Puzey v Commissioner of Taxation [2003] FCAFC 197 (26 August 2003)

Last Updated: 26 August 2003

FEDERAL COURT OF AUSTRALIA

Puzey v Commissioner of Taxation [2003] FCAFC 197

INCOME TAX - whether taxpayer entitled to deductions claimed for participation in an Indian sandalwood plantation under s 51(1) Income Tax Assessment Act 1936 (Cth) or s 8-1 Income Tax Assessment Act 1997 (Cth) - whether, after restructuring of the arrangements the taxpayer ceased to carry on a business under the trust deed.

INCOME TAX - whether a scheme constituted by the purchase of seedlings and loan agreements to finance that purchase is a scheme to which Pt IVA Income Tax Assessment Act 1936 (Cth) applies - dominant purpose considered having regard to the eight factors in s 177D(1) Income Tax Assessment Act 1936 (Cth)

Income Tax Assessment Act 1997 (Cth) s 8-1

Income Tax Assessment Act 1936 (Cth) s 51(1); s 177D; s 177F

Clowes v Federal Commissioner of Taxation [1954] HCA 10; (1954) 91 CLR 209 referred to

Commissioner of Taxation v Jackson (1990) 27 FCR 1 followed

Commissioner of Taxation v Lau (1984) 6 FCR 202 distinguished

Commissioner of Taxation v Stokes (1996) 72 FCR 160 discussed

Enviro Systems Renewable Resources Pty Ltd v Australian Securities and Investment Commission [2001] SASC 11; (2001) 80 SASR 1 followed

Fairway Estates Pty Ltd v Federal Commissioner of Taxation [1970] HCA 29; 70 ATC 4061 referred to

Ferguson v Federal Commissioner of Taxation [1979] FCA 27; (1979) 26 ALR 307 referred to

Hope v Bathurst City Council [1980] HCA 16; (1980) 144 CLR 1 followed

John Smith & Son v Moore [1921] 2 AC 13 discussed

Sharrment Pty Ltd v Official Trustee in Bankruptcy (1988) 18 FCR 449 cited

Sun Newspapers Ltd and Associated Newspapers Ltd v Federal Commissioner of Taxation [1938] HCA 72; (1938) 61 CLR 337 followed

Thomas v Federal Commissioner of Taxation (1972-3) 46 ALJR 397 followed

NOEL PUZEY V COMMISSIONER OF TAXATION OF THE COMMONWEALTH OF AUSTRALIA

W 30 of 2003

W 31 of 2003

FRENCH, HILL & CARR JJ

26 AUGUST 2003

PERT

HIN THE FEDERAL COURT OF AUSTRALIA
WESTERN AUSTRALIA DISTRICT REGISTRY	W30 OF 2003

ON APPEAL FROM A JUDGE OF THE FEDERAL COURT OF AUSTRALIA

BETWEEN:	NOEL PUZEY APPELLANT
AND:	COMMISSIONER OF TAXATION OF THE COMMONWEALTH OF AUSTRALIA RESPONDENT
JUDGES:	FRENCH, HILL & CARR JJ
DATE OF ORDER:	26 AUGUST 2003
WHERE MADE:	PERTH

THE COURT ORDERS THAT:

1. Paragraph 2 of the orders made on 24 December 2002 be varied by deleting the words `...the deductions from taxable income are allowed for plantation establishment fees ($2,000), and for plantation management fees ($800)' and inserting in lieu thereof the words `the deduction from taxable income is allowed for plantation management fees ($800)'.

2. Paragraph 3 of the orders made on 24 December 2002 be set aside and in lieu thereof there be an order that the appellant pay the respondent's costs of the proceedings at first instance.

3. The appeal be otherwise dismissed.

4. Paragraph 1 of the above orders be suspended for ten days. If either party wishes to make submissions concerning the plantation management fees or the plantation establishment fees they may file and serve written submissions within seven days of the publication of these reasons. If any such submissions are received, the suspension of paragraph 1 will continue until further order.

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	W31 OF 2003

ON APPEAL FROM A JUDGE OF THE FEDERAL COURT OF AUSTRALIA

BETWEEN:	NOEL PUZEY APPELLANT
AND:	COMMISSIONER OF TAXATION OF THE COMMONWEALTH OF AUSTRALIA RESPONDENT
JUDGES:	FRENCH, HILL & CARR JJ
DATE OF ORDER:	26 AUGUST 2003
WHERE MADE:	PERTH

THE COURT ORDERS THAT:

1. The appeal be dismissed with costs.

2. The cross-appeal be allowed to the extent of setting aside paragraph 2 of the orders made on 24 December 2002 and substituting therefore an order that the appellant pay the respondent's costs of and incidental to the hearing of the proceedings at first instance, but otherwise each party bear their own costs of these proceedings.

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	W30 OF 2003 W31 OF 2003

ON APPEAL FROM A SINGLE JUDGE OF THE FEDERAL COURT OF AUSTRALIA

BETWEEN:	NOEL PUZEY APPELLANT
AND:	COMMISSIONER OF TAXATION OF THE COMMONWEALTH OF AUSTRALIA RESPONDENT

JUDGES:	FRENCH, HILL AND CARR JJ
DATE:	26 AUGUST 2003
PLACE:	PERTH

REASONS FOR JUDGMENT

FRENCH J:

1 I agree with the orders proposed by Hill and Carr JJ for the reasons set out by their Honours.

I certify that the preceding one

(1) numbered paragraph is a

true copy of the Reasons for

Judgment of the Honourable

Justice French.

Associate:

Date: 26 August 2003

IN THE FEDERAL COURT OF AUSTRALIA
WESTERN AUSTRALIA DISTRICT REGISTRY	W 30 OF 2003 & W 31 OF 2003

ON APPEAL FROM A JUDGE OF THE FEDERAL COURT OF AUSTRALIA

BETWEEN:	NOEL PUZEY APPELLANT
AND:	COMMISSIONER OF TAXATION OF THE COMMONWEALTH OF AUSTRALIA RESPONDENT

JUDGES:	FRENCH, HILL & CARR JJ
DATE:	26 AUGUST 2003
PLACE:	PERTH

REASONS FOR JUDGMENT

HILL & CARR JJ

2 Mr Puzey, the appellant in the present appeal, is an employed meteorologist. In or around May 1997 he entered into an arrangement under which he invested in a project for the planting and development of an Indian sandalwood plantation. The arrangement promised, among other things, taxation deductions in the 1997 and 1998 years of income. The present appeal concerns whether the deductions he claimed in these years arising from his participation in the project were allowable deductions under s 51(1) of the Income Tax Assessment Act 1936 (Cth) ("the 1936 Act") in the 1997 year or s 8-1 of the Income Tax Assessment Act 1997 (Cth) ("the 1997 Act") in the 1998 year of income and, if so, whether the Commissioner was entitled to act under Part IVA of the 1936 Act to disallow these deductions.

3 The appeal was argued upon the basis that there was no difference between s 51(1) of the 1936 Act and s 8-1 of the 1997 Act, the latter being intended to be a rewriting in "clearer or simpler style" without change in meaning: s 1-3 of the 1997 Act. Accordingly it is proposed in these reasons to refer solely to the provisions of s 51(1) as if it operated in each year of income on the basis that the reference is intended to include, where appropriate, the comparable provision of s 8-1 of the 1997 Act.

4 There is now no real factual dispute between the parties. Mr Puzey learned of the project from a Mr Serra who was the proprietor of a firm which carried on a business described as "Financial Services & Systems". It was described to Mr Puzey as being a "tax effective investment in a sandalwood project".

