Cumins v Commissioner of Taxation [2006] FCA 43 (6 February 2006)

Last Updated: 7 February 2006

FEDERAL COURT OF AUSTRALIA

Cumins v Commissioner of Taxation [2006] FCA 43

TAXATION – income tax – application by way of appeal – capital loss – sale of shares by applicant as trustee of beneficial interest in shares by applicant as trustee of a resident trust to himself as trustee of another trust – Tribunal did not misconceive its role – decision on applicability of Part 1VA not in error – no obligation on Tribunal to take into account certain Taxation Determinations – no error in conclusion that capital loss constituted a tax benefit – various allegedly irrelevant considerations not wrongly taken into account – no failure to take into account certain relevant considerations or to consider issues – no error in exercise of discretion to impose additional tax or not to provide for remission

Administrative Appeals Tribunal Act 1975 (Cth) ss 43, 43(2B), 44
Income Tax Assessment Act 1936 (Cth) Pt IVA, 170BA, 177, 177A, 177C, 177C(1)(ba), 177D(a), 177D(b), 177F, 177F(1)(c), 222C, 226(2)(a), 227(3)
Taxation Administration Act 1953 (Cth) s 14ZZK(b)(i)

Abebe v Commonwealth [1999] HCA 14; (1999) 197 CLR 510
Bazaniak v Deputy Commissioner of Taxation [1999] FCA 864
Birdseye v Australian Securities and Investments Commission (2003) 76 ALD 321
Commissioner of Taxation v Spotless Services Ltd [1996] HCA 34; (1996) 186 CLR 404
Dennis Willcox Pty Ltd v Federal Commissioner of Taxation (1988) 79 ALR 267
Dodds v Comcare Australia (1993) 31 ALD 690
Eastern Nitrogen Ltd v Commissioner of Taxation [2001] FCA 366; (2001) 108 FCR 27
Federal Commissioner of Taxation v Brixius (1987) 87 ATC 4963
Federal Commissioner of Taxation v Consolidated Press Holdings Ltd [2001] HCA 32; (2001) 207 CLR 235
Federal Commissioner of Taxation v Hart [2004] HCA 26; (2004) 217 CLR 216
Federal Commissioner of Taxation v Peabody [1994] HCA 43; (1994) 181 CLR 359
Fletcher v Commissioner of Taxation (1988) 19 FCR 442
Minister for Aboriginal Affairs v Peko Wallsend Ltd [1986] HCA 40; (1986) 162 CLR 24
Minister for Immigration and Multicultural Affairs v Yusuf [2001] HCA 30; (2001) 206 CLR 323
Pridecraft Pty Ltd v Federal Commissioner of Taxation (2004) 213 ALR 450
Shand v Federal Commissioner of Taxation [2003] AATA 279; (2003) 52 ATR 1088
TNT Skypak International (Aust) Pty Ltd v Federal Commissioner of Taxation (1988) 82 ALR 175
Walstern v Commissioner of Taxation [2003] FCA 1428; (2003) 138 FCR 1





PETER CUMINS v COMMISSIONER OF TAXATION
WAD 240 of 2004

NICHOLSON J
6 FEBRUARY 2006
PERTH

IN THE FEDERAL COURT OF AUSTRALIA
WESTERN AUSTRALIA DISTRICT REGISTRY	WAD 240 OF 2004

ON APPEAL FROM THE ADMINISTRATIVE APPEALS TRIBUNAL

BETWEEN:	PETER CUMINS APPLICANT
AND:	COMMISSIONER OF TAXATION RESPONDENT
JUDGE:	NICHOLSON J
DATE OF ORDER:	6 FEBRUARY 2006
WHERE MADE:	PERTH

THE COURT ORDERS THAT:

1.	The application by way of appeal is dismissed.
2.	The applicant pay the respondent’s costs of the appeal.

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

IN THE FEDERAL COURT OF AUSTRALIA
WESTERN AUSTRALIA DISTRICT REGISTRY	WAD 240 OF 2004

ON APPEAL FROM THE ADMINISTRATIVE APPEALS TRIBUNAL

BETWEEN:	PETER CUMINS APPLICANT
AND:	COMMISSIONER OF TAXATION RESPONDENT

JUDGE:	NICHOLSON J
DATE:	6 FEBRUARY 2006
PLACE:	PERTH

REASONS FOR JUDGMENT

1 By an amended notice of appeal the applicant ‘appeals’ from the whole of a decision of the Administrative Appeals Tribunal (‘the Tribunal’) delivered on 1 October 2004. In that decision the Tribunal affirmed a decision of the respondent made on 4 July 2002 disallowing an objection made by the applicant. The objection was to the issue by the respondent on 8 February 2002 of a notice of amended assessment (‘amended notice’) amended in respect of the applicant’s income tax for the year ended 30 June 1998. The effect of the amended notice was to increase the assessable income of the applicant for that year of income by $800 000 together with an understatement of penalty and interest. The amended notice was issued as the consequence of the determination by the respondent under s 177F of the Income Tax Assessment Act 1936 (Cth) (‘the 36 Act’) that the amount of $800 000 was a tax benefit in connection with a scheme to which Pt IVA applied and that the benefit be cancelled.

2 The issues before the Tribunal included whether, in the year of income, the applicant in his capacity as trustee of his family trust (‘the Trust’) had incurred a capital loss in the sum of $800 000 under Pt 3-1 of the Income Tax Assessment Act 1997 (Cth) (‘the 97 Act) and, if so, whether Pt IVA of the 36 Act operated to deem that no part of the capital loss had been incurred. The specific grounds of appeal will be addressed as necessary in the course of these reasons.

3 Leave was also granted to the applicant to advance an additional question of law, namely whether the Tribunal erred in law in failing to address or consider the remitting of any additional tax found payable, pursuant to s 227(3) of the 36 Act.

