FEDERAL COURT OF AUSTRALIA

S.N.A Group Pty Ltd v Commissioner of Taxation [2025] FCA 240

ORDERS

THE COURT ORDERS THAT:

1.    The appeal be allowed.

2.    The Respondent’s objection decision dated 30 June 2023 (Respondent’s Reference: 1-SHBRF7W) disallowing the Applicant's Objections dated 4 February 2022 (Objections) in respect of the amended income tax assessments issued to the Applicant for the income years ended 30 June 2015 to 30 June 2019 (Relevant Years) be set aside.

3.    In lieu thereof, it be ordered that the Objections be allowed in full.

4.    The matter be remitted to the Respondent for the issuing of the requisite further amended assessments for the Relevant Years to give effect to these orders and the Court’s reasons for judgment.

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

ORDERS

THE COURT ORDERS THAT:

1.    The appeal be allowed.

2.    The Respondent’s objection decision dated 30 June 2023 (Respondent’s Reference: 1-SHBRFHA) disallowing the Applicant's Objections dated 4 February 2022 (Objections) in respect of the amended income tax assessments issued to the Applicant for the income years ended 30 June 2015 to 30 June 2019 (Relevant Years) be set aside.

3.    In lieu thereof, it be ordered that the Objections be allowed in full.

4.    The matter be remitted to the Respondent for the issuing of the requisite further amended assessments for the Relevant Years to give effect to these orders and the Court’s reasons for judgment.

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

REASONS FOR JUDGMENT

LOGAN J:

1    Although by the time he retired, Mr Theodore Peter Coronis was conspicuously successful in the real estate industry, he did not start his working life as a real estate agent. To distinguish him from his only son, Mr Andrew Coronis, who also gave evidence, and without intending any disrespect, I shall refer to him in these reasons for judgment as “Theo” and to his son as “Andrew”.

2    Initially, Theo trained as a schoolteacher. He followed that occupation for two years, but it was not to his liking. Thereafter, he joined his father in a business which manufactured potato crisps. That business ceased after 13 years. Thereby finding himself unemployed, Theo presented himself at a real estate agency in Everton Park, one of Brisbane’s northern suburbs. There he gained employment as a real estate salesman. That was his entrée into the real estate industry. Then followed a period of some 11 years until 1996, during which Theo initially worked as an employed salesman at Everton Park and then, in conjunction with a different licensed real estate agent, at Rode Road Shopping Centre on Appleby Road, Stafford Heights (another north Brisbane suburb).

ORIGIN OF CORONIS GROUP

3    In 1996, having by then obtained his own real estate agent’s licence, Theo acquired an agency at Stafford Shopping Centre, in the adjacent north Brisbane suburb of Stafford. Initially, that business operated as a franchisee in the Richardson & Wrench chain. However, Theo soon found operating as a franchisee and the related regular payment of a franchise fee was also not to his liking. So, he decided to leave the Richardson & Wrench chain and commence to trade as a real estate agent, using his father’s name for that purpose. Andrew, who was one of the three, himself and Theo included, who worked in and from the small office of that business at the Stafford Shopping Centre described the size of that office as a “hole in the wall”. That decision proved to be the commencement of what Theo described in his laconic, modest, self-effacing and entirely credible evidence as a “crash course on how to be successful”.

4    At the time of giving his evidence at trial, Theo was 87 years old and retired. But his recollection of the evolution and growth of what became the Coronis group of companies was good. It was also obvious that he retained interest in the ongoing affairs of that group, contemporary elements of which, perhaps ironically, are franchised real estate businesses. But as Andrew explained in his evidence, evolving into that franchising aspect reflected recognition on his part and Theo’s of an inevitability, with the passage of time, inevitable mortality and lack of interest in a third family generation, of the diminution and then cessation of direct Coronis family involvement in the management of the Coronis group of companies.

5    Andrew joined the predecessor business at age 18 in late 1980’s. He became the sales manager of Coronis Real Estate in 1996 and Chief Executive Officer in 2000 when Theo assumed the role of Chairman. Upon Theo’s retirement, Andrew became, and remains, Chairman of the Coronis group of companies. Like his father, Andrew gave completely credible, candid, honest evidence.

6    One element of the success of what evolved from these origins into the Coronis group of companies was that Theo learned, as he put it, to “stop being a salesman and just concentrate on being a leader, being the figurehead”.

7    Another element of success was to groom, grow and give good service to the rental property management side of a real estate business. This provided a steady cash flow not dependent upon the peaks and troughs of the property market. As to the latter, Andrew put it in his evidence, “when the market is strong, people buy houses, and when it’s weaker, people don’t”. But the focus on property management also brought with it what might be described as synergistic benefits to the derivation of sales commission income. A satisfied rental property owner who sold a property would often look to the agency to act on the sale or in the purchase of another property. An indication of the significance of, and emphasis on growing, the property management side was that, from an initial 40 or so rental properties under management, it grew over time to more than 7,000. Theo offered this description of this side of the business and an insight into the worth of the name “Coronis” in his evidence:

We had – we had a rent roll. We had – what did we have. We had seven different companies or – that were associated with the – the Coronis Group. That’s how it got its name. We just weren’t real estate agents. We provided a full property service. So we did maintenance on the rentals. We had a company, which – our own staff who were doing maintenance. We had staff who ensured we complied with the fire services regulations on the rental properties that had to be checked every six months, the – the fire alarm systems.

8    The Coronis group also came to include, as Theo recited in his evidence, “a finance branch, which were – were virtually a brokerage to help people buy their houses”. In his evidence, and consistently, Andrew described the evolution of the group’s operations to the position on and from about 2016 thus:

… in about 2016 or – we went on a – a vision to create a holistic, end-to-end business approach and what I call offering every piece of the property puzzle to our clients, which was not just sales and property management, but mortgages, co-branding insurance, conveyancing, a training school …

9    Yet another element of success was the retention of a core of subordinates, incentivising their loyalty by rewarding them with an opportunity to participate in the fruits of success of the Coronis group either by a direct or indirect interest.

10    A feature of this, as both Theo and Andrew attested, and I unreservedly accept, was to manage the Coronis group in a way that saw an annual return to those who were offered and took up such an interest. I elaborate on this management end further below. For the present, I record (and find) I gained the very strong impression, listening to Theo’s and Andrew’s oral evidence and viewing that against the whole of the evidence, that reciprocity of loyalty was a key feature of their respective characters and management style. The following statements Andrew made in his oral evidence exemplified this, “the business is based on long-term trusted relationships and old-fashioned business values. We like having long-term relationships. That’s a – that’s a value of our family”. Theo and Andrew valued loyalty in staff but they also returned that loyalty with the participation opportunity mentioned being a manifestation of this.

11    Also for reasons upon which I elaborate below, that feature of Theo’s and Andrew’s characters and their absence of formal qualifications and experience in accounting carried with it certain vulnerabilities in relation to the accounting side as the initial Coronis Real Estate business evolved and grew from a small, suburban real estate agency in Brisbane into the diversified Coronis group of companies with operations across Australia.

12    Long-serving key subordinates within the Coronis group of companies included Ms Jodie Ford, who “ran the rent roll” and Mr Craig Gillies, who was “in charge of the sales”, as Theo put it.

13    Mr Gillies was a schoolmate of Andrew’s who trained initially as a solicitor. However, in 1992, being disenchanted with legal practice, he took up an offer from Andrew to join the predecessor business. He translated from this into Coronis Real Estate. As that business grew and evolved, so did Mr Gillies responsibilities gradually increase. The growth and success in that business evolution is a testament to the joint effort and enduring close business relationship between Theo, Andrew and Mr Gillies.

14    Another long-serving subordinate until her retirement was Ms Jillian Hanlon who, again as Theo put it, “ran the back office, made sure the pays were right”. Initially, Theo made the strategic decisions. However, as the business evolved and grew, strategic decisions were made until his retirement in 2017 by Theo in conjunction with Andrew and others in a management group comprised of key subordinates. Thereafter, Andrew was the key decision-maker but again in conjunction with others in a management group. Theo continued to retain both formal ownership interests in the Coronis group as well I do not doubt an informal interest in its affairs. Theo continued to act as a sounding board for Andrew and, at least in an informal way, as a kind of “Chairman Emeritus” for the group.

15    From the outset, both the property management and sales limbs of the real estate business Theo founded traded under the name “Coronis Real Estate” and then just “Coronis”.