5 Indian Sandalwood is an aromatic wood highly valued in India and many Asian countries where it has been traded for hundreds of years. In the mid 1840's the indigenous Sandalwood tree was a major export from Western Australia, although the Indian Sandalwood tree is more highly valued because of the high oil content in its hardwood. The tree is a parasitic tree and hence it is planted together with host trees.

6 In the mid - 1980's a research project was commenced by the Western Australian Department of Agriculture in the Ord River Irrigation Area at Kununurra in the Kimberley region of Western Australia to ascertain whether Indian Sandalwood could be grown there under irrigation. By 1997 a plantation of 25 hectares had been established there. By that time it could be regarded, so the learned Primary Judge observed, as a prospective or emerging industry the viability of which had not yet been proven.

7 Mr Puzey was given by Mr Serra a folder inscribed "Ord River Sandalwood Co". It described a proposal for the purchase and planting of sandalwood seedlings in the Ord River Irrigation Area. Included in the material was a document headed "Tax Table - 96-97". That document purported to calculate the impact on the taxation liability of a participant in the project who had a taxable income of $58,000 a sum not greatly different from the expected taxable income of Mr Puzey in that year. The document summarised the calculation as follows:

"Total Rebate due from Franchise Purchase: $16,021

Gross Investment: $14,000

Cash Flow Advantage: $2,021"

Also included in the folder was a sheet headed "Tropical Forestry Project" which purported to summarise the project and in particular the taxation consequences of investing in it. That document read as follows:

"INVESTMENT IN TROPICAL FORESTRY

* Lease of two acres of land in Ord River Irrigation Area (15 year lease)

* Purchase of seedlings comprising: 400 Indian Sandalwood; 160 East African Ebony; 160 Rosewood; 160 Mahogany and 640 Acacia.

* Engage a Plantation Manager

YEAR 1 PURCHASE

* Purchase 1 acre this tax year (ie. 1996 - 97)

* $40,000 tax deduction this tax year

* $14,000 deposit paid out of tax refund (25 Sept. 97)

* $26,000 balance to pay from harvest (ie. $40,000 less deposit of $14,000)

* Interest Option 2 of Finance Schedule recommended

* NO REPAYMENTS UNTIL HARVESTED

YEAR 2 PURCHASE

* Purchase 1 acre next tax year (ie. 1997-98)

* $40,000 tax deduction next tax year

* Tax Variation used to get tax refund back monthly in your pay from Sept. 97

* $14,000 deposit paid out of tax refund in monthly instalments from 25 Nov. 97

* $26,000 balance to pay from harvest (ie. $40,000 less deposit of $14,000)

* Interest Option 2 of Finance Schedule recommended

* NO REPAYMENTS UNTIL HARVESTED

RENT & MAINTENANCE

* $1000 rent & maintenance per acre tax deductible

* NB:- Payable only when trees are planted".

8 The reference to "interest option" referred to a clause in a loan agreement which was part of a package of documents prepared by the promoter of the arrangement Allrange Tree Farms Pty Ltd ("Allrange") which documents Mr Puzey in due course executed. The loan agreement was between Sandalwood Finance Pty Ltd ("Sandalwood") therein described as "lender," (a company with a subscribed capital of $1 held beneficially by Allrange) and the investor in the project (therein described as "borrower"). The agreement provided for two alternative interest options, described as "Option 1" and "Option 2". Option 1 provided for interest at 7% per annum calculated on daily balances and payable by monthly instalments in arrears on the 1^st day of each month commencing on 30 July 1997. Option 2 provided that interest was to be:

"Seven percent (7%) of the proceeds from the sale of the timber grown on the Land referred to in Item 8 nett of all costs and is payable upon receipt of sale proceeds by the Borrower on the Scheduled Repayment Date."

9 The loan agreement executed by Mr Puzey provided for a loan to be made to him of $79,800 to be advanced in two instalments of $39,900, the first instalment to be advanced on 30 June 1997 and the second on 30 June 1998. Partial repayment of the sum lent was to be made by two instalments each of $13,900, the first on 15 August 1997 and the second on 15 August 1998. The balance, $52,000, was expressed to be repayable on demand, but with the proviso that, save for default on the part of the borrower, or his insolvency, demand could not be made before whichever was the first to occur of receipt by the borrower of the proceeds of the sale of the timber to be grown on the land or 30 December 2012. Although, as the learned Primary Judge observed, the documents left uncertain when the harvest of the timber was to occur, it was represented that the harvest would take place 15 years after the commencement of the project, that is to say "in 2012". It was recommended that Mr Puzey take the interest Option 2, which he did.

10 In May 1997 and before committing to the project Mr Puzey sought more information and received a spreadsheet calculating the results of investing in the project. The spreadsheet commenced with the 1997 fiscal year and showed an outgoing for purchase of seedlings of $40,000 but an "actual outgoing" of $14,000. These figures were repeated in the next fiscal year. Other outgoings shown for the 1997 year were stamp duty ($443) on the lease and loan. It was said that the net after tax cost to the grower in that year was $288. The second year had an additional outgoing shown as "establishment costs": of $2,000 and showed a net after tax cost to the "grower" of $1,030. Thereafter outgoings were shown as rent, increasing from $1,200 in the 1999 year to $1,992 in the year 2011-12, plantation management increasing to $1,328 in the 2012 year and thereafter a harvest showing timber sales for sandalwood calculated at $20,000 per ton of $573,600 and other timber sales of $18,000 with harvest costs of $8,000 and loan repayment of $52,000.

11 Other documents in the package which Mr Puzey executed were an option to purchase seedlings from Allrange, a lease of land upon which the seedlings were to be planted and a management agreement.

12 Under the option agreement, Mr Puzey for an option fee of $100 to be applied in part purchase of the seedlings, exercisable one month from its date, was granted an option to purchase seedlings for $80,000 payable as to $100 on exercise of the option, $39,900 on 30 June 1997, $100 on 15 July 1997 and $39,900 on 30 June 1998.

13 The lease was in respect of a plot of land of approximately one hectare in the Ord River Irrigation Area for a term to continue from 1 May 1998 when possession was to be given until 30 November 2013. There were, apparently, 115 other lots which were expected to be leased. The rental payable under the lease was $1,200 and was reviewable annually.

14 The management agreement was between Lincfel Enterprises Pty Ltd, ("Lincfel") therein referred to as the "Plantation Manager" and Mr Puzey whereby Lincfel agreed to provide "plantation services" for the period from entry into the agreement until the date of harvesting. Lincfel was to plant trees and thereafter maintain them on the lot. Under this agreement Mr Puzey was to pay a "preparation and establishment fee" of $2,000 and an "annual plantation management fee" of $800. Lincfel was a company controlled by Mr and Mrs Heading. Mr Heading had formerly been employed by the Department of Agriculture in its tropical agricultural research division. The Department subsequently became the Department of Conservation and Land Management ("CALM").

15 In addition Mr Puzey and others who participated in the scheme signed a pro forma letter designed to convey the impression that each participant had independently made his or her own arrangements for leasing and management and thus to cause the Australian Securities Commission ("ASC") to give an exemption to the project from compliance with certain provisions of the Corporations Law.

16 Earlier in 1997 Allrange had entered into a contract with Lincfel under which Lincfel agreed to provide services as "nursery manager" of the project. Under this contract Lincfel was to supervise the erection of a seedling nursery for Allrange, install machinery and carry out the propagation of sandalwood seedlings in that nursery for a fee of $115,000. Lincfel was to commence its duties under this contract in March 1997 and it was to continue until seedlings were handed over to the plantation manager on behalf of individual growers. Lincfel undertook that seedlings would be deliverable by May 1998. In September 1997 Allrange entered into a license agreement with CALM under which CALM was to provide information to Allrange on the growing of Indian sandalwood in the Ord River area and to supply technical support.

