment by or consequent upon a decision of the Tribunal is also subject to the limitations imposed by s 170 and s 177G(1) of the Act.  Therefore in situations where the Commissioner’s power was limited to amending an assessment within the time limitation set out in those sections, it is argued that the Tribunal exercising the Commissioner’s power could not and did not in turn have a greater power than that held by the Commissioner at the time.  Nor did s 43(1) of the AAT Act purport to confer any such power. 

100               Once again the Commissioner objects to the applicants raising in the appeal the issue of whether or not there were any time limits within which the Tribunal (as distinct from the Commissioner) must make the Pt IVA determination.  The Commissioner contends that the parties agreed to a narrower range of issues being argued in the Tribunal and that the argument cannot be advanced now when it was not before the Tribunal. 

101               The Commissioner contends that because the applicants never sought to raise the time limit issue in any correspondence or in any argument before the Tribunal there has been no error of law by the Tribunal capable of review by the Court because the issue simply has not arisen.  For that submission the Commissioner relies on Glennan 90 FCR 538 at [80]-[83], a decision of the Full Court constituted by Hill, Sackville and Hely JJ.  In the joint judgment of the Court at the passage cited above the following was said:

[80]     In Commissioner of Taxation (Cth) v Raptis (1989) 20 ATR 1262 at 1267; 89 ATC 4994 at 4999, Gummow J observed that: "[t]here must be some difficulty ... in finding an `error of law' in the failure in the Tribunal to make a finding first urged in this Court." Raptis was cited with approval by the Full Court in Department of Social Security v Cooper (1990) 26 FCR 13 at 18. In Commissioner of Taxation (Cth) v Perkins (1993) 26 ATR 8; 93 ATC 4524, the issue on which the Commissioner sought to rely on appeal had not been brought to the attention of the AAT as a matter for its decision. Davies J, with whom the other members of the Court concurred, said (at 10; 4526):

I am of the view that no error of law has been demonstrated in the manner in which the Tribunal dealt with the matter. It was the role of the Tribunal to decide questions of fact and, before the Tribunal, counsel for the Commissioner identified one fact alone as the crucial fact which had not been disclosed. No other fact was so identified or relied upon. The Tribunal did not err in law in failing to regard as a material fact a fact which counsel for the Commissioner failed in his submissions to the Tribunal to contend was material.

[81]     Ferriday v Repatriation Commission (1996) 69 FCR 521 at 528 (Lee J), and Maretech CMDL Pty Ltd v Commissioner of Taxation (Cth) (1996) 34 ATR 459; 97 ATC 4033 (Nicholson J) are decisions of single judges of the Court which have proceeded on the basis that no question of law arises in relation to a matter with which the AAT was not invited to deal and in respect of which it did not make material findings of fact. The authorities were reviewed by Carr J in Paull v Department of Immigration and Multicultural Affairs (unreported, Federal Court, Carr J, No WAG 30 of 1998, 23 October 1998), where his Honour said (at p 11):

It is true ... that the Tribunal is at liberty to inform itself of any matter and in any manner that it thinks appropriate. However, that does not mean, in my opinion, that the Tribunal was obliged to consider the relevance of the alleged representation to an argument based on estoppel which was never put to it. That issue was not a precondition to the exercise of the Tribunal's discretion and nor was it, in my view, sufficiently fundamental to require it to make its own enquires. This particularly so, given that the applicant was represented before the Tribunal by counsel.

In a slightly different context, in Commissioner of Taxation (Cth) v Osborne (1990) 26 FCR 63, a Full Court recognised that the duty arising from s 43(2B) of the AAT Act is not necessarily breached by a failure to advert to matters which were not argued before the AAT.

[82]     ...

[83]     It follows from what we have said that we do not see the problem facing the taxpayer as simply being that he has sought in this Court to raise fresh arguments not put to the AAT. It is not simply a matter of whether the AAT would have found in favour of the taxpayer had the arguments been put and whether raising those arguments before the Court creates “prejudice” to the Commissioner. The issue in the present case is, in the context of the relevant provisions of the TAA, whether the AAT erred in law by not addressing the arguments now sought to be raised: cf Australian Fisheries Management Authority v P W Adams Pty Ltd (No 2) (1996) 66 FCR 349.  (emphasis added)

102               To the extent it may be necessary to consider this submission, I would not preclude this ground of appeal on this basis.  It was, in essence, the Tribunal that observed that it could make the declarations itself.  The applicants are objecting to this approach.  I think they are entitled to do so.  It does not follow that I agree with the applicants’ argument. 

103               On the substantive point, (as distinct from whether it may be raised) it is clear that the Tribunal stands in the shoes of the decision maker for all purposes.  It is able to undertake a review without restriction based upon the previous decision made by the decision maker – Australian Securities & Investments Commission v Donald (2003) 136 FCR 7 and Fletcher 19 FCR 442 at 452-454.  The issue of time limits does not arise in respect of the Tribunal’s decisions because s 170(7) provides that the s 170 time limits do not prevent the amendment of an assessment by the Commissioner to give effect to a decision on appeal or review:  see Stevenson v Commissioner of Taxation (1991) 29 FCR 282 at 299 and Fabry v Commissioner of Taxation (2003) ATC 4885 at 4894. 

104               For those reasons, I consider that the argument based on grounds 4.7 and 4.8 must fail. 

CONCLUSION

105               In each matter, the application is dismissed.  The applicants are to pay the costs of the respondent to be taxed if not agreed.

Associate:

Dated:         4 April 2008