16    The business Theo founded did not just have long-serving internal staff. From even before its founding, Theo had retained Mr James Sidney Bryant, a chartered accountant of the firm Bryant & Company, now retired, to provide external accounting, tax agent, taxation, accounting and financial advisory and auditing services. This retainer continued and deepened from the commencement and during the evolution and growth of Coronis Real Estate. Theo described the services Mr Bryant provided in this way:

[A]part from organising the – the financial side of the business and being our trust account auditor, he was also our primary advisor, and because of our association with him, we had a lot of trust in what James was doing. I – I – I couldn’t argue with him, because I had no knowledge that gave me the power to argue with him.

Andrew also gave evidence to like effect of Mr Bryant’s involvement. He, too, relied upon Mr Bryant’s expertise in the provision of accounting services in the broadest sense, which included advice about suitable business structures as the business evolved and grew. It is an agreed fact that Mr Bryant acted as the de facto Chief Financial Officer for the Coronis group from its commencement to the time 2020 income year. Thereafter, Mr Bryant retired.

RESTRUCTURING OF CORONIS

17    In 2005, due to the Coronis group’s evolution and growth in the years after its founding, and following advice from Mr Bryant, it was decided that changes needed to be made to its structure, primarily to protect the principal assets of the group from operational risks. An example of the type of risk faced given in evidence was if a tenant at a managed property had a fall on the stairs the managing agent might be liable because of an alleged maintenance deficiency. The entities which emerged from the restructure, materially included the following (as taken from the statement of agreed facts filed in the proceedings).

APTR Pty Ltd (APTR)

18    APTR is an Australian private company. It carries on the business of selling real property for reward.

19    For the periods 1 July 2015 to 30 June 2019 (the Relevant Years), APTR shares were held by:

(a)    Andrew - 50%; and

(b)    Theo – 50%.

20    For the Relevant Years, the directors of APTR were Andrew and Mr Gillies.

SNA Group Pty Ltd (SNA)

21    SNA is an Australian private company. It carries on the business of real estate property management.

22    For the Relevant Years SNA shares were held by:

(a)    Andrew - 45%;

(b)    Theo - 30%;

(c)    Mr Gillies - 25%.

23    For the Relevant Years, the directors of SNA were Andrew and Mr Gillies.

The Emily Trust

24    The Emily Trust is a unit trust within the Coronis group established on 2 March 2005 by deed (the Emily Trust Deed). The Emily Trust Deed was signed by Andrew, Theo and Mr Gillies and their signatures were witnessed by Mr Bryant. The deed sets out the powers of the trustee.

25    P.A.C Realty Pty Ltd (PAC Realty) is the trustee of the Emily Trust.

26    For the Relevant years, the shares in PAC Realty were held:

(a)    Andrew – 45%;

(b)    Theodore – 30%; and

(c)    Mr Gillies – 25%.

27    For the period 1 July 2015 to 22 August 2016, the directors of PAC Realty were:

(a)    Andrew;

(b)    Theo; and

(c)    Mr Gillies.

28    For the period 23 August 2016 to 30 June 2019, the directors of PAC Realty were:

(a)    Andrew; and

(b)    Mr Gillies.

29    All of the units in the Emily Trust were held by the Henry Trust during the Relevant Years.

30    The Emily Trust owned “rent rolls” for various properties sitting as non-current assets on the balance sheet for the Relevant Years.

31    On the evidence, a “rent roll” is a real estate industry term for a portfolio of contracts with rental property owners which confer on the manager engaged by the rental property owner a right to receive income for the provision of a property management service to that owner. As Andrew related, and I accept, rent rolls were progressively acquired by PAC Realty as trustee via a combination of borrowing funds from the Commonwealth Bank (with which he, Theo and related entities had a longstanding relationship) and entity funds. The composition of a rent roll is not static for a variety of reasons. Theo offered these examples in evidence: dissatisfaction for one reason or another with management services; otherwise just changing the manager; a landlord moving overseas; a landlord moving into a hitherto rental property; and deciding or needing to sell a rental property. The Commonwealth Bank required periodic valuations of the Emily Trust rent rolls as a condition of its finance facility. As Andrew related, and I accept, such valuations also formed part of the basis upon which decisions were made concerning the overall fee charged each year to SNA. I took this to mean he and Theo had a good idea how much the rent roll was worth.

32    During the Commissioner’s closing submissions, there was a passing suggestion that Ms Jodie Ford should have been called by the applicants, especially given that it was recorded on the face of particular valuations by third party valuers that the valuations had been prepared for the Coronis group on her instructions. This, seemingly, was on the basis that I should, in light of Jones v Dunkel (1959) 101 CLR 298 (Jones v Dunkel), draw an inference that her evidence would not have been helpful to the applicants’ case. But on the agreed facts Ms Ford had no controlling interest in either APTR or SNA or the entities to which the claimed service fees were paid. She was not the “directing mind and will” of any of these entities. Nor even, for that matter, was Mr Gillies. And the rent roll valuations themselves were not controversial. It would entail a misapplication of Jones v Dunkel to draw the inference solicited by the Commissioner. I decline so to do.

The Henry Trust

33    The Henry Trust is a unit trust within the Coronis group established 1 April 2006 by deed (the Henry Trust Deed). The Henry Trust Deed is signed by Andrew, Theo, Mr Gillies and someone on behalf of FG2 Pty Ltd as trustee for the Cornford Trust. Each of the signatures on the Henry Trust Deed was witnessed by Mr Bryant. The Henry Trust Deed sets out the powers of the trustee.

34    CLAARS Pty Ltd (CLAARS) is the trustee of the Henry Trust. Pursuant to a written authority, Andrew as director of CLAARS consented to act as trustee of the Henry Trust.

35    For the Relevant Years the shareholdings in CLAARS were:

(a)    Andrew - 47%

(b)    Theo - 29%

(c)    Mr Gillies - 24%.

36    For the period 1 July 2015 to 22 August 2016, the directors of CLAARS were:

(a)    Andrew;

(b)    Theo; and

(c)    Mr Gillies.

37    For the period 23 August 2016 to 30 June 2019, the directors of CLAARS were:

(a)    Andrew; and

(b)    Mr Gillies.

38    The unitholders of the Henry Trust over the Relevant Years were as follows:

39    The Henry Trust was the vehicle via the taking up of units in which not just entities related to Theo or Andrew or even Mr Gillies but key subordinates could participate via distributions on units, in benefits arising from the success of the Coronis group. It was also a vehicle by which, as Andrew related in his evidence, a real estate business operated by Mr Warwick Clark was acquired in an expansion of the Coronis business. Inferentially from the above table, that acquisition entailed the issuing of units in the Henry Trust to entities associated with Mr Clark. All this acknowledged, and although Mr Gillies in particular had significant parcels of shares in various companies within that group and of units in the Henry Trust, overall control was maintained by Theo and Andrew and entities associated with them. But with that enduring control, as was so apparent from the evidence of Theo and Andrew, was an understanding of a need annually to provide a return to unitholders.

40    Throughout the Relevant Years:

(a)    The name “Coronis” was a registered trademark with the Patent Office as at 19 July 2013. CLAARS as trustee for the Henry Trust is the owner of the trademark. CLAARS as trustee was also the registered owner on and from that date of a related symbol. Even so, no trademark or other intellectual property is recorded as a non- current or intangible asset in the financial statements for the Henry Trust for any of the Relevant Income Years.

(b)    the Henry Trust employed:

(i)    Andrew as Chief Executive Officer (of the Coronis group); and

(ii)    Ms Hanlon as Administrative Director.

41    Mr Bryant prepared:

(a)    the Coronis group entities’ financial statements in each of the Relevant Years; and

(b)    lodged the tax returns for the Coronis group entities from their establishment until the 2020 income year.

42    From 27 July 2016, Mr Bryant was listed as a director of Coronis Group Ltd (ACN 606 982 423).

43    As can be seen from the above, the restructuring over 2005 and into 2006 preserved but formally split between two operating entities what had from the outset of Theo’s founding of Coronis Real Estate been two major areas of business endeavour: property management and sales of real property. Further, in keeping with the objective of asset protection, operating entities were separated from asset owning entities.

44    APTR was the operating entity which conducted a business of selling real property in return for commission or other income.

45    SNA was the operating entity which conducted the business of rental property management. However, the owner of the “rent rolls” was not SNA but rather PAC Realty as trustee for the Emily Trust. Yet neither APTR, nor SNA nor PAC Realty engaged the key managerial staff within the Coronis group such as, notably, Andrew and Ms Hanlon. Such persons were engaged by CLAARS as trustee for the Henry Trust. It was CLAARS in this trustee capacity which also owned the trademark “Coronis” and a related symbol used by each of the operating entities.