17 On 3 June 1997 Mr Puzey exercised the option so that by 30 June 1997 he became one of approximately 310 participants in the project.

18 On 26 June 1997 Allrange as trustee of a unit trust said to be carrying on the business of propagating and selling sandalwood seedlings purported to contract with itself as trustee of a trust, said to be carrying on business as a consultant, to assist Allrange in its former capacity to market seedlings for which Allrange as consultant was to be paid $24,000 for each seedling contract which Allrange entered into as trustee of the unit trust. The purpose of this was that of $28,000 to be paid by project participants out of tax refunds $24,000 was to be paid to Allrange as trustee of the unit trust. Also in June 1997 Allrange offered to lend to Sandalwood an amount up to $25 million for a term ending on 30 June 2011. Under the loan which was made on acceptance of the offer interest was said to be payable at 6.95 per cent on the daily balance of the amount borrowed with the first interest payment being due on 1 July 1998 and thereafter annually. As the learned Primary Judge pointed out the date the loan was repayable was 18 months prior to the date on which the amounts advanced to the participants would become payable to Sandalwood.

19 These agreements allowed exchanges of cheques to take place at Allrange's bank on 27 June 1997. The banking entries showed the withdrawal from the Allrange account of $12,369,000 and the deposit of that sum in Sandalwood's account; (ie as a loan to Sandalwood) the withdrawal of the same sum from Sandalwoods' account by 310 cheques each drawn in an amount of $39,900 and the deposit of these cheques in the Allrange account ie as loans by Sandalwood to each participant and paid on the participant's behalf to Allrange.

20 As was contemplated by the sales literature Mr Puzey in his taxation return for the 1997 year of income claimed as a deduction the sum of $40,000 for the purchase of seedlings to be delivered to him around May 1998. In fact they appear to have been delivered around April of that year. Under the self assessment regime Mr Puzey received, around 25 August 1997 a refund of income tax of $18,876.88, as PAYE tax had been deducted at source from his salary for that year. The refund would have included some other minor deductions but substantially reflected the tax on the claimed $40,000 deduction.

21 Also on 28 July 1997 Mr Puzey applied under s 221D of the 1936 Act to reduce his PAYE instalments for the 1998 year of income on the basis that he had a deduction in the 1998 year of $42,000 being outgoings to be incurred in that year as a "Grower of Sandalwood and other Tropical Forestry Trees". The PAYE instalments were reduced accordingly. In the return lodged for the 1998 year of income Mr Puzey claimed a deduction of $42,575 being $40,000 for the acquisition of seedlings, $2,000 for plantation establishment costs, $400 for manager's fees and $175 for other fees and charges.

22 The project underwent, at least to some extent, a reconstruction in the 1998 year of income as a result of the ASC revoking the exemption it had granted to the project when it became clear to that body that there had been no individual negotiations between investors and landowners and that as a result the provisions of the Corporations Law dealing with offering "prescribed interests" should have applied without exemption. After considerable negotiations between the Allrange interests and the ASC investors were given the chance to opt out of the project and receive a refund of all monies invested. By doing nothing they were to be taken as participating in the reformed project. Mr Puzey did not opt out.

23 In the result a unit trust known as the Kununurra Tropical Forestry Project was established by a trust deed dated 12 May 1998 under which Professional Funds Management Pty Ltd was appointed trustee. Investors who did not opt out were beneficiaries of this trust. The leases, management agreements and loan agreements previously entered into were unaffected and thus continued in force. The Consultancy Agreement under which Allrange purported to contract with itself was abandoned or terminated. Allrange undertook to establish an "Administration Fund" of $300,000 for the purposes of the trust. Another company Allrange Tree Farms Management ("Allrange Management") was a party to the trust deed and undertook to provide services to the trustee as manager of the "Trust and the project". The directors of Allrange Management were the three individuals who were also directors of Allrange and they held three of the five issued shares in that company. The trust fund established under the deed was to consist inter alia of all monies otherwise payable to Allrange or any other party under the agreements which remained in force. The fund was to be applied by the Trustee in paying on behalf of investors moneys which the investors were liable to pay under the agreements which continued in force.

24 An important provision of the restructure arrangement was that the individual areas leased were to be pooled and the investors were entitled to participate pro rata in distributions from the trust so that no longer was an investor to receive the net proceeds of timber sales from the particular area of leased land, but rather a shared interest in the net proceeds of sale obtained by the trustee which was thereafter to conduct the project.

25 On 29 June 1998 there was a second exchange of cheques at Allrange's bank. On that day a deposit of $14,084,700 was recorded in the account of Sandalwood from Allrange and a withdrawal from that account by 287 cheques each in the sum of $39,900 and three cheques drawn in the sum of $877,800 which were deposited to the account of Allrange. The 287 cheques represented monies advanced by Sandalwood to the investors under the loan agreements and paid at their direction to Allrange.

26 As the learned Primary Judge recorded, between May 1997 and October 1998 Mr Puzey paid two amounts each of $14,000 being the "deposits" he was obliged to pay for the purchase of seedlings. He did not, however, direct that the monies paid to Allrange be remitted to Sandalwood as part repayment of monies which Sandalwood had lent to him although the transaction was treated as if he had.

27 As already noted the first lot of seedlings was delivered for planting on Mr Puzey's leased land in April 1998. Between July 1998 and December 1998 sandalwood and host trees were planted on some 275 hectares of land leased to participants including Mr Puzey. As things turned out the area leased to Mr Puzey performed poorly and seedlings failed, apparently in part, at least, as a result of bad weather and poor drainage. Allrange Management resigned as manager and was not replaced. A Mr Underwood, who had been a manager of forestry research and general manager of CALM recommended replanting over almost the entire plantation. There were not funds available to do this. Mr Underwood noted that the project had not provided for forestry expertise to be employed to oversee the project. On the other hand a Mr Padmanabha, a forester with considerable experience with Indian sandalwood in India gave evidence that the venture could become a commercial venture if replanted and if an efficient drainage system was installed.

28 One important fact to emerge from the evidence of Mr Underwood was that the price of $80,000 for which Allrange sold seedlings to participants, was "extraordinary". A reasonable price for seedlings supplied would have been, in his opinion, which the learned Primary Judge accepted, in the order of $3,000. While it is true, as senior counsel for Mr Puzey repeatedly emphasised, that at the time the agreement was first entered into by Mr Puzey there was no supplier of seedlings in the market other than Allrange which at the time was taking steps to propagate seedlings from seeds emanating from CALM, it is also true that on 31 December 1997, approximately six months from Mr Puzey paying the first instalment of monies in June 1997, CALM offered to supply seedlings to a company called East Sandalwood Company Ltd, related to Allrange, for between $1,850 and $2,375 per hectare. At the lowest range (which took account of the suggestion that the Allrange nursery would be made available to CALM) the offer is not greatly different from the estimate of $3,000 which Mr Underwood regarded as the reasonable price.

29 Whether or not the figure of $3,000 is accepted, one consequence of the discrepancy between the real cost of seedlings and the amount which participants were required to pay for them using the loan funds advanced was, it can be inferred, that the cash payments actually to be made by participants in the first two years of the project as partial repayment of the loans advanced to them sufficed to cover the real costs of the project and the balance repayable on the loans at the end of the project represented the inflated amounts which were necessary for the participants to incur so as to be entitled (or so it was hoped) to claim taxation deductions sufficient to provide tax refunds in such amount as would enable them to make the cash payments.