4 The applicant seeks orders upholding the appeal or alternatively setting aside the decision under appeal, remitting the matter to the Tribunal for hearing and determination by a differently constituted Tribunal and for the respondent to pay the applicant’s costs.

TRIBUNAL’S REASONS AND FINDINGS

FINDINGS ON PRIMARY FACTS

5 The Tribunal made detailed findings of fact. Most of the primary facts were established by the T documents lodged by the respondent pursuant to s 37 of the Administrative Appeals Tribunal Act 1975 (Cth) and were not in dispute. The findings are as follows.

6 The applicant was the sole trustee and a general beneficiary of the Trust. The Trust was created by a deed made on 6 March 1992. The provisions of that deed show :

(1) the Trust was a discretionary trust and was under the sole control of the applicant;
(2) the Trust was for the benefit of the applicant and his family;

(3) the applicant was the trustee, an income and corpus beneficiary, the guardian and the appointor.

7 Between July and October 1997 the applicant as trustee of the Trust purchased 14 329 100 shares in Cash Converters International Limited (‘CCIL’) for a price of 30 cents each share. The shares were purchased from his brother and from Riverwood Park Pty Ltd, a company associated with his brother, in a management buyout.

8 The applicant, as trustee of the Trust, borrowed $4.3 million from the National Australia Bank (‘the Bank’) to acquire the shares (‘the NAB loan’). Special terms and conditions applicable to the NAB loan are found in a letter from the Bank dated 10 July 1997 and the Loan Agreement. In the Loan Agreement it was provided that the applicant as borrower shall not, without the prior written consent of the Bank, assign or transfer its rights or obligations under the Loan Agreement. It was further provided that a failure to do so would constitute an event of default. Arrangements to secure the loan are set out at item 6 of the schedule to the Loan Agreement (referring to an attached annexure). Other arrangements included:

(1) the applicant, as trustee for the Trust, appointed a wholly owned subsidiary of the Bank called National Australia Trustees Limited (‘NAT’) as custodian of all securities delivered to it by the applicant;
(2) the shares were delivered to NAT, registered electronically in the name of NAT, and NAT was given the holder identification number;
(3) the applicant appointed NAT as agent and attorney to do a number of things including to buy, sell and otherwise deal in any investments as properly directed by the Bank, and to receive all funds, resulting from the sale of any investments, and other investment receipts;
(4) the applicant could only terminate the agreement with NAT with the agreement of the Bank;
(5) dividends were paid to NAT as the registered owner of the shares. Surplus dividends, after payment of interest, were to be held on term deposit under a letter of set-off as security for the facility;
(6) the loan was further secured by guarantees and indemnities from the applicant, his brother and associated entities and registered mortgages over certain properties.

9 On 11 June 1998 the applicant, as trustee of the Trust, sold another parcel of shares for a consideration of $800 000. That sale generated a capital gain of $787 375 reported in the Trust return for the income year ending 30 June 1998. There were also other smaller capital gains returned by the Trust in the year of income.

10 On 12 June 1998 a second family discretionary trust (‘Trust 2’) was settled with the applicant as sole trustee. The settled sum was $5. The applicant as trustee did not open a bank account for Trust 2.

11 The provisions of the trust deed for Trust 2 show:

(1) the trust was a discretionary trust and was under the sole control of the applicant;
(2) the trust was for the benefit of the applicant and his family;

(3) the applicant was the trustee, an income and corpus beneficiary, the guardian and the appointor.

12 On 12 June 1998 the applicant as trustee of the Trust sold 8 million of the CCIL shares to the applicant, as trustee of Trust 2, for a consideration of $1.6 million. Features of this agreement were:

(1) the sale was effected by an unsigned share sale agreement dated June 1998;

(2) that document was drafted as an agreement for the purchase and sale of 8 million of the shares, free from encumbrances, for a price of $1.6 million;
(3) the vendor was to deliver a share transfer for the shares, which were held on an uncertificated register, against payment of the price;

(4) the sale was to be settled on 30 June 1998; and

(5) the vendor had the right to deliver the transfer at settlement even if the purchaser did not pay the price at settlement, in which event the purchaser was to pay interest on the price at the rate of 8.32% per cent per annum payable six monthly in arrears until payment of the price.

13 Trust 2 did not pay $1.6 million for the 8 million shares and no other financial arrangements were made for this acquisition. The Bank was not informed of the settlement of Trust 2 or of the share sale.

14 This sale from the Trust to Trust 2 resulted in a capital loss of $800 000. The capital loss was calculated on a reduced cost base of $0.30 per share and consideration of $0.20 per share, the closing market price of the shares on 12 June 1998.

15 As a result of the sale, the balance of the net capital gain of the Trust for the income year that was distributed to the applicant and included in his assessable income for the purposes of the 36 Act, was reduced from $939 099 to $139 099.

FINDINGS CONCERNING PT IVA

16 With regard to s 177C and s 177D(a) of the 36 Act, the Tribunal found:

(1) the applicant had obtained a tax benefit connected with the scheme identified by the respondent;
(2) the tax benefit was the capital loss incurred on the transfer of the shares from the Trust to Trust 2;
(3) it was ‘unable to reliably predict’ that the Bank would have consented to an alternative transaction for incurring the capital loss;
(4) in the circumstances, it was unreasonable to expect that the applicant would have incurred the capital loss had the scheme not been carried out.

17 The scheme identified by the respondent and set out in the reasons of the Tribunal was:

(1) the creation of Trust 2 on 12 June 1998;

(2) the purported sale of 8 million CCIL shares by the Trust to Trust 2 on 12 June 1998;
(3) the purported realisation of a capital loss of $800 000 from the sale of the 8 million CCIL shares which was disclosed by the Trust in its income tax return for the income year ended 30 June 1998;
(4) the offsetting of the $800 000 capital loss against the Trust’s capital gains for the year ended 30 June 1998;
(5) the distribution by the applicant as trustee for the Trust, of the net capital gains of the Trust for the income year ended 30 June 1998 (after the offsetting of the purported capital loss of $800 000), save for the first $27 500, to the applicant pursuant to the resolution of the applicant as trustee of 26 June 1998; and
(6) the purported reduction of the net capital gain distribution to the applicant by the Trust for the year ended 30 June 1998 by $800 000.