46    This perhaps overly lengthy introduction sets the scene for the present taxation controversy. That controversy is a sequel to an audit of the taxation affairs of SNA and APTR which the Commissioner commenced in October 2019.

THE PRESENT DISPUTE

47    On 30 November 2021, the Commissioner issued amended income tax assessments and penalty assessments and related reasons for decision to SNA and APTR for the Relevant Years, ie the income years 30 June 2015 to 30 June 2019 (inclusive). The penalty assessments imposed penalties at the rate of 50% based on recklessness.

48    Greater detail concerning the issues and amounts in dispute is provided by setting out the position as returned by SNA and APTR for the Relevant Years and the adjustments made by the Commissioner by the amended assessments:

SNA

a.    For the Relevant Years, SNA claimed in its respective income tax returns a deduction under s 8-1 of the Income Tax Assessment Act 1997 (Cth) (the ITAA1997) for payments made by way of a service fee to CLAARS Pty Ltd as trustee for the Henry Trust and PAC Realty Pty Ltd as trustee for the Emily Trust, in the following amounts:

b.    For the Relevant Years, SNA disclosed the following amount of taxable income or, as the case may be, loss in the respective income years:

APTR

a.    For each of the Relevant Years, in APTR claimed in its respective tax returns a deduction under s 8-1 of the ITAA1997 for payments made by way of a service fee to CLAARS Pty Ltd as trustee for the Henry Trust, in the following amounts:

b.    For the Relevant Years, APTR disclosed in its respective income tax returns the following amount of taxable income or, as the case may be, loss:

49    The amended assessments, as confirmed on objection, were premised upon the deductions by SNA and APTR under s 8-1 of the Income Tax Assessment Act 1997 (Cth) (ITAA1997) not being allowable.

50    As a result of his disallowance of these deductions, the Commissioner calculated the following tax shortfalls for SNA and APTR respectively, resulting from increase in their taxable incomes as assessed in the amended assessments:

a.    For APTR (Henry Trust)

b.    For SNA (Combined Emily and Henry Trusts)

51    On 4 February 2022, SNA and APTR lodged objections to each of the amended assessments, penalty assessments and related interest charges (objections).

52    On 30 June 2023, the Commissioner disallowed each of the objections (objection decisions).

53    Being dissatisfied with the objection decisions in respect of the income tax related objection decisions, SNA and APTR appealed against them to this Court in its original jurisdiction pursuant to s 14ZZ(1)(a)(ii) of the Taxation Administration Act 1953 (Cth) (TAA) by notices of appeal filed on 25 August 2023. At the same time, also dissatisfied with the objection decisions in respect of the penalty assessments, they availed themselves of the alternative right of review conferred by the TAA by applying to the then Administrative Appeals Tribunal for the review of those objection decisions.

54    Given that they raise like issues and entail overlapping evidence, it was in the interests of justice to hear SNA’s and APTR’s respective appeals together. At the outset of the long-appointed trial dates, the Commissioner sought an adjournment, as a sequel to an amendment to the applicants’ appeal statements. However, on close analysis of the grounds of objection, the objection decision and the applicants’ original appeal statement, it became apparent that the amendments carried no element of surprise. The adjournment application was therefore refused and the trial proceeded.

55    As with any appeal against an objection decision in respect of an assessment, the onus lies on SNA and APTR respectively to prove the assessments concerned to be excessive or otherwise incorrect, and what the assessment should have been: s 14ZZO(b), TAA. That does not mean proof to demonstration, only evidence that proves these criteria on the balance of probabilities: s 140(1), Evidence Act 1995 (Cth).

56    Although that is the overarching obligation which falls on SNA and APTR in these proceedings, the amended income tax assessments flowed from the disallowance of the service fees claimed. Those assessments have no other foundation. Thus, if SNA and APTR can show that each incurred in the Relevant Years a deduction allowable under s 8-1 of the ITAA1997 in the amount claimed or at least in an amount which renders the amended assessment concerned excessive, or otherwise incorrect they will have satisfied the test in s 14ZZO(b), TAA.

57    At one stage, the Commissioner was disposed to put forward that, in any event, an alleged non-compliance with the record-keeping requirements found in s 262A of the Income Tax Assessment Act 1936 (Cth) (ITAA1936) inhibited in the circumstances of this case the ability of SNA and APTR to claim the deductions concerned. However, any such contention was expressly abandoned by counsel for the Commissioner. Given this, it is unnecessary to consider whether that contention would have had any merit.

LICENCE AGREEMENTS

58    Another feature of the restructuring which occurred in 2005 and 2006 was that, also on Mr Bryant’s advice, licence agreements were entered into between APTR and (purportedly) CLAARS Pty Ltd as trustee for the Henry Trust (the 2005 APTR Licence Agreement) on the one hand and between SNA and PAC Realty Pty Ltd as trustee for the Emily Trust on the other (the 2005 SNA Licence Agreement).

59    The 2005 APTR Licence Agreement does not specify a date of signing on its face but is expressed to operate on and from 1 July 2005 and end on 30 June 2015 “and then on an annual basis as agreed” (item 4 in the schedule). As read in conjunction with item 4 and clause 1.1(a), by clause 2.1 of that agreement CLAARS granted to APTR “the licence as described in item 6 of the schedule within the Territory for the Term”. The licence as described in item 6 of the schedule was “licensed activity in real estate sales and marketing operations and property management” with the specified “Territory” being the State of Queensland. By clause 3.1, CLAARS warranted that “to the best of its knowledge, information and belief it is the legal and beneficial owner of the proprietary rights associated with the Work and that such rights are free from any encumbrance or dispute and that [it] has necessary authority and capacity to grant to the Licensee the licence under the terms of this agreement”. The “Work” is defined (clause 1.1(c) and item 3) to be “Trademarks, intellectual property, computer data, management skills and related assets including goodwill”. The agreement (clause 4.1) specified that the consideration for the licence was as specified in item 9 of the schedule. Item 9 sets out a sliding scale of licence fee amounts based on a percentage of gross sales milestone amounts. In other words, there is a base licence fee with further fees becoming payable depending upon whether a specified annual sales milestone is attained. As each or any gross sales milestone beyond the minimum $5,000,000 is achieved, the percentage fee in respect of that milestone amount decreases. Item 9 specifies that the time when these fees are payable is, in each instance, “as agreed”.

60    The 2005 SNA Licence Agreement likewise does not specify a date of signing on its face but is also expressed to operate on and from 1 July 2005 and end on 30 June 2025 “and then on an annual basis as agreed”. It is in like form to the 2005 APTR Licence Agreement, save that the licence fee milestones and percentages and times for payment in item 9 are different. The licence fee percentages still decline as the milestone amount increases but the times of payment are expressed to be monthly up to the milestone annual turnover amount of $9,000,000, quarterly up to the milestone annual turnover amount of $14,000,000 and “as agreed” for $15,000,000 and above.

61    On 9 November 2006, new and different licence agreements were entered into. One was between APTR and CLAARS, again in its trustee capacity (the 2006 APTR Agreement); the other was between CLAARS in its trustee capacity, PAC Realty in its trustee capacity and SNA (2006 SNA Agreement).

62    A feature of the 2006 APTR Agreement is that the licensed activity to be conducted by APTR is specified as “real estate commission sales” with the licence, flowing from the definition of “Territory” extending to “Australia as well as South-East Asia”. Further, the term of the licence is, subject to rights of early termination, an indefinitely continuing one (clause 4). According to the recitals to this agreement (CLAARS being “the Licensor and APTR the “Licensee”), the occasion for its making was:

A.    The Licensor is the legal and beneficial owner of the Name and Trademark and the corresponding Intellectual Property Rights.

B.    The Licensee requires the name CORONIS in its corporate name for the purposes of conducting its Business and also CORONIS REALTY and related Trademarks, Logo’s and Business Names.

C.    The Licenser and the Licensee wish to record the license which has been granted to the Licensee to use the name and trademark CORONIS in accordance with the terms of this Agreement.

[sic]

63    The licence fee in the 2006 APTR Licence Agreement is expressed (clause 6.1 and Reference Schedule) to be:

Annually a fee of A$1,000 payable and two percent (2%) of the gross revenue obtained by the Licensee, such to be suspended until such time as Licensee turns a profit, and thereafter the fees having not been paid, such fees, such fees to be paid retrospectively with interest at the rate of five percent (5%). [sic]

64    Subject to the following, the 2006 SNA Agreement is in like form including in its specification of the licence fee. The agreement specifies in the Reference Schedule that the business is “Property Management”. The recitals omit reference to a need for the name “CORONIS REALTY”, mentioning only “CORONIS”. That singularity is taken up in the definition of “intellectual property rights” for the purposes of the agreement. However, that definition is in like terms to that found in the 2006 APTR Agreement. Yet the “Licensor” in the 2006 SNA Agreement is CLAARS and PAC Realty.