30 On 24 January 2000 the Commissioner issued amended assessments disallowing the deductions claimed by Mr Puzey and imposing penalty tax for each year. Mr Puzey objected and the objections were disallowed. At the time the amended assessments issued the Commissioner had not made any determination under s 177F of the 1936 Act. On 31 January 2000 the Commissioner made determinations under s 177F in respect of each of the two years of income. It was contended on behalf of Mr Puzey that the determination made on 31 January 2000 could not be relied upon since it post dated the amended assessments. Accordingly on 8 November 2001 new determinations in the same terms were made "as a precaution". The Commissioner determined that the amounts of $40,000 otherwise allowable deductions in each income year were not allowable deductions. Amended assessments issued on the same day showing the same amount of taxable income and tax payable as was shown in the original amended assessments. Again Mr Puzey objected, and the objections were disallowed.

31 In the result there were two sets of appeals brought in the original jurisdiction of the Court against the two sets of objection decisions that had been made by the Commissioner. The parties agreed that the second appeal against the objection decisions relating to the amended assessments made on 8 November 2001 should be heard first and that the prior appeal proceedings should await its determination.

32 One conclusion that clearly emerges from the history of the project so far as it is known is that from the outset it was highly speculative.

The judgment appealed from

33 A significant issue at first instance was an attack by the Commissioner on the transactions entered into on the basis that they constituted a sham. It was submitted that the agreement under which Mr Puzey purported to purchase seedlings and the loan by which Sandalford purported to lend Mr Puzey money to purchase the seedlings were both shams or disguises for some other and real transaction, that being said to be that Mr Puzey would purchase seedlings for a total of $28,000 payable by him at the time he actually paid each sum of $14,000. It followed from the arguments, it was said, that Mr Puzey did not incur the sums of $40,000 in each income year as claimed by him. The attack was based upon the material distributed by the promoter which suggested that there be two cash payments each of $14,000 with the balance of $52,000 to be paid from the proceeds of the sale of timber at the end of the project.

34 The Commissioner's attack based on sham failed. There was, it was found, no common intention that the parties enter into an arrangement such as was suggested by the Commissioner. Rather they intended that the agreements entered into take effect in accordance with their tenor: Sharrment Pty Ltd v Official Trustee in Bankruptcy (1988) 18 FCR 449. There is no appeal against his Honour's findings on sham.

35 There remained then before his Honour the two substantive issues, which issues are also the issues on the appeal. The first was whether in each of the years of income the sums claimed were allowable deductions under s 51(1) of the 1936 Act. The second, which arose only if the first issue was found in favour of Mr Puzey was whether the provisions of Part IVA of the 1936 Act applied to permit the Commissioner to disallow the deductions (the relevant tax benefit). There was also a third issue, which was argued both before the learned Primary Judge and before us, namely the consequence of the two sets of determinations and the two sets of amended assessments.

36 The learned Primary Judge found that in the 1997 year Mr Puzey had commenced to carry on a business with the result that the outgoings for seedlings incurred by him in that year were an allowable deduction. This question his Honour found was not one which was easily resolved. Indeed, his Honour set out in some detail reasons why it could be held that Mr Puzey was not carrying on a business, reasons which are, with respect, rather compelling. His Honour said at [49]:

"On the one hand, as at June 1997 the project was still being put together by Allrange as promoter. The licence agreement with CALM, necessary for the provision of crucial know-how on the propagation of sandalwood seedlings, was not in place and was not executed until September 1997. As at June 1997 the applicant had entered contracts on which the promoter could rely to progress the creation of an enterprise but the applicant had neither entered nor adhered to a business of sandalwood production then being carried on by the promoter or by investors in common. Indeed, under the lease it was not to be until 1 May 1998 that the applicant could take possession of his lot to make it available for use in conjunction with land leased to other participants for the purpose of planting sandalwood seedlings in a plantation. That is to say that as at June 1997 it could be argued that the operation of the project was in no more than a formative stage. (See:  Calkin v Commissioner of Inland Revenue (1984) 1 NZLR 440). It may also be said that the applicant could not point to indicia capable of supporting a conclusion that he had commenced a business on his own account for the purpose of gaining assessable income. He had responded to a canvasser who represented that investment in the sandalwood project would be "tax effective", and when he invested in the project the applicant did not turn his mind to whether he would be entering into the conduct of a business nor, if so, how he would carry on that business. No activities were undertaken by the applicant thereafter that reflected the operation of a business such as the maintenance of books of account or other records relating to the conduct of a business, nor did he inform himself of any matters affecting the day to day running of the business. It was not suggested that the applicant could carry on business as a sole producer of sandalwood on the lot he held on lease. Although the applicant purchased seedlings, agreed to lease an area of land on which the seedlings were to be planted and entered an agreement for the planting and maintenance of the seedlings, it could be suggested that, in truth, he was a passive investor in a project which the promoter of the project would control, or carry on, as an enterprise by use in common of the several interests of the participants in the project. (See: Enviro Systems Renewable Resources Pty Ltd v ASIC [2001] SASC 11; (2001) 80 SASR 1 at 16)."

37 However his Honour noted that Mr Puzey in the 1997 year retained an interest in the trees grown on his leased lot, had employed a manager to plant and maintain the seedlings on his behalf and could control the harvest and sale of the timber produced from his lot. He was, his Honour held, engaged in carrying on a business using the skill and services of the promoter and the plantation manager. In a passage the subject of criticism from senior counsel for the Commissioner, his Honour noted that the business was carried on "through the agency of the promoter and the plantation manager". His Honour referred to Commissioner of Taxation v Lau (1984) 6 FCR 202 as an example of a case where in somewhat similar circumstances it was found that the trees there were managed for the taxpayer so that in the circumstances the taxpayer was carrying on a business.

38 His Honour was of the view that the situation changed after the restructuring because thereafter it was the trustee which became the producer of sandalwood using the property which Mr Puzey and the other participants in the project had leased. It was the trustee which was carrying on business. However, his Honour held that the amount paid was nevertheless an allowable deduction in that year as being incurred under the contractual commitments entered into. The amounts incurred in the 1998 year of income were, his Honour held, outgoings incurred by Mr Puzey in gaining and producing assessable income in the later years when the trees were harvested and Mr Puzey was to participate in the proceeds of sale under the unit trust structure. The outgoings were incidental and relevant to the end of gaining and producing the assessable income. A submission that in this event the outgoings were outgoings of capital or of a capital nature also failed. His Honour said of this submission at [60]:

"The revenue character of an outgoing is identified by the purpose it serves. The outgoings incurred by the applicant were not for the acquisition of an income bearing asset from which commodities for sale would be produced, but for products to be planted, in effect, as a crop to be matured and harvested for sale. The profit obtained by selling the wood produced would be a revenue, not a capital return, and the cost of acquisition of the product to be developed and sold, albeit over some years, should be characterised as an outgoing of revenue character."