18 In relation to ss 177D(b)(i) to (viii), the Tribunal found:

(1) the share sale was not carried out in an ordinary manner because the shares were mortgaged in circumstances where the applicant was contractually obliged to obtain the Bank’s consent to any sale of the shares;
(2) in form the transaction was by sale of the shares free from encumbrances with the vendor obliged to deliver a share transfer against payment of the price. In substance the legal interest was held by the custodian and the applicant only had a beneficial interest. There was a disconnection between the form and substance of the share sale agreement;
(3) Trust 2 was settled and the shares were transferred at the capital loss on 12 June 1998. The applicant had settled the share sale generating a capital gain of $787 375 on 11 June 1998;
(4) by entering the scheme, the applicant, as trustee of the Trust, incurred a capital loss for the year ended 30 June 1998 that substantially offset the aggregate capital gains derived in that year of income. A consequential substantial change in the applicant’s personal financial position resulted from the scheme.

19 The Tribunal also found that, having regard to all the facts and circumstances, it would not be concluded that the applicant’s purpose, or one of his purposes, in carrying out the scheme was to shelter the 8 million shares from claims of creditors or future creditors of the Trust.

20 After consideration of all of the matters referred to in s 177D(b) of the 36 Act, the Tribunal found that a reasonable person would conclude that the applicant, as trustee of the Trust, carried out the scheme with the sole purpose of obtaining the identified tax benefit.

21 The Tribunal affirmed the respondent’s determination under s 177F(1)(c) of the 36 Act that the applicant, as trustee of the Trust, did not incur the capital loss in the year of income.

THE APPEAL

22 The appeal is brought in reliance upon the amended notice of appeal and s 44 of the Administrative Appeals Tribunal Act. The appeal must therefore be brought on a question of law. The existence of a question of law is not merely a qualifying condition to ground the appeal, but also the subject matter of the appeal itself: see TNT Skypak International (Aust) Pty Ltd v Federal Commissioner of Taxation (1988) 82 ALR 175 at 178 citing Federal Commissioner of Taxation v Brixius (1987) 87 ATC 4963 at 4967; Birdseye v Australian Securities and Investments Commission (2003) 76 ALD 321 at [16]. The respondent contends that the applicant’s grounds of appeal do not maintain the distinction between questions of fact and questions of law.

GROUND 4.1: FAILURE BY TRIBUNAL TO PERFORM ITS PROPER ROLE

23 Early in its reasons at [1] the Tribunal made a statement that its role involved it determining whether the respondent exercised his discretion under Pt IVA of the 36 Act correctly. Later at [63] it further stated:

‘So the issue to be decided by the Tribunal is whether the respondent correctly determined, pursuant to s.177F(1)(c), that the applicant, as trustee of the [T]rust, did not incur the capital loss for income tax purposes because it was a tax benefit connected with the scheme identified by the respondent and the scheme is one to which Part IVA applies.’

24 The applicant contends in this ground that these references establish that the Tribunal erred in law in the manner in which it approached the matter. This is because, as a consequence of s 43 of the Administrative Appeals Tribunal Act, it was obliged to consider afresh the exercise of the relevant powers and discretions of the respondent and not to consider whether the respondent had exercised the powers and discretions ‘correctly’: Fletcher v Commissioner of Taxation (1988) 19 FCR 442 at 451; Bazaniak v Deputy Commissioner of Taxation [1999] FCA 864 at [19], [29]-[30].

25 The applicant’s submissions contend that the application of Pt IVA involves two distinct stages and inquiries with discretion relevant only at the final stage. The first stage is said to concern the question whether there is a tax benefit obtained in connection with a relevant ‘scheme’ to which Pt IVA applies. This involves the determination of matters of ‘objective fact’ and inferences to be drawn from primary facts: Commissioner of Taxation v Spotless Services Ltd [1996] HCA 34; (1996) 186 CLR 404 at 413; Federal Commissioner of Taxation v Peabody [1994] HCA 43; (1994) 181 CLR 359 at 382; Pridecraft Pty Ltd v Federal Commissioner of Taxation (2004) 213 ALR 450 at 476, at [106]. The final stage involves the discretionary decision to be made under s 177F, namely whether the tax benefit should be cancelled and whether it should be cancelled in whole or in part.

26 The applicant further contends that the Tribunal failed to consider this latter discretion and did not seek to exercise it. The submission is that the Tribunal left unexamined the exercise of discretion on the issue. Relevant to the exercise of the discretion if it had been made, in the applicant’s submission, are issues to what are described later in these reasons as ‘wash sales’. Therefore it is argued by the applicant that there was a failure by the Tribunal to take into consideration a mandatory relevant consideration, thus giving rise to a jurisdictional error and raising a question of law: Dennis Willcox Pty Ltd v Federal Commissioner of Taxation (1988) 79 ALR 267.

27 The applicant also relied on Eastern Nitrogen Ltd v Commissioner of Taxation [2001] FCA 366; (2001) 108 FCR 27 at 45, at [86] to support the proposition that the burden of proof under s 14ZZK(b)(i) of the Taxation Administration Act 1953 (Cth) had no material role to play before the Tribunal.