65    In a statutory declaration made on 31 May 2021 during and for the purposes of the Commissioner’s audit, Andrew stated:

1.    the following License Agreements:

a.    License Agreement between CLAARS Pty Ltd as Trustee for the Henry Trust and APTR Pty Ltd dated 9 November 2006; and

b.    License Agreement between CLAARS Pty Ltd as Trustee for the Henry Trust, PAC Realty as Trustee for the Emily Trust, and SNA Group Pty Ltd dated 9 November 2006 (collectively, the “2006 License Agreements”).

do not supersede, nor replace the following License Agreements:

c.    License Agreement between CLAARS Pty Ltd as Trustee for the Henry Trust and APTR Pty Ltd dated 9 November 2005; and

d.    License Agreement between CLAARS Pty Ltd as Trustee for the Henry Trust, PAC Realty as Trustee for the Emily Trust, and SNA Group Pty Ltd dated 9 November 2005 (collectively, the “2005 License Agreements”).

2.    due to an administrative error, the extension of term of the 2005 License Agreements was not documented in writing. However, in my role as Director for the trustee companies and my role as Director for SNA and APTR, I have agreed to extend the term of the 2005 License Agreements indefinitely until otherwise resolved.

3.    the 2006 License Agreements and 2005 License Agreements are both in operation and are intended to operate concurrently.

66    Inferentially, what are referred to collectively in this statutory declaration as the “2005 Licence Agreements” are the 2005 APTR Agreement and the 2005 SNA Agreement.

67    The statements made in this statutory declaration and the 2005 APTR Agreement occasioned Andrew some embarrassment during cross-examination. That is because the Henry Trust of which CLAARS Pty Ltd is trustee was not settled until 6 April 2006, ie after that agreement was made and certainly after the date (1 July 2005) on and from which it was expressed to operate. Further, the focus of the consideration for the licence fee under the 2006 APTR Licence Agreement and the 2006 SNA Agreement is narrower, “an exclusive license to commercialize the name and trademark in the conduct and operation of the Business of the Licensee” (clause 2.1) than the consideration, flowing from the definition of “the Work”, for the licence fee in the 2005 APTR Agreement and the 2005 SNA Agreement. Yet further, the two 2005 agreements specify a different mechanism for the calculation of the licence fees thereunder from the two 2006 agreements.

68    There was also some confusion introduced in relation to whether the 2006 APTR Agreement was signed, because the signature block part of that agreement was reproduced out of order in the Court Book. Andrew also had difficulty in cross-examination in identifying his and his father’s signatures in each of the 2006 agreements. But in Theo’s cross-examination, he had no difficulty in identifying his and Andrew’s signatures on the 2006 SNA Agreement. I make nothing of Andrew’s difficulty in light of the firm evidence given by his father about the signatures.

69    The more fundamental issue is not one of formal signing in any event but rather whether any of these agreements was the source of an incurred liability in the Relevant Years occasioning a resultant deduction under s 8-1 of the ITAA1997?

70    By the time Andrew signed his statutory declaration in 2021, Mr Bryant was retired and in ill-health. Andrew had not seen him since his retirement. The statement in the declaration that each of the agreements remained operative cannot be right, given the non-existence of the Henry Trust in 2005 and the inconsistencies of consideration for the specified licence fee and fee calculation mechanisms already noted. Andrew’s embarrassment about the statutory declaration was obvious during his oral evidence, especially when it was pointed out the Henry Trust had not been constituted in 2005. I formed the clear impression he had signed without personally checking a declaration the wording of which had been prepared by another. That was trusting and careless but not dishonest.

71    It was Andrew’s oral evidence, which I accept, that, by the Relevant Years, he did not undertake any referencing of the 2005 agreements the 2006 agreements in the annual fixing of service fees. As he put it, “in both cases we had operational companies that had to pay a fee for assets” and “it was a charge that it [APTR and SNA] needed to pay to operate the business because it couldn’t operate without it”. Instead, during these years, based on these over-arching considerations, Andrew was acting on advice from Mr Bryant as to what was fair and reasonable in the real estate industry as an annual service fee. I thought that this statement made by Andrew had the ring of truth about it (and find accordingly):

[We] had an obligation to charge for assets to those operating companies and those operating companies were charged accordingly what at the end of the year we thought was fair to be charged, and Jim [Mr Bryant] would generally do that work for us and present it to us. And when I say “us”, I mean not much – myself, my father, Mr Gillies. And generally at those times we used to call our meetings at the Chinese restaurant – our – our unit holder meetings, and we would say – he would say, “This is what the charge is going to be.” We would think it would be fair and reasonable. I don’t think we ever said, “No. Don’t charge that.” I don’t – it was not in our scope to challenge somebody who was a – I think I’ve explained previously, who was such a piece of the business – an integral piece of the business, in our opinion. So we trusted what he [Mr Bryant] said.

72    Andrew identified the “we” as him, Theo and Mr Gillies.

73    During the Relevant Period and, on the evidence, ever since the restructuring about a decade earlier, transfers were made from SNA and APTR as the operating entities to the asset owning entities within the Coronis group. Within that group, Ms Hanlon oversaw this. By the time she gave evidence, Ms Hanlon had retired. However, it was obvious she retained a good recollection of the internal bookkeeping practices of the group. It is necessary to state “bookkeeping”, because Ms Hanlon was not a qualified accountant and never the source of accounting or tax advice to Theo or Andrew. That was always Mr Bryant, as Ms Hanlon confirmed in her evidence. Her interactions with Mr Bryant were qualitatively different to those of Theo and Andrew. I thought this explained difference of recollection in evidence about Mr Bryant’s level of involvement.

EVIDENCE OF MS HANLON, MR BRYANT AND MR GRAHAM

74    Ms Hanlon understood, because she was briefed by Mr Bryant back in 2005, that a restructuring had occurred and that the reason for this was asset protection. As a sequel to that, she discharged her duties according to the guidance which Mr Bryant had given to her at the time. She described this (and I find) all in this way:

[Mr Bryant] was the person that had discussed with Andrew and Theo about the restructure, and it was his office that gave me some training on how to operate MYOB. I didn’t – I hadn’t known anything about MYOB before that period.

So when did you first start using MYOB?---At the same time that the restructure happened.

So that’s, what, around 2005?---Yes.

…

So were there ever any instructions given to you about how to deal with particular items?---At the – when the structure was set up, I was given instructions on how to manage the transfer of funds between entities and that was basically what I did from that point on. It would only be in a very rare instance, if something had changed, that I would deal directly with Jim – sorry, James [Mr Bryant], but – yes. I think that was – yes.

So can you tell his Honour what those instructions were?---Okay. So the instruction was that the – the structure was set up as asset protection for the entire group, and if there were any excess funds in the APTR or S.N.A, then those moneys would be transferred through to the trusts and coded as a service fee between the entity and the trust.

75    Ms Hanlon elaborated on the labels used in the internal ledgers produced by via the use of the MYOB programme to record transfers in this way, using an SNA ledger as an example:

How do you explain the use of that language: “finance charges reimbursed”?---Yes. Yes. So the service fees were – originally all of the transfer of funds between the entities were all charged out as service fees, and that’s what the service fees in there relate to: all of the funds transferred from S.N.A through to Emily Trust. In 2017, we had another lady join the team, and at that point she – and earlier on, the actual finance on-charge fee was embedded in that service fee code of 49520, but then in 2017, where this other lady started, she separated out the service – the finance on-charge code and – and created that code, and so all the fees were subsequently then put into that code which were originally coded under service fee.

…

[Were] there any other labels that were used?---There was a label called “group franchise fee”, which was a transaction between the entities – that was the transfers between the entities through to the Henry Trust, and these were for the unit holders’ monthly distribution that – that was coded as a separate code so that we could identify what those sums were.

76    She described how her role interfaced with that of Mr Bryant in relation to financial statements and tax returns as follows:

[D]uring the relevant years, which are the years ended 30 June 2015 through to 30 June 2019, did you have any involvement in the preparation of the financials for the relevant companies here? So we’re talking about S.N.A, APTR and the Emily and Henry Trust. Any involvement with the preparation of those documents?---No involvement, no.

What about tax returns for those companies in those relevant years?---No. I had no involvement in those either.