39 The Commissioner submitted that Mr Puzey was really engaged in a profit making scheme rather than the production of income and for that reason the outgoings were capital. His Honour rejected the submission and said at [63]:

"However, in the instant case the applicant was engaged in a project to obtain a return from the pooling of his interest in timber seedlings with like interests, and from the management of those interests in common to produce a commodity able to be harvested and sold at a profit. The interests included an area of land held under lease by the applicant on which sandalwood seedlings purchased by the applicant were to be planted. At the time the outgoings in issue were incurred the applicant was to pay regular outgoings by way of rent and management fees in connection with the growing and maturation of his seedlings. Therefore, the return sought was not a capital accretion on a sum invested but a return from the growth, harvest and sale of a product purchased for resale, that return to be promoted by regular outgoings incurred for the purpose of producing the product for sale. Accordingly the distribution to the applicant of monies obtained as proceeds from the sale of timber harvested from the plantation would represent the gaining of assessable income according to ordinary concepts. "

40 A further submission that the amounts payable for the seedlings were the costs of obtaining rights in the venture, in particular rights under the trust deed and were therefore capital was likewise rejected. So too was a submission that there could not be deductibility under s 51(1) of the 1936 Act because the amounts paid for the seedlings were grossly excessive. This last submission was expressly disavowed on the appeal by senior counsel for the Commissioner as it was not a ground of appeal before us.

41 The learned Primary Judge then turned to consider Part IVA of the 1936 Act.

42 His Honour first identified the scheme. The Commissioner had submitted in the alternative that the scheme was either what may be referred to as Mr Puzey entering into the package of documents and making the payments he was obliged to make under them or, alternatively the entry into the agreement for the purchase of the seedlings and the agreement for loan. His Honour concluded that it was the narrower scheme to which consideration should be given. His Honour said at [88] and [89]:

"The scheme entered into was the presentation and execution of a seedling purchase agreement under which the cost of seedlings was calculated to provide to a participant in the project an outgoing in an amount able to provide a tax benefit in a sum understood by the participant and the promoter to be necessary to reduce the assessable income of the participant in such a degree that the tax "saved" would cover payments to be made by the participant to, and for, the purposes of the project, including the delivery of seedlings to the participant. The Loan Agreement, and the agreement for loan made between Allrange and Sandalwood, were ancillary to the seedlings purchase agreement and to the scheme. The Loan Agreement fixed the time at which the balance of monies payable by a participant under the project was to be paid and provided the contract under which the participant could pay monies to the project out of the consequences of the tax benefit. The agreement for loan between Allrange and Sandalwood provided the means by which the foregoing steps could be undertaken.

The evidence established that the cost of seedlings set out in the seedling purchase agreement was grossly inflated and unrelated to the reasonable value of the items purchased. The evidence also established that the inflated price was an element of a scheme designed to obtain a sufficient tax benefit for a participant to make participation in the project attractive for that person. The representational material distributed by the promoter stated that the amount to be paid by the applicant to the project for seedlings would be met out of the tax savings to be received by the applicant by deduction from the applicant's assessable income of the amounts set out in that material as the cost of the seedlings. Insofar as there was a "balance" to be paid by the applicant for the cost of the seedlings, it was to be paid from the "harvest". Although the applicant entered a legal obligation to pay a sum of $80,000 for the seedlings, supplanted in part by an obligation to pay $79,800 in repayment of a loan advanced by Sandalwood said to have been applied to payment of the purchase price of $80,000, that obligation itself was part of the scheme by which a deduction of $40,000 was to be obtained in each year of income. The essence of the scheme by which the tax benefits in the form of deductions would be obtained was the seedling purchase agreement. By that agreement the price stipulated for the seedlings was inflated as required for the purpose of obtaining tax benefits for the applicant sufficient to generate taxation savings for the applicant commensurate with the sum of $28,000 to be paid by the applicant to the project. The construction of the tax benefit by the scheme was important to the marketing of the project as a `tax effective' investment."

43 His Honour then turned to consider the eight matters to which regard must be had under s 177D(b) of the 1936 Act in deciding whether it should be concluded that a person who entered into or carried out the scheme did so for the purpose or the dominant purpose of obtaining a relevant tax benefit, here the deductions claimed. His Honour did consider the relevant factors and reached a conclusion adverse to Mr Puzey. In consequence his Honour held that Part IVA of the 1936 Act authorised the Commissioner to make a determination to cancel the tax benefit.

44 His Honour accordingly upheld the Commissioner's objection decisions in the second set of proceedings and dismissed Mr Puzey's appeal. Ultimately his Honour dismissed as well the first set of proceedings and in each case ordered Mr Puzey to pay costs. It is from these decisions that Mr Puzey now appeals to the Full Court.

Was Mr Puzey carrying on a business in the 1997 year.

45 It would seem to be common ground, but subject to the provisions of Part IVA of the Act that if Mr Puzey was carrying on business in the 1997 year of income then the amounts paid for seedlings would be an allowable deduction to him in that year and a fortiori would not be on capital account.

46 The question whether a person is carrying on a business is a conclusion to be drawn from all relevant facts and circumstances. There are some relevant propositions which can, however, be stated. First, as was said by Barwick CJ, in Fairway Estates Pty Ltd v Federal Commissioner of Taxation [1970] HCA 29; 70 ATC 4061 at 4069 and it is self-evident, every business must have a first transaction. And there may be a business, even if that business is small in scope: cf Thomas v Federal Commissioner of Taxation (1972-3) 46 ALJR 397 at 401 with Hope v Bathurst City Council [1980] HCA 16; (1980) 144 CLR 1 at 10. A person may carry on a business, notwithstanding that the person had some other activity, such as full time employment. It is not necessary in concluding that a business is carried on that the acts to be undertaken are acts of the person seeking to establish he or she is carrying on a business. So a person may appoint another to take the steps which constitute the business activity: Ferguson v Federal Commissioner of Taxation [1979] FCA 27; (1979) 26 ALR 307 at 319 and, at least if the facts in Commissioner of Taxation v Lau at 218 involved a business, that case is another example.

47 It will be relevant in deciding whether a business is carried on that there is some repetition of acts and that the activities in question have "something of a permanent character"; Hope per Mason J at 8. What is required is that activities be engaged upon "on a continuous and repetitive basis"; Hope ibid at 9. However, perhaps not too much attention should be given to the concept of repetition where the activity is one, such as plantation operation, where the activity will continue over a relatively long period of time but where there will be significant periods of what may be referred to as inactivity. Business does not mean being busy.

48 In deciding whether or not a business is carried on courts have pointed to what have been called in the United Kingdom the "badges of trade," indicia which, while no one of them will be determinative of whether a business is carried on, collectively will demonstrate a business. These include the profit motive (although a non profit company may still carry on a business), acting in a business like way, (although many businesses may be found which operate in a non-business like way), the keeping of books of account and records, (although the fact that there are none will not necessitate the conclusion that a business is not carried on) and repetition (although a fixed term project may still be a business).

49 Of the matters which the learned Primary Judge regarded as pointing against Mr Puzey having commenced a business one is very important. His Honour notes that it was not suggested that Mr Puzey could carry on business as a sole producer of sandalwood on the lot he held on lease. It is not quite clear what his Honour meant by this observation for on one view of the matter that is exactly what the documentation which Mr Puzey signed contemplated. Obviously it was clear to Mr Puzey and indeed to all others who participated that the planting, tendering of the plantation and ultimate harvesting would be carried out on the whole of the lots which were leased to investors in the project. If that is all his Honour meant by the comment it probably does no more than state the obvious. If on the other hand his Honour meant that it would be not open to find that Mr Puzey could carry on the business which the documents contemplated then it is difficult to see either why this was so or why his Honour found as he did that a business was in fact carried on.

50 It is not possible to argue from the decision in a particular case that a person is carrying on business unless there is a complete identity of facts and that is seldom the case. Nevertheless there is some assistance to be gained from the case of Commissioner of Taxation v Lau (1984) 6 FCR 202, to which I now turn.