28 Having considered the reasons of the Tribunal in relation to the remaining grounds of appeal, I share the view of their effect taken by the respondent in his submissions. The respondent contends that the allegation that the Tribunal saw its role as confined to determining whether the respondent had erred, rather than itself arriving at the correct or preferable decision, is inconsistent with the whole of the decision. There can be no doubt that the Tribunal directed itself to determining what was the correct decision and did not simply decide whether error was shown in the decision of the respondent. For example at [68] the Tribunal refers to the eight matters in s 177D(b) ‘to which the tribunal must have regard in determining whether it would be concluded that the applicant, as trustee of the trust, carried out the scheme, or any part of it, for the purpose of obtaining the tax benefit that is the capital loss’.

29 In relation to Pt IVA, the Tribunal considered and made findings on:

(1) whether the capital loss was a tax benefit connected with the scheme;
(2) whether, having regard to the eight matters prescribed in s 177D(b) it would be concluded that the applicant carried out the scheme, or any part of it, for the purpose of obtaining tax benefit.

In making its decision the Tribunal exercised its discretion in the same way as the respondent had, by making the finding that Pt IVA applies and by affirming the objection decision that upheld the amended assessment that gave effect to the determination under s 177F.

30 Reading the whole of the reasons, there is no apparent error of law of the type alleged in this ground in the issue the Tribunal identified for decision. On the findings made by it (in particular at [67] and at [69]), having reviewed and considered for itself the evidence and submissions before it, the Tribunal was authorised by the combined effect of the Administrative Appeals Tribunal Act and s 177F of the 36 Act to affirm the determination made by the respondent. In doing so it made no error in carrying out its statutory function of reviewing the decision of the respondent.

31 In particular, the Tribunal did not make the error made by the Tribunal in Bazaniak, namely considering the questions before it on the basis of material before the respondent rather than before it.

32 Likewise, the reliance on Eastern Nitrogen does not assist the applicant as it addresses a distinguishable issue. Section 14ZZK(b)(i) of the Taxation Administration Act places on an applicant for review the burden of proving that if the taxation decision concerned resulted in an assessment, the assessment is excessive. It was that burden which was referred to by the Tribunal in [84] of its reasons.

GROUND 4.2: MISAPPLICATION OF PT IVA

33 In this ground the applicant raises the issue of whether the Tribunal erred in its interpretation of Pt IVA by failing to find that it was not intended to apply and does not apply to a genuine transaction which crystallises losses actually incurred on the value of listed shares, being the circumstances of the current case.

34 The applicant’s argument on this ground commences by reference to the fact that Pt IVA was not intended to apply and has not been applied in the context of capital gains tax (‘CGT’) where the essence of the relevant transaction is a genuine sale of an asset like a listed share, at a proper value, where the value has fallen since acquisition. It is said that in the case of the listed shares, it is not the taxpayer who creates, generates or even stimulates the loss at the time of sale. The loss is ‘part and parcel’ of the share-trading price, crystallised for, and recognised by, the CGT system when a sale occurs.

35 The respondent contends the ground, like the preceding ground, is expressed at a great level of generality. The fact that a scheme has a commercial objective does not determine the answer to the question posed by s 177D of the 36 Act. As the Court said in Federal Commissioner of Taxation v Consolidated Press Holdings Ltd [2001] HCA 32; (2001) 207 CLR 235 at 264, at [96] citing Spotless Services at 415:

‘[A] person may enter into or carry out a scheme, within the meaning of Pt IVA, for the dominant purpose of enabling the relevant taxpayer to obtain a tax benefit where that dominant purpose is consistent with the pursuit of commercial gain in the course of carrying on a business.’

See also Federal Commissioner of Taxation v Hart [2004] HCA 26; (2004) 217 CLR 216 at 227, at [16] and at 243, at [64].

36 Again I consider the answering submissions of the respondent on this ground to be correct. Part IVA requires the decision-maker to have regard to the eight objective factors posited in s 177D(b) of the 36 Act. If a reasonable person would conclude from those factors that the sole or dominant purpose of one or more of the participants in the scheme was to enable the taxpayer to obtain a tax benefit, the decision-maker is empowered to make a determination under s 177F cancelling the tax benefit. The fact that the scheme may have been ‘genuine or directed at crystallising a loss’ does not preclude the application of Pt IVA. In the present case, the Tribunal considered the matters it was required to have regard to by s 177D(b) and found that it would be concluded that the applicant entered into the scheme for the purpose of obtaining the tax benefit. On its findings the Tribunal was correct to affirm the respondent’s determination under s 177F.

37 I also agree that the scheme in the present case could hardly be described as ‘a genuine transaction which crystallises losses actually incurred on the value of listed shares’. No economic loss was suffered as a result of the scheme. The beneficial ownership of the shares remained under the sole and complete control of the applicant who retained the power to distribute the benefit of the shares to himself and/or to such other members of his family as he thought fit and in his unfettered discretion. The legal ownership of the shares remained with the Bank as security for the debt owed by the Trust. The scheme was such that it was open for it to be found that it was in the character of a contrivance to create a capital loss for the purpose of the income tax legislation in order to reduce the amount of the net capital gain that the Trust would otherwise be required to return by reason of other sales that had given rise to capital gains.