…

HIS HONOUR: It was your understanding, was it, that these ledgers were used to inform the preparation of the financial statements? Is that right?---Correct. My understanding is that we would just, at – at our office level, we would just enter all of the data into MYOB - - -

Yes?--- - - - and then at end of year Mr Bryant would conduct all of the necessary journals and preparation of all the proper management or – like, profit and loss reports and management reports to – for the entire group and then lodge the tax returns based on all of that.

Right. So what you were creating in the general ledger was a transactional record and then the chartered accountant, qualified person, Mr Bryant, derived the management accounts and financial accounts from the ledgers?---Correct. Yes.

77    Ms Hanlon gave more detailed evidence concerning the recording of various amounts in the MYOB system, but it is not necessary to set that out. She also confirmed that the recordings in MYOB were accessed for the purpose of preparing (by an external female consultant engaged for this purpose) and submitting to the Commissioner business activity statements (BAS) and related remittances, including goods and services tax, either monthly or, as the case may be, quarterly by entities within the Coronis group.

78    On and from 2007 when she was given an opportunity by Theo to take up units, Ms Hanlon was a unit holder in the Henry Trust. She had an expectation of receiving, and did receive, returns from that trust on her units. It is instructive to set out the relevant passage of her evidence:

In 2007 Theo gave me the opportunity to buy in as a unit holder and I accepted the offer.

Can you explain – so what was – so why did you buy in? What was the advantage?---The advantage was for personal advantage to secure my future in my retirement, that sort of thing.

So why was it attractive to you?---The offer at the time for me was given that the return would be an eight per cent on my investment.

HIS HONOUR: And you were looking for a return on those units. That was part of the attraction?---Correct, yes.

And still is and in retirement?---Yes, it is.

Yes. So you had an expectation as a unit holder that there would be a return on those units - - -?---Correct, yes.

- - - from the word go - - -?---Yes.

Which has been honoured?---It has been, yes. Correct.

79    The picture then which emerges from the evidence of Theo, Andrew and Ms Hanlon is that of a group which retained some of the habits of informality of its small business origins even after considerable evolution and growth. Theo, Andrew and Mr Gillies well-knew and trusted one another. They also trusted, implicitly, their longstanding external accounting adviser, Mr Bryant. Perhaps, by the time in of the Relevant Years, the evolution and growth of the Coronis group was such that there needed to be a full time, in-house, chief financial officer, with formal qualifications in accountancy, to whom Ms Hanlon would report and look for day to day guidance. As it was, in-house there was still just a loyal and trusted bookkeeper, Ms Hanlon.

80    Ms Hanlon looked to Mr Bryant for an initial setting up of the post-restructuring internal ledgers and occasionally to him or his staff for guidance thereafter, but she had a limited remit. She did not deal with Mr Bryant in relation to the formal financial accounts or consequential preparation of tax returns for any of the entities within the group. Further, she tendered no advice either to Theo, Andrew or Mr Gillies on such subjects. That was, and she knew this, the remit of Mr Bryant. She was aware that service fees were charged to operating entities and that these were fixed based on advice from Mr Bryant as to what was reasonable. She was also aware that the ledgers she and her staff prepared were considered by Mr Bryant in preparing financial statements and tax returns and in tendering advice as to what was a reasonable service fee but that these formed but part of a review which Mr Bryant undertook.

81    Each of Theo and Andrew were by the Relevant Years very aware that, over a decade beforehand, for reasons they thought good and on Mr Bryant’s advice, they had separated out operational from asset owning companies. On their evidence, which I accept, Theo and Andrew each had a view as to what that return should be annually - no more than eight per cent of the net assets of the Coronis Group. By the Relevant Years, their views as to a return of this order were informed by lengthy experience in the real estate industry and an acute sense of obligation to a class of unit holders membership of which was beyond their family interests but which extended to persons whose loyalty and services they had sought to retain by inviting them to take up units in the Henry Trust. It was also informed by financial commitments to the Commonwealth Bank. In turn, their view was always informed by the advice from Mr Bryant as to what was a reasonable service fee in a given year. During the Relevant Years, as they had beforehand, Theo and Andrew acted on the advice tendered by Mr Bryant as to what was a reasonable fee.

82    None of this is to say that those 2005 and 2006 agreements did not continue to play a role in Mr Bryant’s thinking when formulating his advice as to what was a reasonable fee in a given year. Mr Bryant described that process during his oral evidence. Mr Bryant was in retirement and still not in good health when he gave evidence. He was obviously elderly and frail physically. I rather thought this may well have explained why at times during his evidence Mr Bryant appeared to have a somewhat flat, disaffected mood. However, he retained a good recollection of his methodology for formulating his advice and I accept his evidence. This is how he described his methodology:

Was there, to your knowledge, a standing policy – well, no, I will withdraw that. It might be said that the written agreements had a life to them which didn’t extend I automatically into each of these income years, but was there, to your knowledge, a standing policy to which you worked, as you understood it, as formulated by the elder Mr Coronis, his son Andrew and, perhaps, Mr Gillies about what was expected in terms of a return?---Yes. The agreements could be extended mutually – by mutual agreement. So each year, I would check that nothing had changed in that respect so that then I would calculate the service fees, franchise fees, whatever, in accordance with those agreements.

And was there quite a degree of understanding by you of client expectation that was brought to bear with that?---Yes. Yes, it was – yes. Well, the – the original concept was this was a type of franchise arrangement, except it’s perhaps not as arm’s length as, say, Ray White or some of the other large franchise groups. So there was – there was a two percent of gross turnover fee payable for goodwill, management services, computer facilities and general admin, and there was a six to – well, it varied six to 10 percent or even higher, depending on turnover, and that was the licence fee. So there was a combined service fee, licence fee.

Was it the case that you knew there was an expectation by the elder Mr Coronis, Mr Andrew Coronis, Mr Gillies that you would advise them as to what was the reasonable amount?---No. Once it had been set out in the agreement, I – I complied with that.

You sought to comply with that?---Yes.

All right. Yes. I was just curious there, Mr Schulte. On you go.

MR SCHULTE: Thank you, your Honour. If you could just bear with me a moment. I have no further questions. Thank you, your Honour.

HIS HONOUR: All right. Even though the agreements were there, you nonetheless each year reviewed the amount for reasonableness before putting it to the client for - - -?---Yes.

- - - signature?---Yes.

Is that right?---That’s correct. Yes.

So in that sense, you knew there was an expectation that there would be a reality check, as it were - - -?---Yes. I could - - -

- - - by you, about - - -?---Yes.

- - - are these reasonable?---Yes.

Is that it?---That’s correct. Yes. Yes.

And that was more or less a standing instruction?---Yes. I could – that would be true.

Without it descending into anything in writing, it was just something that, from your years of association with - - -?---Yes.

- - - the Coronis family, you knew that was an expectation?---That’s correct. Yes.

83    I do not doubt that, in formulating his advice, Mr Bryant did seek in his own way to comply with the 2005 agreements and the 2006 agreements according to his understanding of them but this was always subject to a review of any outcome in his calculations for what in his view was a reasonable service fee. It matters not whether Mr Bryant’s understanding of the agreements was or was not correct. Ultimately, he prepared and presented to Theo and Andrew the accounts and related tax returns for the various entities within the Coronis group, including APTR and SNA on the basis that that service fees as recorded were reasonable. He knew that was a standing expectation by Theo and Andrew of him.

84    Other than in terms of end result in the financial accounts of APTR and SNA and Coronis group entity recipients of service fees, there is no contemporaneous record of the methodology Mr Bryant used in calculating the advice he tendered as to what was a reasonable service fee for a given year. Perhaps by the Relevant Years the evolution and growth of the Coronis group was such that there should have been. Perhaps also this was another manifestation of a habit of small business which remained. But my present role is to determine a taxation appeal by the application of the income tax legislation to the facts as found, not the provision of management consultancy advice.

85    There was one time, a time I vividly recall, during Mr Bryant’s evidence, when his mood was anything other than flat and disaffected. To the contrary, he was animated and firm. It arose during his cross-examination when he was asked whether he recalled meeting representatives from the Commissioner’s office on 29 July 2019 [ie during the audit phase]. He was then asked whether he recalled a further meeting with the Commissioner’s officers on 24 September 2019. Mr Bryant stated that he recalled each of these meetings. It was then put to him that during this second meeting he had “advised the purpose of the service fees was for profit distribution amongst entities, so it ends up in the Henry Trust”? Mr Bryant’s emphatic response was this, “[It’s] contrary to everything I believe, and everything I had stated elsewhere. So I’m really very surprised if I said that.”