51 Lau concerned an afforestation scheme involving pine trees. The area of land leased to the taxpayer in that case was "no less than fourteen hectares" on which a minimum of ten hectares of trees were to be planted. Pine trees took at least 7 years to grow to a stage where they could be sold. The lease of land was for a period of three years, but with options to extend for a period of 21 years. The management agreement was for a fixed term of 21 years. The loan advance to meet the balance of the taxpayer's commitment after payment from his own funds of a cash deposit was repayable at the end of the 21 year period with interest payable in the meantime of 2.4 per cent per annum. The financing and other payments took place, as here, by means of an exchange of cheques. There was expert evidence that the proceeds of timber was unlikely to exceed $20,000, a sum significantly less than the amount of $35,300 which the taxpayer was obliged to repay at the end of the loan period, that is to say that the likely returns were somewhat less than the expectations which the taxpayer had in entering into the agreements. However, it was accepted that the agreements had been negotiated "in a genuine commercial setting" (see per Beaumont J at 217). The taxpayer relied, so Beaumont J suggested, upon the business judgment and expertise of the promoters. The taxpayer made no attempt to seek advice from the Forestry Commission and only once visited the plantation.

52 A Full Court of this Court (Fox, Jenkinson and Beaumont JJ) held unanimously that the taxpayer was entitled to a deduction for the management fees paid at the outset and rental under the lease. There was no apportionment made in the management agreement between consideration for seedlings and consideration for managing the plantation and hence no argument was made whether the cost of seedlings might be treated differently from the cost of the management services. The judgment of Fox J, with which Jenkinson J agreed did not specifically consider whether a business was in fact carried on, although it may, perhaps, be implicit in the judgment of Fox J, that there was (see at 211, the reference to the decision to enter the arrangement not being unbusinesslike). The taxpayer himself referred to the project as being "a `primary industry type situation'" (at 211-212) whatever that might mean. Beaumont J, almost in passing at 221 refers to the "taxpayer's business" in discussing whether the outgoings were on capital account. In any event the Court held, as earlier noted, that the fees paid were all deductible under s 51(1) of the 1936 Act. Given that the case was argued really as a case involving the deduction for management fees and rent it would not have been of any real significance whether the taxpayer carried on a business or merely made an investment as fees for managing an investment would be ordinarily deductible, as indeed would rent.

53 A much earlier case involving a forestation project involving pine trees, and which was distinguished in Lau was Clowes v Federal Commissioner of Taxation [1954] HCA 10; (1954) 91 CLR 209 upon which the Commissioner relied. There the taxpayer purchased two "lots", one of one acre and the other of two acres, but what the taxpayer actually obtained was a beneficial interest in the timber of a large parcel of land which was to be planted with pines and in due course harvested with the taxpayer's percentage interest being pro rata to the total number of lots in the scheme in 90% of the proceeds of timber, the remaining 10% being taken by the promoter. Not surprisingly the taxpayer was regarded as "a passive investor" (see per Dixon CJ at 215) who had made an investment of capital in the hope that at the end of many years he would receive a greater sum. There was no business carried on by the taxpayer.

54 In our view the present case is on the border line. It would be possible as the learned Primary Judge said, to see Mr Puzey as no more than a passive investor, despite the agreements he entered into which sought to give him the appearance of a person carrying on a business. On the other hand this was a commercial transaction, notwithstanding the obvious interest Mr Puzey had in the taxation benefits which accompanied it. On the projected figures the project appeared to give a considerable return albeit over a long period. It involved the taxpayer employing the Manager and the expert to plant trees, maintain them and in due course harvest them. The learned Primary Judge may, perhaps be criticised, as counsel for the Commisisoner did, in referring to the activity of planting, tendering trees and harvesting as being undertaken for Mr Puzey. But clearly his Honour was not suggesting that a principal and agency relationship existed between any party and Mr Puzey. Rather his Honour was describing the reality of the situation whereby work was undertaken on the leased land by a contractor in contractual relations with Mr Puzey and therefore undertaking that work for him. Mr Puzey relied upon what may well have appeared to be the expertise of the promoter and the obvious experience of Mr and Mrs Heading. The relationship between Allrange and CALM no doubt engendered confidence in the project. The fact that the purchase agreement for seedlings may have been for an excessive price was not a matter known to Mr Puzey. The fact that the physical activity of clearing and planting had not commenced at the time Mr Puzey entered into the arrangements does not require the conclusion that the business had not commenced. Rather, it seems to us that the correct analysis is that Mr Puzey committed himself to a business with the first step of entering into the relevant agreements and that in so doing Mr Puzey commenced a business.

55 The next question is whether the restructuring of the arrangements at the request of the ASC had the consequence that Mr Puzey thereupon ceased to carry on the business which he commenced in June 1997 as his Honour held. It is important to note that the contracts of lease and management entered into by Mr Puzey continued in operation and continued to be enforceable by him. On one view, what changed was that rather than being entitled to the proceeds of timber from the harvesting of his own lot Mr Puzey became entitled pro rata to a share of the proceeds of timber harvested from the totality of lots in the scheme with the trustee of the unit trust being obliged to receive the proceeds and hold them for the unit holders including Mr Puzey.

56 The learned Primary Judge interpreted the agreements entered into as meaning that each lot owner made his lot available to the Trustee or Manager of the Trust and that thereafter the planting, tendering and harvesting activities were activities of the Trustee or Manager and not of the lot holders. The key to his Honour's conclusion was that after the restructuring the Trustee or Manager under the trust deed carried on the business of planting, tendering and thereafter harvesting all of the trees on the whole leased area. It was the Trustee's business and not the business of each individual lessee. On this basis clearly Mr Puzey did not thereafter carry on a business.

57 There is some ambiguity in the documentation, but on balance we agree with the interpretation of his Honour with the consequence that Mr Puzey thereafter ceased to be carrying on a business and became a passive investor in a managed investment scheme, just as was the case from the outset of the investor in Enviro Systems Renewable Resources Pty Ltd v Australian Securities and Investment Commission [2001] SASC 11; (2001) 80 SASR 1.

58 The question which then arises is whether the change affects the deductibility of the amounts outlaid by Mr Puzey. There can be no doubt that a contractual payment to a manager to manage such a scheme would be deductible. So too would rent paid by Mr Puzey. Outgoings such as rent and fees for services, if for the purpose of gaining and producing assessable income are deductible and not on capital account. The only question of any difficulty is whether a different result follows in respect of the purchase of seedlings. In our view once it is decided that Mr Puzey did not carry on a business it can no longer be said that the seedlings are trading stock (or as it is sometimes called, the circulating capital) of his business for there is no business. It is obvious enough that the outgoings in question were incurred to gain or produce at the end of the project assessable income. The question is whether that assessable income is the gross proceeds of the sale of timber, or whether it is the trust distribution representing the net profit of the trustee's business but after deducting the capital outlaid by Mr Puzey.

59 The classic test for determining whether a loss or outgoing is on revenue account is that found in the judgment of Dixon J (as his Honour then was) in Sun Newspapers Ltd and Associated Newspapers Ltd v Federal Commissioner of Taxation [1938] HCA 72; (1938) 61 CLR 337 at 363. There, his Honour said:

"There are, I think, three matters to be considered, (a) the character of the advantage sought, and in this its lasting qualities may play a part, (b) the manner in which it is to be used, relied upon or enjoyed, and in this and under the former head recurrence may play its part, and (c) the means adopted to obtain it; that is, by providing a periodical reward or outlay to cover its use or enjoyment for periods commensurate with the payment or by making a final provision or payment so as to secure future use or enjoyment."