GROUND 4.3: FAILURE TO TAKE INTO CONSIDERATION TAXATION DETERMINATIONS ON WASH SALES

38 This ground contends that the Tribunal erred in law in failing to take into consideration or apply Taxation Determination 95/4 or Taxation Ruling IT 2643. Each relates to the application of Pt IVA to wash sales. It is common ground that a ‘wash sale’ is:

‘The sale and repurchase of the same security for tax purposes. A wash sale allows an investor to lock-in capital losses for tax purposes even though the fall in share or asset price may be temporary. A wash sale may contravene (CTH) Corporations Act 2001 Pt 7.10 Div 2.’ (Butterworths Concise Australian Legal Dictionary (2004))

39 Taxation Ruling IT 2643 is titled ‘Income Tax: Sale of Shares in Companies in Liquidation, Receivership (‘Wash Sales’)’. It provides details of a response given by the office of the respondent to a request for an opinion of the possible operation of Part IVA of the 36 Act to a sale of shares in a company in liquidation to a close relative, including where the company is in liquidation. The response states relevantly:

‘3. It is not possible to give an assurance that Part IVA would not apply to ‘wash sale’ arrangements generally. It is considered that Part IVA can apply where, as a consequence of the arrangement, an amount to be included in a taxpayer’s assessable income under section 160ZO is reduced by a subsection 160ZC(1) amount . . .
5. Assuming that shares in a particular case are effectively transferred, the question of whether Part IVA might apply would depend on the facts of the particular case, applying the tests set out in section 177D. In this connection, we do not accept a proposition that share arrangements between related parties such as family members are precluded from the possible application of Part IVA.
6. However, subject to these reservations and to the terms of Taxation Ruling IT 2500, a transfer of shares in a company in liquidation would not, as a general rule, attract the application of Part IVA where:

(a) absolute control and ownership of the shares are validly and effectively transferred;
(b) the shares are transferred at a true market value; and
(c) there is no intention, arrangement or understanding at the time of transfer that the shares are to be re-acquired.’

As the respondent’s submissions point out, the circumstances described in par 6 of this Ruling are not the circumstances of the case which was before the Tribunal.

40 The applicant argues that in not dealing with ‘wash sales’ the decision of the Tribunal fell into error, undermining its decision in several respects. The first was that it did not have regard to the availability of alternative transactions which could have been implemented to produce a wash sale effect. The second was the context of the non-applicability of Pt IVA to CGT, an issue addressed in the previous ground. The third was that a number of public tax rulings reflect the practice of the respondent to not apply Pt IVA to wash sales of shares even when they occur (as may be usual) near the end of the financial year and involve
re-acquisition of the same number of shares. These considerations are said by the applicant also to have importance to whether the position taken by the applicant was reasonably arguable in relation to the imposition of penalties by way of additional tax (ss 222C and 226(2)(a) of the 36 Act) or whether it was defensible for the purposes of the exercise of the discretion to remit any additional tax pursuant to s 227(3) of the 36 Act.

41 The position at law is that the applicant can only establish that the Tribunal erred in law by failure to take into consideration or apply Taxation Determination 95/4 or Taxation Ruling IT 2643 if they were matters which the Tribunal was required to take into account.

42 It is settled law that whether a matter must be taken into account is to be determined by reference to the subject matter, scope and purpose of the Act: see Minister for Aboriginal Affairs v Peko Wallsend Ltd [1986] HCA 40; (1986) 162 CLR 24 at 39-40 and at 55; Abebe v Commonwealth [1999] HCA 14; (1999) 197 CLR 510 at 579. There is nothing in either the 36 Act or the Taxation Administration Act which requires Taxation Ruling IT 2643 to be taken into account or applied.

43 Taxation Determination 95/4 is expressed to be a ‘public ruling’ within the meaning of Pt IVAAA of the Taxation Administration Act. A favourable public ruling concerning a tax other than withholding tax is binding on the respondent, in the sense that the assessment and the amount of tax payable must be what they would be if the interpretation of the law stated in the public ruling applied: s 170BA of the 36 Act and Taxation Ruling TR 92/1.

44 There is nothing in the rulings, however, to support the applicant’s ground of appeal or his submissions. Taxation Determination 95/4 concerns the ‘simple disposition of an income-producing asset by a natural person to a wholly-owned private company’. Taxation Ruling TR 96/14, referred to in submissions but not in the ground of appeal, deals with traditional securities as defined in s 26BB of the 36 Act. None of the rulings are relevant to the transaction carried out by the applicant in the present case. Moreover all rulings state that Pt IVA may apply to the arrangements with which they are concerned depending upon the particular facts and circumstances. In my view it follows that this ground cannot be made out.

GROUND 4.4: FAILURE TO CONSIDER ALTERNATIVE TRANSACTIONS ADEQUATELY

45 At [66] and [67] of its reasons the Tribunal stated:

‘66. The applicant, at para. 25 of his outline of submissions, contended that the capital loss was not a tax benefit connected with the scheme identified by the respondent because there was at all material times a reasonable expectation that a sale of the beneficial ownership in the shares would have occurred in an alternative form or forms. The transaction involved in the scheme identified by the respondent had additional commercial advantages (the applicant testified that it served the purpose of distancing the shares from the trust’s creditors) and it lacked commercial disadvantages associated with the alternatives – publicity, risk of driving share price down, paying brokerage and making the bank nervous.
67. On the evidence before it, the Tribunal is unable to reliably predict that the bank would have consented to the alternative transactions for incurring the capital loss suggested by the applicant. The shares were mortgaged to the bank’s subsidiary to secure a substantial loan to the applicant as trustee of the trust. It is unlikely that the bank would have consented to a sale of 8 million of the shares to realise a loss, without repayment of the loan, for the same reasons the applicant decided not to seek its consent to such a sale. So the Tribunal finds for the purposes of s. 177D(a) of the Act that the applicant, as trustee of the trust, obtained a tax benefit connected with the scheme identified by the respondent because, in the circumstances of this matter, it is unreasonable to expect that the applicant would have incurred the capital loss had the scheme not been carried out. The scheme identified by the respondent includes the sale of 8 million of the shares at the capital loss.’

46 In respect of the conclusion in [67] this next ground generally contends the Tribunal erred in law in finding that the capital loss incurred by the Trust on the sale of shares to Trust 2 constituted a tax benefit for the purposes of Pt IVA. Six sub-grounds state respects in which the error is claimed to have been manifested around the issue of the consideration by the Tribunal of alternative transactions.