86    There is a statement in the Commissioner’s objection report which records the statement put to Mr Bryant. The officers to whom this recorded statement is supposed to have been given were not called in the Commissioner’s case. Even assuming that the statement as recorded in the objection report is admissible pursuant to s 69 of the Evidence Act, as read in conjunction with s 182 (given that the report is a Commonwealth record) it is impossible, because it is but a summative excerpt of a conversation, to determine the context in which the recorded statement was made, if it was made at all. Further, in a sense paying any service fee reduces any gross profit of the entity incurring it and forms part of the gross income of the entity deriving and receiving it. Yet further, the Commissioner by his counsel expressly disavowed any suggestion that any sham formed any part of the Commissioner’s case. In the circumstances, I do not just give the statement in the objection report no weight, having had the benefit of seeing Mr Bryant give his oral evidence and of considering that in the overall context of the evidence led in this case, I expressly prefer Mr Bryant’s account.

87    The other witness who gave evidence was Mr Murray Scott Graham a specialist chartered accountant of the firm Pitcher Partners who investigated and reported upon (report dated 22 December 2023) the amounts claimed as service fee deductions during the Relevant Years by APTR and SNA. Mr Graham had earlier furnished what might be described as a benchmarking report in respect of arm’s length pricing and other responses to queries raised by the Commissioner prior to the issuing of the amended assessments (responses dated 31 May 2021 and 3 August 2021).

88    Mr Graham expressed the opinion in his report dated 22 December 2023 that a service fee range of 7%-10% of gross revenue was reasonable. He had the requisite qualifications and experience to express such an opinion. He went further in relation to the fees charged to APTR and SNA, opining that the range could be “possibly higher for additional services provided to APTR and SNA by the Henry Trust, such as executive oversight, including that of Coronis’s CEO and Administration Director”. He stated that this range was based on “comparable third-party franchise agreements entered into by Coronis and provided to me as part of this report” and “In addition, franchise agreements obtained from two of Australia’s largest independent real estate agency franchisors [names redacted - commercial in confidence] are considered to be comparable, with each having inter-alia a franchise fee payable by third-party franchisees calculated as 8% of gross revenue. The 8% falls comfortably within the 7% to 10% range that Coronis has agreed with third-party franchisees.”

89    The essence of Mr Graham’s evidence, which I unreservedly accept (and in recording that I have expressly taken into account his role during the audit process), was found in this exchange during his rather lengthy cross-examination:

HIS HONOUR:    Is it the case the internal intra-management methodology may or may not be idiosyncratic, but in terms of outcome, the outcome was within a range you would regard as reflecting an arm’s length market value for what was being provided? Is that a fair summary?---That is – that’s a very fair statement. That’s exactly – I was somewhat confused as to how it was done and the basis, but then when you look at what the result was, the result is actually, in my view, within an arm’s length value.

Yes. Yes. And you weren’t there constructing how the amount was arrived at as opposed to looking at it. Is it really what you would regard, bringing all your expertise to bear, as an arm’s length market fee for what was being provided?---Yes.

In expressing this opinion, Mr Graham had access to, and considered, the 2005 agreements and the 2006 agreements, as well as relevant accounting records. Mr Graham formed the view that these agreements were no longer being followed during the Relevant Years for the precise fixing of a fee but nonetheless looked to them “for the purposes of understanding what assets were being provided for use by what entities in the group, and that’s really the extent to which I’ve used those two licence agreements”.

90    The parties also put forward in supplementary submissions what came to be an agreed position in relation to a summary and categories provided for in the General Ledgers. There is no doubt that the payments recorded in the ledgers were made by APTR and SNA. However, given the way in which the service fee came to be formulated and adopted each year, totalling amounts recorded against particular labels in those ledgers does not yield the amount of the service fee in the financial statements or the taxation return for a given year. Further, those labels reflect Ms Hanlon’s (in the main or another staff member working to her) interpretation of the occasion for a particular payment.

91    Although, for the reasons given herein, I consider that APTR and SNA have discharged their onus of proving the assessments excessive such that the deduction claims as made should have been allowed, there is what one might term an alternative, lesser outcome, which is that APTR and SNA at least proved the incurring of fees in the amounts as labelled in the ledgers. However, it is obvious from the financial statements that, when these ledgers were reviewed by a qualified chartered accountant for the purpose of preparing entity financial statements, the entries in them did not directly translate into entries in the financial statements.

ELIGIBILITY FOR DEDUCTIONS

92    Before turning to the question whether, in the circumstances related, APTR and SNA have proved they incurred the service fees claimed and satisfied the other requirements in s 8-1 of the ITAA1997, it is convenient to set out some general propositions about eligibility to a deduction under that section. During the Relevant years, the section provided:

8-1    General deductions

(1)    You can deduct from your assessable income any loss or outgoing to the extent that:

(a)    it is incurred in gaining or producing your assessable income; or

(b)    it is necessarily incurred in carrying on a *business for the purpose of gaining or producing your assessable income.

Note:    Division 35 prevents losses from non commercial business activities that may contribute to a tax loss being offset against other assessable income.

(2)    However, you cannot deduct a loss or outgoing under this section to the extent that:

(a)    it is a loss or outgoing of capital, or of a capital nature; or

(b)    it is a loss or outgoing of a private or domestic nature; or

(c)    it is incurred in relation to gaining or producing your *exempt income or your *non assessable non exempt income; or

(d)    a provision of this Act prevents you from deducting it.

For a summary list of provisions about deductions, see section 12 5.

(3)    A loss or outgoing that you can deduct under this section is called a general deduction.

For the effect of the GST in working out deductions, see Division 27.

Note    If you receive an amount as insurance, indemnity or other recoupment of a loss or outgoing that you can deduct under this section, the amount may be included in your assessable income: see Subdivision 20 A.

93    In GP International Pipecoaters Pty Ltd v Commissioner of Taxation (Cth) (1990) 170 CLR 124, at 137, the High Court summarised the position which obtains in respect of characterising expenditure for the purposes of Australian income tax law:

The character of expenditure is ordinarily determined by reference to the nature of the asset acquired or the liability discharged by the making of the expenditure, for the character of the advantage sought by the making of the expenditure is the chief, if not the critical, factor in determining the character of what is paid: Sun Newspapers Ltd. and Associated Newspapers Ltd. v. Federal Commissioner of Taxation; Colonial Mutual Life Assurance Society Ltd. v. Federal Commissioner of Taxation; Cooper v. Federal Commissioner of Taxation (affirmed on other grounds) …

[Footnote references omitted]

94    The definitive explanation on the meaning of “incurred” as used in what is now s 8-1 of the ITAA1997 is that of Dixon J (as his Honour then was) in New Zealand Flax Investments Ltd v Commissioner of Taxation (Cth) (1938) 61 CLR 179, at 207:

“Incurred” does not mean only defrayed, discharged, or borne, but rather it includes encountered, run into, or fallen upon. It is unsafe to attempt exhaustive definitions of a conception intended to have such a various or multifarious application. But it does not include a loss or expenditure which is no more than impending, threatened. or expected.

95    The presence of the phrase, “to the extent that” where first appearing now in s 8-1, means that it contemplates apportionment: Ronpibon Tin N.L. and Tongkah Compound N.L. v Federal Commissioner of Taxation (1949) 78 CLR 47, at 59. In that case (also at 59), the High Court envisaged at least two possible kinds of apportionment:

One kind consists in undivided items of expenditure in respect of things or services of which distinct and severable parts are devoted to gaining or producing assessable income and distinct and severable parts to some other cause. In such cases it may be possible to divide the expenditure in accordance with the applications which have been made of the things or services. The other kind of apportionable items consists in those involving a single outlay or charge which serves both objects indifferently.

96    Ordinarily, in deciding whether an amount is allowable as a deduction under s 8-1 of the ITAA1997, it “is not for the Court or the Commissioner to say how much a taxpayer ought to spend in obtaining his income, but only how much he has spent”: Cecil Bros Pty Ltd v Commissioner of Taxation (Cth) (1964) 111 CLR 430, at 434. Later, in Magna Alloys and Research Pty Ltd v Commissioner of Taxation (Cth) (1980) 11 ATR 276, at 284, in a passage recently cited with express approval by Edelman, Steward and Gleeson JJ in Automotive Invest Pty Ltd v Federal Commissioner of Taxation (2024) 98 ALJR 1245, at [135], Brennan J (as his Honour then was) observed:

The taxpayer is at liberty to determine for himself what the scope and nature of his business or undertaking shall be and how it shall be conducted, the Act having no effect upon those matters but taking “the result of the taxpayer’s activities as it finds them”.