60 The amount outlaid for seedlings is not a recurrent outlay as that expression is used by Dixon J. There was (albeit in two instalments of the cash outlay) a once and for all payment for obtaining the seedlings. The fact that there is a lump sum rather than a continuous outlay will not be determinative of deductibility, for a lump sum outlay may still be on revenue account. It will be necessary to consider the character of the advantage obtained. A management fee, even if paid in a lump sum at the commencement of the management agreement may still be deductible. However, in the present case the seedlings for the 1998 year of income were to be acquired to be contributed to the group investment scheme where they became the subject of what may be said to be the business of the trustee.

61 There is, perhaps, some similarity between the present case and the case of John Smith & Son v Moore [1921] 2 AC 13 which is discussed by Dixon J in Sun Newspapers. There the taxpayer acquired coal contracts for the purpose of buying coal under them and selling the coal. Although the project was a short term one it was held that the outlay was on capital account and the contracts acquired were part of the fixed capital of the taxpayer's business. There is the difference, and it is not unimportant, that the seedlings here are what is both acquired and sold. On the other hand, if no business is carried on by the taxpayer then the seedlings really become the fixed capital of the taxpayer's business with which the taxpayer will earn income by pooling them with seedlings similarly acquired by other investors and permitting the trustee (or manager) to carry on business with them and after a lengthy period of time receive a pro rata distribution of the net proceeds.

62 It follows, in our view, that to the extent that the amounts outlaid by the taxpayer in the 1998 year of income were for the seedlings they are not deductible under s 8-1 of the 1997 Act. However, for the reasons given we are of the view that the balance of the outgoings in both years of income would be.

Part IVA.

63 The relevant provisions of Part IVA of the Act are set out in the judgment appealed from and need not be repeated here. In summary, it can be said that Part IVA requires that there be identified a "scheme" in the defined sense, and a "tax benefit" in the defined sense that is obtained by the taxpayer in connection with the scheme. With respect to the submissions made on behalf of Mr Puzey there is no difficulty with either of these two elements. The scheme, as identified by the learned Primary Judge at [88] was: "the presentation and execution of a seedling purchase agreement under which the cost of seedlings was calculated to provide to a participant in the project an outgoing in an amount able to provide a tax benefit..." so that the tax saved would cover payments to be made by the participant and the delivery of the seedlings. On this basis the loan agreement was ancillary. The alternative scheme proposed by the Commissioner was the entire set of agreements entered into by Mr Puzey and the steps taken under them. In our view it matters not which of the alternative schemes is taken to be the relevant "scheme" for the purposes of Part IVA and this was implicitly, if not explicitly, conceded by senior counsel for the taxpayer.

64 It was submitted that the learned Primary Judge had in breach of procedural fairness, adopted a different "scheme", not being one of the two schemes which had been put forward by the Commissioner in the alternative. The submission relied upon what was said by his Honour at [90], namely:

"... the underlying arrangement was that the seedlings would be produced by Allrange and delivered to the applicant in return for the payment by the applicant to the project of the sum of $28,000. If, after 15 years, timber was harvested and sold and proceeds of sale distributed to the applicant, only then would Allrange receive in hand any balance of the purchase price payable for the seedlings. That sum to be obtained, or accounted for, by Allrange as a repayment by Sandalwood of a loan made to Sandalwood by Allrange, the monies paid by the applicant from the proceeds of timber sales being applied to repayment of a loan advanced to the applicant by Sandalwood."

65 One thing is clear. The discussion as to the underlying arrangement points to what may be referred to as the substance of the scheme as represented, and without regard to the documentation. It is clear that the scheme was sold by the promoters on the basis that the project participant would pay cash amounting to $28,000 at the outset of the scheme and in 15 years after harvest the remaining loan funds would be repaid from the proceeds of timber sales. Of course, that is not the arrangement documented. The scheme must be identified by reference to the arrangement actually entered into. This is not to say that the scheme as represented is irrelevant to the conclusion that has to be reached under Part IVA. It is. However, it suffices here to say that there was certainly no denial of natural justice on the part of the Primary Judge in selecting as a scheme something that had not been put to Mr Puzey for this is not what the learned Judge did.

66 The tax benefit is the deductions to which Mr Puzey became entitled as a result of the scheme. It is clear that had Mr Puzey not entered into the scheme he would not have had the deductions which became available to him. On the view we take as to the second year the amount paid for the seeds would not be an allowable deduction. But nothing turns on this for present purposes. If we are wrong on this matter, then the deduction for seedlings would be available in the two years of income and would likewise be part of the tax benefit. The remaining outgoings for rent and management fees (together with the outgoing for seedlings in the 1997 year of income) formed the tax benefit which Mr Puzey obtained as a result of the scheme.

67 It is then necessary to consider the eight matters set out in s 177D(b) and determine whether it would be concluded that either the taxpayer or a person who had entered into or carried out the scheme did so for the purpose or the dominant purpose of obtaining the relevant deductions. It is convenient to consider each of the eight matters separately, while noting, that some of them might point in the one direction and others in the other direction and that the task is to weigh the totality of these matters in reaching the conclusion as to dominant purpose. The learned Primary Judge considered only the matters which his Honour found to be significant. There is no error of law in adopting that approach.

The manner in which the scheme was entered into or carried out.

68 It is relevant to note the fact that the scheme was promoted with the taxation consequences of deduction to the fore. It was promoted not by someone interested and expert in sandalwood timber who sought to interest those prepared to finance a plantation as a business investment but by a financial adviser. Indeed, as has already been made clear, taxation deductibility was an essential ingredient in funding the participation in the arrangement. The one page summary headed "Investment in Tropical Forestry" which is discussed by the Primary Judge at page 4 was really a summary of the taxation consequences, not a summary of the investment consequences. As the learned Primary Judge pointed out the promotional material explained that a participant would be able to obtain "tax refunds", sufficient to meet the payments required to obtain the seedlings for planting. It was sold by canvassers and others on behalf of the promoters as "tax effective".

69 Further, unlike what may be seen to be an ordinary investment project, the scheme was to be entered into by a participant signing a series of documents which were pre-prepared and there were instructions to the participant to take the necessary steps to have the PAYE instalments varied.

70 Of particular importance, not only to this factor, but also to others, was that this was a case where what was certain was, or at least was promoted to be, the taxation deductions. What was uncertain, was the project's investment consequences. These were highly speculative. So long as the taxation deduction was available, however, the uncertainty carried with it little cost. The sandalwood plantation was a commercial gamble. There was a chance of some profit from it. But it was the taxation consequences that were certain. Or so at least it appeared.

71 Another matter, it may be listed here or under other headings, is the significant fact that the amount paid for the seedlings was grossly excessive. One might naturally ask why would Mr Puzey pay an amount which was grossly excessive in comparison with the amount that could probably have been negotiated with CALM had someone with a real interest in establishing a sandalwood plantation investment sought to do so. As has been pointed out, it was this excessiveness which enabled Mr Puzey to obtain a cash refund in a sufficient sum to finance the initial cash payment of $14,000 and likewise to obtain a PAYE variation to fund the payment in the 1998 year of income of the same amount.

Form and substance.

72 Under this heading it is important to note that the substance of the scheme was that which appeared in the promotion documents, including the spreadsheet. A participant was to pay two cash amounts of $14,000. These, with other minor (and deductible payments), were to entitle the participant to a return when the timber was harvested. The form of the investment differed, the difference being the result of the taxation consequences. In substance, the participant was to make a payment of $40,000 in each of the first two years of income. An advance was to be made to the participant to fund the participation which was repayable at whichever was the first to occur of the sale of the timber or 30 December 2012. The outgoings which the participant contracted to make were for seedlings, rent, and management.