47 The ground contends that the issue of repayment of the loan was an irrelevant consideration as it did not feature in the actual transaction between the Trust and Trust 2, in any of the alternative transactions put forward by the applicant at the hearing, or in the hearing or argument. The respondent disallowed the applicant’s objection on the ground, amongst others, that had the scheme not been entered into, the Trust would not have sold, or might reasonably be expected not to have sold, the 8 million shares and therefore would not have realised a capital loss of $800 000. The respondent in his reasons referred to the fact that the alternative transactions ‘would have required the permission of [NAT], and affected the loan with [the Bank]’. At the hearing the respondent did not make any concession that had the scheme not been entered into an alternative transaction would have been carried out or that the Bank would have given its consent. However, the issue was not one mentioned or raised before the Tribunal.

48 The starting point at the hearing was that the evidence disclosed that the Loan Agreement raised the prima facie position that the consent of the Bank would be required in relation to any transaction involving the shares. As each of the alternative transactions identified by the applicant involved the shares, the Tribunal was entitled to infer, in the absence of any evidence brought by the applicant to the contrary, that the consent of the Bank was a necessary pre-condition to any such alternative transaction. Such transaction would be any transaction encompassed within the requirement in the Loan Agreement for the written consent of the Bank to any further mortgage, charge or further encumbrance of the property the subject of the Securities or whereby any charge or liability became or might become imposed upon that property or any part or parts of it.

49 It is the case that the applicant gave evidence of his understanding or opinion about what the Bank might have done. I agree with the respondent that the Tribunal’s finding in [67] necessarily involved a rejection of the opinion evidence of the applicant in that respect. In the face of the scope and strength of the provision in the Loan Agreement, such rejection is not surprising.

50 Additionally it was the applicant’s case that the alternative transactions had commercial disadvantages associated with them in terms of publicity, risk of driving share prices down, paying brokerage and making the Bank nervous. There was therefore in the applicant’s case no invitation for the Tribunal to explore the alternatives in the way this ground of appeal contends. Given the identification of those disadvantages, the evidence that the applicant had not approached the Bank and the absence of any evidence from the Bank, it was open to the Tribunal to infer that it was unlikely the Bank would consent to the sale for the same reasons the applicant decided not to seek its consent to such a sale.

51 The question for the Tribunal raised by s 177C (and s 177D(a)) was whether the capital loss incurred by the applicant (taxpayer) during the relevant year of income would not have been, or might reasonably be expected not to have been, incurred by the taxpayer during the year of income if the scheme had not been entered into or carried out. This did not require the Tribunal to make a comparison between the scheme and any alternative transaction put forward by the applicant. The Tribunal correctly held that a reasonable expectation requires more than a possibility citing Peabody that it ‘involves a prediction as to events which would have taken place if the relevant scheme had not been entered into or carried out and the prediction must be sufficiently reliable for it to be regarded as reasonable’.

52 The provision requiring the approval of the Bank was central to that hypothesis. It had the effect that even if any of the alternative schemes had been entered into, the status quo would have remained the same. That is, the Bank would have been the legal owner of the shares held as security for the debt owed to it and either Trust 2 or any other transferee would have held the equitable interest in those shares.

53 I agree with the submission for the respondent that there is no inconsistency between [66] of the Tribunal’s reasons and its later finding that no part of the purpose of the scheme was referrable to commercial purposes. That is because [66] recites the applicant’s submissions on the point. The commercial advantage identified by the applicant of protecting the shares from the creditors of the Trust was not one achieved by the scheme. This was because the Bank both before and after the scheme retained legal title to the shares as security for the debt. The debt created by the scheme between the two trusts was one which it was open to the creditors of the Trust to access at some future time.

54 In making the finding that ‘[I]t is unlikely that the bank would have consented to a sale of 8 million of the shares’ and, the conclusion ‘it is unreasonable to expect that the applicant would have incurred the capital loss had the scheme not been carried out’ the Tribunal was predicting what would have happened had the scheme not been carried out. These findings were supported by the facts it found, including the $4.3 million loan, the lodging of the CCIL shares as security with NAT and the manner in which the transaction was effected.

55 In my view there was no error involved in the Tribunal’s findings. (In view of this conclusion it is not necessary for me to consider the further submission of the respondent that, in any event, the alleged error was one of fact rather than law).

GROUNDS 4.5 AND 4.6: TAKING INTO ACCOUNT IRRELEVANT CONSIDERATIONS ON FORM AND SUBSTANCE

56 In [71] of its reasons the Tribunal stated:

‘The provisions of Part III A operate in relation to transactions that are disposals of relevant assets and the proposition referred to by their Honours [in Federal Commissioner of Taxation v Hart at [53]] may apply where a taxpayer ordinarily disposes of an asset at a capital loss to achieve a particular net position in relation to capital gains and losses in a year of income. That was not the case in the present matter. The share sale, of necessity, was not carried out in an ordinary manner because the shares were mortgaged to the bank’s subsidiary entity in circumstances where the applicant was contractually obliged to obtain the bank’s consent to any sale of shares. There were also other commercial reasons for not adopting that course.’

57 Ground 4.5 contends that the Tribunal took into account an irrelevant consideration when finding that the share sale was not carried out in an ordinary manner because the shares were mortgaged to the Bank.

58 The Tribunal was required by s 177D(b)(i) and (ii) of the 36 Act to have regard to:

(i) the manner in which the scheme was entered into or carried out; and
(ii) the form and substance of the scheme.

59 In relation to the manner in which the scheme was carried out the applicant submitted to the Tribunal that it was simple and straightforward, and its elements were duplicated in numerous share trading transactions. In his written contentions the applicant questioned whether Pt IVA should be applied to ‘transactions [that] are capable of explanation by reference to ordinary business or family dealing’. These arguments were referred to by the Tribunal at [70] and rejected at [71].