The quoted passage in this excerpt is taken from Tweddle v Federal Commissioner of Taxation (1942) 180 CLR 1, at 7 (Williams J).

97    Where, however, the expenditure concerned is productive of no assessable income or there is a great disproportion between the expenditure and any assessable income which can be seen to be derived, the motive of the taxpayer in the incurring of the expenditure can be relevant if not decisive in a practical, common sense identifying and weighing up of the direct and indirect objects of incurring the expenditure: Fletcher v Commissioner of Taxation (Cth) (1991) 173 CLR 1, at 18-19 (Fletcher). Even so, if in that weighing up and notwithstanding disproportion what remains is a genuine rather than colourable incurring of the expenditure for the gaining or producing of assessable income then the whole will be deductible under s 8-1. In other cases, that weighing up may disclose but a colourable incurring of the expenditure for gaining or producing assessable income while in yet others the result may be apportionment.

98    Given the nature and extent of the controlling interest which they (or entities they controlled) retained between them in, materially, APTR, SNA, PAC Realty as trustee of the Henry Trust and CLAARS as trustee of the Emily Trust, my acceptance of the evidence of Theo and Andrew carries the consequence that the source of any “incurring” of any service fee by APTR and SNA was neither the 2005 agreements nor the 2006 agreements. By the Relevant Years, as they could given their control of the parties to those agreements, they no longer regarded those agreements as the source of any liability for the payment of a fee either by APTR or SNA.

99    But does that mean the appeals by these companies fail at the threshold hurdle of a failure to prove the deductions claimed were incurred? I think not, for these reasons.

100    Acceptance of the evidence given by Theo and Andrew also carries the consequence that, in each of the Relevant Years, APTR and SNA each considered itself subject to a liability to pay a service fee and PAC Realty and CLAARS each considered themselves entitled to the payment of such a fee. It is clear to the point of demonstration from acceptance of their evidence that some habits of informal decision-making from that small “hole in the wall” office at Stafford in the early days of Coronis Real Estate were still present even after that business had evolved and grown into the Coronis group. Great informality attended the dealing between father and son in their various capacities in relation to service fees. Such informality of dealing is hardly unique to this case.

101    In relation to whether, in circumstances of great informality, it can be concluded that a contract exists and, if so, what are its terms Kennett J stated in Chiodo v Silk Contract Logistics [2023] FCA 1047, at [8]-[9]:

8    … where the contract is not written and its terms are to be inferred in whole or in part from the parties’ conduct. The terms of an oral contract may not be limited to express terms; terms may be inferred from the circumstances, including a course of dealing between the parties, or implied where necessary for business efficacy: Realestate.com.au Pty Ltd v Hardingham [2022] HCA 39; 406 ALR 678 at [21]–[22] (Kiefel CJ and Gageler J).

9    Where there is no written contract and no evidence of a particular conversation in which a contract was formed orally, evidence of the parties’ conduct must necessarily be considered in order to draw inferences as to whether the meeting of minds necessary to create a contract has occurred and what obligations they have thereby undertaken (see Personnel Contracting at [177] (Gordon J, Steward J agreeing)).

[footnote references omitted]

I adopted a similar approach to the determination of whether a contract existed, and the character of the relationship formed under it in Hallam v Tancred [2024] FCA 837.

102    In Branir Pty Ltd v Owston Nominees (No 2) Pty Ltd (2001) 117 FCR 424, at [369] Allsop J (as his Honour then was), with the agreement of Drummond and Mansfield JJ, offered a definitive exposition :

… [A] number of authorities discuss the need not to constrict one’s thinking in the formation of contract to mechanical notions of offer and acceptance. Contracts often, and perhaps generally do, arise in that way. They can also arise when business people speak and act and order their affairs in a way without necessarily stopping for the formalities of dotting I’s and crossing t’s or where they think they have done so. Here, the i's were not dotted and the t’s were not crossed because of Mr Graham's conduct. Sometimes this failure occurs because, having discussed the commercial essentials and having put in place necessary structural matters, the parties go about their commercial business on the clear basis of some manifested mutual assent, without ensuring the exhaustive completeness of documentation. In such circumstances, even in the absence of clear offer and acceptance, and even without being able (as one can here) to identify precisely when a contract arose, if it can be stated with confidence that by a certain point the parties mutually assented to a sufficiently clear regime which must, in the circumstances, have been intended to be binding, the court will recognise the existence of a contract. Sometimes this is said to be a process of inference or implication. For my part, I would see it as the inferring of a real intention expressed through, or to be found in, a body of conduct, including, sometimes, communications, even if it be the case that the parties did not consciously advert to, or discuss, some aspect of the relationship and say: ‘and we hereby agree to be bound’ in this or that respect. The essential question in such cases is whether the parties' conduct, including what was said and not said and including the evident commercial aims and expectations of the parties, reveals an understanding or agreement or, as sometimes expressed, a manifestation of mutual assent, which bespeaks an intention to be legally bound to the essential elements of a contract. The authority for the above can be found in, at least, the following: Meates v Attorney-General [1983] NZLR 308 at 377 per Cooke J (as his Lordship then was); Integrated Computer Services Pty Ltd v Digital Equipment Corporation (Aust) Pty Ltd (1988) 5 BPR 11,110 at 11,117-11,118 per McHugh JA (Hope and Mahoney JJA concurring); Vroon BV v Foster’s Brewing Group [1994] 2 VR 32 at 81-83 per Ormiston J (as his Honour then was); Empirnall Holdings Pty Ltd v Machon Paull Partners Pty Ltd (1988) 14 NSWLR 523 at 555 per McHugh JA (with whom Samuels JA concurred); Pagnan SpA v Feed Products Ltd [1987] 2 Lloyd’s Rep 601 at 611 per Bingham J (as his Lordship then was) affirmed on appeal at 615; Pobjie Agencies v Vinidex Tubemakers [2000] NSWCA 105 at [22]-[24] per Mason P (with whom Meagher and Handley JJA concurred); Brambles Holdings Ltd v Bathurst City Council [2001] NSWCA 61 at [74] - [80] per Heydon JA; though see Toyota Motor Corporation Australia Ltd v Ken Morgan Motors Pty Ltd [1994] 2 VR 106 at 178 per Tadgell J (as his Honour then was); and in this context see also Electrical Enterprises Retail Pty Ltd v Rodgers (1988) 15 NSWLR 473 at 489 per Kearney J and Manzi v Smith (1975) 132 CLR 671 at 674.

103    During the Relevant Years, and as Theo’s and Andrew’s evidence attests, the Emily Trust had a valuable asset, the “rent roll”, essential to the operation of SNA’s property management business. It was PAC Realty, as trustee of the Emily Trust which owned that rent roll. As trustee, PAC Realty had paid, and was paying (to the Commonwealth Bank in the form of loan repayments), good money progressively to acquire that rent roll. As the controllers of PAC Realty, Theo and Andrew wanted a reasonable return on that rent roll. The whole point of the restructuring had been asset protection and with that the separation of the assets used by the operating entities from those operating entities. By the Relevant Years, the trademark “CORONIS” and related symbols were worth something, and Theo and Andrew certainly thought so. Perhaps those assets should have been recognised in the accounts but again, no counsel of accounting practice perfection attends whether a deduction is allowable under s 8-1 of the ITAA1997.

104    As controllers of both SNA and APTR, it was under that name, as a matter of deliberate commercial value judgement, that each of these operating companies traded. Yet it was CLAARS as trustee of the Henry Trust which owned this intellectual property. It was also CLAARS as trustee which employed two persons essential in Theo’s and Andrew’s view, to the commercial success of APTR and SNA, Andrew himself and Ms Hanlon. Each of these persons had very particular skills and experience. Under Ms Hanlon, that company as trustee also supplied the computerised record keeping service. The inference is inescapable that, in each of the Relevant Years, APTR and SNA were subject to a liability, contractual in nature, to pay a service fee. Yet further, it is a likewise inescapable inference from the circumstances related above, based on the evidence that I have accepted, that terms of that contract were that the precise amount of that service fee would be determined annually by PAQ Realty or, as the case may be, CLAARS on the basis of advice from Mr Bryant as to what was fair and reasonable but subject to the general guidance that it would not give more than an 8% overall return. It should also be inferred that SNA and APTR were subject to a monthly obligation to make remittances which would be credited against their respective service fee obligations when the accounts were struck for a given year.