60 The Tribunal’s finding at [71] has three parts to it:

(1) first, the CCIL shares were mortgaged to NAT;

(2) second, the applicant was contractually obliged to obtain the Bank’s consent to any sale of the shares; and

(3) third, there were commercial reasons for not obtaining the Bank’s consent.
There was no error in the Tribunal treating the fact that the shares were mortgaged to NAT at the material time as factually relevant to the manner in which the scheme was entered into or carried out. The conclusion that because the shares were security for the NAB loan the share sale was not carried out in an ordinary manner - with the consent of the Bank - is a statement of fact and was supported by the evidence.

61 Ground 4.6 contends that in evaluating the form and substance of the scheme for the purposes of s 177D(b)(ii) the Tribunal took into account the irrelevant consideration, that of the disconnection between the form and substance of the share sale agreement because the relevant transfer document refers to the transfer of 8 million shares free of encumbrances whereas the Trust had only a beneficial interest in the shares. The irrelevance is said to arise from circumstances where, first, the Tribunal had already found that the applicant as trustee of the Trust was aware of the security arrangement and that the transfer was subject to the security; second, the transfer was subject to the security as a matter of law; and third the respondent had conceded, and the Tribunal had found, that the discrepancy in relation to the transfer form referring to the passing of unencumbered legal title was attributable to the fact that a standard transfer form was used.

62 There was in fact a ‘disconnection’ between the form and substance of the share sale agreement. The form of the transaction was the sale and transfer of shares free from encumbrances. In substance, legal title to the shares remained with the Bank unaffected and untouched by the transaction, and the beneficial title remained with and under the sole control of the applicant. The explanation for the difference between the form and substance of the scheme lies on the evidence only in the generation of a capital loss for the purposes of the income tax legislation. Section 177D(b)(ii) of the 36 Act required the Tribunal to take the form and substance of the scheme into account.

GROUND 4.7: FAILURE TO CONSIDER CONDUCT OF HOLDERS OF SHARES

63 Ground 4.7 contends that when considering the timing of the transaction as being close to the end of the year, the Tribunal failed to take into account the relevant consideration that holders of share portfolios regularly enter into such transactions near the end of the financial year pursuant to Pt III of the 36 Act.

64 Section 177D(b)(iii) of the 36 Act requires regard to be had to the time at which the scheme was entered into and the length of the period during which the scheme was carried out.

65 The relevant tax benefit, defined in s 177C(1)(ba) is:

‘a capital loss being incurred by the taxpayer during a year of income where the whole or a part of that capital loss would not have been, or might reasonably be expected not to have been, incurred by the taxpayer during the year of income if the scheme had not been entered into or carried out’ (emphasis added)

66 The Tribunal’s finding in relation to the time at which the scheme was carried out is at [73]. The Tribunal referred to the sale on 11 June 1998 which generated the capital gain of $787 375 reported in the trust return for the income year. It also referred to the settling of Trust 2 on 12 June 1998 at a capital loss of $800 000. These temporal aspects were considerations to which the Tribunal was obliged to have regard under s 177D, and the factual findings were supported by the evidence.

67 The applicant attempts to overcome the factual finding by the claim that it is a ‘relevant consideration’ that the holders of share portfolios may regularly enter such transactions near the end of the financial year. However:

(1) the matter to which the applicant refers is not one which the 36 Act requires be taken into account; and

(2) in any event, the Tribunal had found
(i) this was not a transaction carried out in the ordinary manner – at [71];

(ii) it is unlikely that the sale would have proceeded as a ‘normal sale’ and that the Bank would have consented – at [67].

In the light of those findings, the asserted regular practice of other holders of shares is immaterial. Moreover there was no evidence before the Tribunal supporting the assertion that ‘wash sale’ transactions are common at the end of financial years.

68 Additionally there was no suggestion in the evidence that but for the transaction which occurred on 11 June 1998 there would have been the transaction on 12 June 1998.

GROUND 4.8: FAILURE TO MAKE FINDING AND GIVE REASONS

69 In [75] of its reasons the Tribunal stated:

‘In relation to the matters set out in s 177 D (b)(v)(vi)(vii) and (viii) the applicant submitted that a commercial benefit accrued to the applicant, and to members of his family, from the scheme because the shares that were sold to him, as trustee of trust 2, were no longer available to the unsecured creditors and future creditors of the trust. In the event that the loan were redeemed and that the shares rose in value, trust 2, which had no creditors, would have valuable unencumbered assets. When all the matters listed in s 177 D (b) are considered in relation to the facts and circumstances of the scheme in this matter, the Tribunal finds that it would not be concluded that the applicant’s purpose, or one of the applicant’s purposes, in carrying out the scheme, was to shelter 8 million of the shares from any claims that the creditors, or future creditors, of the trust may otherwise have on them.’

70 In this ground the applicant raises two matters in relation to the Tribunal’s application of s 177D(b)(v), (vi), (vii) and (viii):

(1) whether the Tribunal failed to properly consider or make a finding about the purpose attributable to the applicant in entering the scheme; and

(2) whether it failed to give reasons in respect of that issue.

71 The applicant contends that the Tribunal was not entitled to consider all the above matters in s 177D globally and was obliged to consider them individually and give reasons in respect of each. Support is sought for this in Federal Commissioner of Taxation v Hart at 244-245, at [70].

72 The material finding is that required by s 177D(b) and s 177A(5) of the 36 Act. The Tribunal made the material finding at [69], that the applicant carried out the scheme with the sole purpose of obtaining the tax benefit. It set out the reasons for that finding in at [70]-[75]. The finding at [75] that it would not be concluded that the applicant’s purpose was to shelter the shares from creditors is the corollary to the s 177D finding.

73 Where the Tribunal gives written reasons for its decision, those reasons ‘shall include its findings on material questions of fact and a reference to the evidence or other material on which those findings were based’: Administrative Appeals Tribunal Act, s 43(2B). The reasons should expose the logic of the Tribunal’s decision and the findings on those matters of fact which are essential to that logic: Dodds v Comcare Australia (1993) 31 ALD 690 at 691. The Administrative Appeals Tribunal Act does not, however, require the Tribunal to record findings on all questions of fact that might objectively be regarded as material. The provision merely obliges the Tribunal to set out its findings on those questions of fact which it considers to be material to the decision it has made, and to the reasons it has for reaching that decision: Minister for Immigration and Multicultural Affairs v Yusuf [2001] HCA 30; (2001) 206 CLR 323 at 346. Yusuf concerned the construction of s 430(1) of the Migration Act 1958 (Cth) the language of which is similar to that of s 43(2B). The reasoning in Yusuf has been applied to the construction of s 43(2B): see TelePacific Pty Limited v Commissioner of Taxation (2005) 218 ALR 85 at [51]-[53].

74 Reading the reasons as a whole, the Tribunal has sufficiently set out both the substance of its material findings and the reasons for reaching them. It cannot be said in the circumstances that the Tribunal has failed to meet the requirements of s 43(2B), or has otherwise erred in law. In my view it cannot be said that the global expression of the Tribunal with respect to items raised by this ground has the consequence that there was no consideration of the factors.

75 The applicant contends that ‘[T]he Tribunal manifestly failed to explain why the purpose to project [sic] the shares from creditors (which was supported by uncontroverted objective evidence) could be said to be non-existent’. The explanation is readily apparent and has previously been referred to in these reasons. The scheme was not designed to, and did not, protect the shares from the creditors of the Trust. The shares remained in the legal ownership of the Bank as security for the debt owed by the Trust to its largest creditor.

GROUNDS 4.9 AND 4.10: FAILURE TO CONSIDER RELEVANT ISSUES ON ADDITIONAL TAX AND REMITTANCE

76 In [79] the Tribunal stated:

‘The facts of the scheme in this matter, as found by the Tribunal, and the relevant provisions of Part IVA, do not, in any material sense, support the position taken by the applicant in relation to Part IVA and so it would not be concluded, for the purpose of s.222C, that what the applicant argued for is about as likely as not correct. The Tribunal finds that it is not reasonably arguable that Part IVA does not apply to the scheme and so the correct penalty percentage for calculating the amount of additional tax is 50% as defined in s.226(2)(a).’

77 Ground 4.9 raises the issue whether, in so deciding, the Tribunal failed to take into consideration that the scheme as defined would apply to a myriad of ordinary commercial share transactions between associated parties or the matters referred to in ground 4.3, namely the Taxation Determinations previously considered. Ground 4.10 raises the question whether the Tribunal erred in law in failing to address or consider remission of any additional tax payable pursuant to s 227(3) of the 36 Act.

78 The applicant also contends that the Tribunal erred in principle in not following the approach approved by the Full Court in Pridecraft at 476-477 drawing on the decision of Hill J in Walstern v Commissioner of Taxation [2003] FCA 1428; (2003) 138 FCR 1. On the face of the reasons, the Tribunal did apply the principles there enunciated when it concluded that it was not reasonably arguable that Pt IVA did not have application to the scheme and that what the applicant argued for was not as likely as not correct. That is consistent with the above resolution, adversely to the applicant, of each of the grounds of appeal.

79 The Tribunal set out the applicant’s arguments at [78], including the argument that the scheme in this matter was a normal sale of the beneficial interest in shares.

80 The Tribunal held against the applicant on the question of penalty because it held the facts of the scheme, as found by it, and the relevant provisions of Pt IVA, ‘do not, in any material sense, support the position taken by the applicant in relation to Part IVA’. Those fact findings are inconsistent with the applicant’s position that the scheme was a normal sale of the beneficial interest in shares conferring no relevant benefit on the applicant.

81 As to the matters referred to in ground 4.3, neither the Taxation Determination or the Taxation Ruling are relevant considerations required to be taken into account by the Tribunal. Further, as discussed above, neither document applies to the transaction carried out by the applicant.

82 As to the issue of remission raised by ground 4.10, the applicant refers to Shand v Federal Commissioner of Taxation [2003] AATA 279; (2003) 52 ATR 1088 at 1107-1108, at [34]-[40]. In that decision of the Tribunal the Deputy President declined to find that the question of the taxpayer’s residency in Australia was so finely balanced as to conclude that the argument on his behalf was about as likely as not to be correct and that his advisers had adopted an unarguable position. Nevertheless the Deputy President considered the taxpayer’s position was not entirely without merit and did not consider he was personally in any way blameworthy. He therefore exercised the discretion conferred by subs 227(3) to remit the whole of the additional tax.

83 That subsection provides for a discretion in the respondent to remit the whole or any part of the additional tax payable.

84 There was not in the applicant’s case before the Tribunal any basis raised for remission of penalty other than that put to and rejected by the Tribunal. It is clear that the Tribunal has taken into account and rejected the issues of wash sales and alternative schemes raised by the applicant. No case was made to the Tribunal that the applicant was unblameworthy because he had followed professional advice, so this is not like the circumstances in Shand. I therefore agree with the respondent that the applicant has not demonstrated any error of law under either ground 4.9 or 4.10.

CONCLUSION

85 For the above reasons I consider the application by way of ‘appeal’ must be dismissed.

I certify that the preceding eighty-five (85) numbered paragraphs are a true copy of the Reasons for Judgment herein of the Honourable Justice Nicholson.

Associate:

Dated: 6 February 2006

Counsel for the Applicant:	Dr JT Schoombee with FF Halsey
Solicitor for the Applicant:	Carles Solicitors
Counsel for the Respondent:	GJ Davies QC with JD Allanson
Solicitor for the Respondent:	Australian Government Solicitor
Date of Hearing:	21 October 2005
Date of Last Written Submissions:	14 November 2005
Date of Judgment:	6 February 2006