105    The existence of such a contract is entirely consistent with the way in which SNA and APTR, struck their respective financial statements and, in turn, SNA and APTR made service fee claims in their taxation returns. In the circumstances, it would be perverse to conclude that the financial statements did other than record the existence and effect of such a contract. The occasion for so doing is even stronger than it was in Pastoral and Development Pty Ltd v Commissioner of Taxation (1971) 124 CLR 453, at 459-460 (Walsh J).

106    Lest it be thought otherwise, I make it plain that it would not be necessary, for a liability to be “incurred” for the purposes of s 8-1 of the ITAA1997, that there be a contractual obligation to incur that expenditure. An expenditure voluntarily incurred may be deductible under s 8-1 of the ITAA1997: John Fairfax & Sons Pty Ltd v Commissioner of Taxation (Cth) (1959) 101 CLR 30, at 40 (Fullagar J).

107    Contrary to a submission made on the part of the Commissioner, there is no necessary inconsistency between Theo and Andrew regarding the 2005 agreements and the 2006 agreements as expired and no longer applicable in the Relevant Years and Mr Bryant still looking to them for the purpose of formulating his advice as to an overall service fee which was fair and reasonable. On the evidence, what was presented to Theo and Andrew was an end result figure in financial statements presented to them for approval. It was not put to either of Theo and Andrew that Mr Bryant had discussed in detail with them his methodology. Theo and Andrew were, I find, just interested in the charging of a fair and reasonable service fee to the operating entities for assets and expertise which, for good reason, they regarded as valuable and to ensure a related, resultant return to unit holders in the Henry Trust. In this, they were each honest and honourable men of business. Neither had any accountancy expertise. The bottom-line advice of their longstanding, trusted accountant as taken up in the financial accounts of the various entities as presented to them by him was necessary and sufficient for them.

108    Contrary to what at one stage seemed to be a view of the Commissioner, neither Theo nor, more particularly Andrew was obliged to perform duties as a director of an entity for free. Insofar as Andrew as an employee of CLAARS as trustee of the Henry Trust undertook director’s and other duties for operating entities, CLAARS was entitled to charge for these as a component of a service fee.

109    It was also put for the Commissioner that, in assessing Theo’s and Andrew’s credibility and whether the applicants had discharged their onus of proof that there was an inconsistency between instructions given to Mr Graham and their evidence as to the foundation for the service charges in the Relevant Years. What Mr Graham expressed in his report was this:

I note that there are differences between the applicants and respondents appeal statements in relation to which agreements are operative. As such, I have included and analysed all agreements in my report. Further, I am instructed to assume that the aforementioned agreements formed the basis of an agreement in each of the years under review.

[emphasis added]

110    It was put neither to Theo nor Andrew that they were the source of instructions to Mr Graham. It was not put to Mr Graham that either of them was the source of the instructions recited. Further, it was Mr Bryant’s evidence that he did still look to the 2005 agreements and the 2006 agreements when formulating his advice to Theo and Andrew. In this sense, those agreements did indeed “form the basis”. It is just that this was that was subject to an overall review for reasonableness. Yet further, as Mr Graham confirmed in his evidence, in the passage quoted above, the precise methodology used in calculating the service fees was not apparent to him. I have taken these matters and the statement in Mr Graham’s report, as well as, against the background of the whole of the evidence, my direct observation of each of them when giving their oral evidence into account when expressing my acceptance of the evidence of Theo and Andrew.

111    On the evidence which I have accepted, this case is very different to Anglo American Investments Pty Ltd (Trustee) v Commissioner of Taxation [2022] FCA 971. There, the management fee deductions claimed were nothing more than the ex post facto constructs of the relevant directing mind and will (Mr Vanda Gould), a type of balancing charge. Unlike the present case, the evidence in that case did not admit of the drawing of an inference that there existed an anterior, contractual obligation to pay the fee.

112    It was not necessary for Theo’s and Andrew’s evidence to be corroborated by that of Mr Graham for APTR and SNA to discharge their onus of proof. It is not the purpose of the income tax legislation (much less the function of the Commissioner) to dictate how a business is to operate, as opposed to applying to that business as it is operated. What Mr Graham’s evidence does show is that, certainly by the Relevant Years, Theo and Andrew did indeed have a keen understanding of rates of return in the real estate industry. Although his methodology was opaque, it may also be that, in conducting his overall review for what in each year was fair and reasonable for the purpose of advising Theo and Andrew, so, too, did Mr Bryant. In any event, I accept Mr Bryant’s evidence that the amounts of the service fees were reasonable. Mr Graham’s evidence occasions no cause for doubting that the fees were reasonable.

113    Further, and contrary to another submission of the Commissioner, this case is very different to Fletcher. The object of the incurring of the service fee expenditure in the Relevant Years is obvious. APTR and SNA needed to pay for the assets and expertise which were essential for their gaining or producing assessable income or in carrying on a business for that purpose. These were held by other entities which expected a return. It matters not in this case that those other entities were under the effective control of the same persons who effectively controlled APTR and SNA. Each of these entities had an existence in law separate from Theo and Andrew. To fail to recognise this, as seemed at times to be an undercurrent in the Commissioner’s submissions, is to fail to recognise the enduring authority of Salomon v A Salomon & Co Ltd [1897] AC 22. Further, the service fee struck was struck on accounting professional advice as to what was reasonable and was not so high as to admit of a conclusion that some purpose other than those specified in s 8-1 of the ITAA1997 was abroad. Instead, on the evidence, the service fee payments by APTR and SNA were, as in Commissioner of Taxation (Cth) v Phillips (1978) 36 FLR 399, especially at 401 per Bowen CJ and Deane J and at 409-410 per Fisher J, in the relevant sense, necessarily incurred in carrying on the accountancy business for the purpose of gaining or producing assessable income or for the purposes of carrying on their respective businesses to that end. The character of the advantage sought by the incurring of the service fees was the use of assets and human capital for such purposes.

114    This is not a profit stripping case. Given that it was never part of the Commissioner’s case that valuable assets and expertise necessary for the carrying on of their respective businesses were held by sham entities and were really those of APTR and SNA, one might have thought that ordinary care, common sense and understanding of commerce would challenge thinking that it was a profit stripping case. It is unremarkable that the owners of these assets, including human capital, would expect a return on them. Especially that is so when, in relation to the rent roll, liabilities had been incurred to a bank to assist in the progressive augmentation of that asset. Especially also that is so when there are third party unit holders who expect a return on units the value of which is related to valuable assets held in trust. It is just fantasy in the circumstances of this case to consider that paying for the means of deriving a gross profit is “profit stripping”. As it is, all that has occurred is that SNA and APTR have proved they correctly returned their assessable income and allowable deductions, materially the service fees. In turn, and though it is not controversial in this case, those service fees form part of the assessable income of other entities. Also in turn and insofar as service fees were derived by a unit trust and flowed through to unit holders by way of distributions, those distributions formed part of the assessable income of the unit holders. That is how the income tax legislation operates.

115    The cases I have cited above (and those referred to in them) about inferring the existence of contracts in circumstances of great informality in business show that the informality of relationships between entities in the Coronis group are hardly unique. Perfection in documentation does not dictate eligibility to a deduction under s 8-1 of the ITAA1997. The disparity in financial resources and a related ability to conduct taxation appeal proceedings either in this Court or in the Administrative Review Tribunal between many in small business and the Commissioner is great. Of course, the informality of inter-entity relationships within the Coronis group made for challenges in discharging an onus of proof. But great injustices can be visited upon those in small business or who have retained those habits, if the Commissioner does not bring to bear at the audit stage an understanding grounded in the realities of commerce.

116    It only comes to this, in respect of each of the Relevant Years APTR and SNA have each proved that the amounts as set out above, claimed as service fees paid to CLAARS Pty Ltd as trustee for the Henry Trust and PAC Realty Pty Ltd as trustee for the Emily Trust were allowable deductions under s 8-1 of the ITAA1997. By so doing, they have proved that the amended assessments concerned were excessive and what they should have been.

OUTCOME

117    The appeals must be allowed, the objection decisions in respect of the amended income tax assessments set aside and, in lieu thereof, it must be ordered that, insofar as they relate to the amended income tax assessments the objections be allowed in full. The matter must be remitted to the Commissioner for the issuing of the requisite further amended assessments in accordance with this Court’s judgment.

118    Although it is a necessary consequence of the outcome of these appeals that there was no tax shortfall, it will be for the Administrative Review Tribunal to give formal effect to that on the review proceedings.

119    It will be necessary to hear the parties as to costs.

Associate:    

Dated:    21 March 2025