The time the scheme was entered into and length of the period during which it was to be carried out.

73 Mr Puzey entered the scheme by exercising his option to do so on 3 June 1997, that is to say shortly before the end of the 1997 year of income. The cheque exchanges which took place all took place close to the end of the 1997 and the 1998 years of income. As the learned Primary Judge pointed out the time payments were made was structured to allow a participant like Mr Puzey to receive a refund of tax after lodgment of the 1997 tax return and obtain a variation of the PAYE instalments for the 1998 year of income to permit the participant to make the cash payment required to be made of $28,000 over the two income tax years.

74 On the other hand it is not irrelevant that the scheme was expected to continue until 2012. This was not just a short term taxation arrangement. That it was not is a matter favouring Mr Puzey. It was not suggested that there was ever any intention to bring the scheme to an end prior to the timber being harvested.

Result in relation to the operation of the Act.

75 Clearly the scheme would, subject to the operation of Part IVA, produce the result that substantial deductions would be available in the 1997 year and, but for the restructuring, in the 1998 year. The scheme thus produced the result that a participant such as Mr Puzey could finance his cash participation through the tax system by obtaining a tax refund in the 1997 year and by applying for a variation of PAYE tax instalments

Change in financial position of taxpayer and others.

76 This was not just a paper scheme. Mr Puzey was required to outlay money to participate in the scheme, even if the outlay was intended as part of the scheme to come from the tax refund which he claimed and the variation of PAYE tax instalments. On the other hand the real outlay in the years of income was not the $40,000 which the documentation required Mr Puzey to pay each year but the lesser sum of $28,000 in total which was to be financed through the tax refund and instalment variations. Allrange, as his Honour pointed out, became the recipient of the cash payment and received the amounts as consultancy fees. Mr Serra received a commission for introducing Mr Puzey to the project.

Other consequences for the taxpayer or others.

77 There was a possibility, although it was speculative, that the plantation would be successful and that Mr Puzey would become entitled to a share of the sale of timber.

The nature of any connection between the taxpayer and others.

78 Pointing against a taxation purpose, or at least neutral is the fact that there was no relationship between Mr Puzey on the one hand and those who were involved in the scheme on the other hand, other than a commercial relationship.

Conclusion as to purpose.

79 When these matters are considered there is no doubt that it would be concluded that Mr Puzey, entered into and carried out the scheme for at least the dominant purpose of obtaining for himself the taxation deductions which it was expected the scheme would bring and which, except for the cost of seedlings in the 1998 year, it did bring subject to the operation of Part IVA. Taxation was the prevailing purpose; any return from the sale of sandalwood was both speculative and secondary.

80 This being the case there is no reason to consider whether it would also be concluded that the promoter or any other person who entered into or carried out the scheme did so for at least the dominant purpose of securing to Mr Puzey the taxation benefits of the scheme.

The validity of the amended assessments and the consequences if any of there being two sets of assessments.

81 It will be recalled that there are two sets of appeals presently before the Court and that there had been two tax appeals, properly applications to the Court in its original jurisdiction, heard by the learned Primary Judge. Each appeal relates to amended assessments for the two income tax years. Each set of amended assessments were identical in the quantum of taxable income and tax payable. The difference was that the first set of amended assessments was made before any determination under s 177F(1) had been made by the Commissioner. A determination was made initially in respect of each year of income some few days after the first set of amended assessments issued. However, no amended assessments issued following upon the making of that determination.

82 A second set of amended assessments was made shortly before the hearing was to commence of the application which related to the objection decisions which disallowed objections to the first set of amended assessments. Before this second set of amended assessments issued a second determination was made under s 177F(2) in respect of each year of income. The making of the second determination and the second set of amended assessments was precautionary.

83 It was submitted that the second set of amended assessments was invalid because the assessments were "tentative" and did not fix the amount of tax payable by the applicant. The learned Primary Judge rejected the submission and held that the second amended assessments were authorised by s 170(1) of the Act because there had been, as a result of the determination, changes in the process of an assessment in which the liability for tax was calculated.

84 It was also submitted that the second set of amended assessments was invalid because a determination could only have been made by the Commissioner if he was of the view that the deductions claimed in the relevant years were not allowable under s 51(1) of the 1936 Act (or s 8-1 of the 1997 Act). But by the first assessment, which had not been preceded by a determination, the Commissioner must be taken to have issued the amended assessments because he was of the view that the deductions were not allowable deductions. Having done so he could not make a determination under Part IVA for such a determination could only be made if the Commissioner was of the view that but for Part IVA deductions were available. This argument was likewise rejected by the learned Primary Judge who held that a determination under s 177F operated not only upon a tax benefit conceded to be an allowable deduction but also upon a tax benefit that would become an allowable deduction but for the determination.

85 With respect to the submissions made the conclusions of the learned Primary Judge were in both cases correct. Clearly the first set of amended assessments was valid, although the issue of the assessments could not be supported by Part IVA. So much is common ground. The second set of assessments was not "tentative" in the sense that word is used in the cases. The word "tentative" emanates from the judgment of the High Court in Federal Commissioner of Taxation v S Hoffnung & Co Ltd [1928] HCA 46; (1928) 42 CLR 39. It was used in that case to refer to an assessment that was not definitive, and thus such as not to bind the taxpayer. Such a tentative assessment, that is to say, an assessment which did not put the taxpayer under an obligation to make payment within thirty days of notice of it, would not be an assessment at all, so that the time would not run in which the taxpayer could object to it.

86 Later in F J Bloemen Pty Ltd v Federal Commissioner of Taxation [1981] HCA 27; (1980-81) 147 CLR 360 the Court pointed out that a provisional or tentative assessment was no assessment at all. However, the Court rejected an argument in that case that the assessment which was sought to be challenged in the appeal of Mr Simons, whose appeal was argued at the same time as that of F J Bloemen Pty Ltd was, in the relevant sense, tentative. The mere fact that what on its face was a regular notice of assessment was accompanied by an adjustment sheet which intimated that the Commissioner would review the assessment in a certain event did not have the result that the assessment was tentative. Aickin J, expressed the view that it was important that the notice of assessment in Hoffnung itself described the assessment as tentative and in fact struck out the reference in the notice relating to the time in which objection could be lodged. Clearly, it will be a rare case when an assessment of which notice is given in the usual way will be found to have been tentative and thus no assessment at all.

87 The mere existence of two assessments issued against different taxpayers, each of which was, in form definitive and which assessments were issued in the alternative did not mean that either was tentative and thus not an assessment at all: Federal Commissioner of Taxation v Richard Walter Pty Ltd [1995] HCA 23; (1995) 183 CLR 168. The issue of two assessments made under two separate powers of assessment (there ss 104 and 105 of the Act) against the same taxpayer in respect of the same year of income was likewise not tentative. Each assessment definitively fixed a liability to tax: Cadbury-Fry-Pascall Pty Ltd v Commissioner of Taxation (Cth) [1944] HCA 31; (1944) 70 CLR 362. But that case turned upon the existence of separate assessment powers. The case is not, however, authority for the proposition that two assessments may be made against the same taxpayer in the same year of income both made under the same assessment power. That this was so was held in Commissioner of Taxation v Stokes (1996) 72 FCR 160, a case upon which the taxpayer relied.

88 In Stokes the Commissioner purported to make and gave notice of three assessments of income tax payable by a taxpayer in respect of the same year of income. He did so because of different views held as to what the tax benefit was under s 177C of the Act which Part IVA of the Act authorised him to cancel. It was held that the Act contemplated in respect of a taxpayer that there would be only one assessment of taxable income and only one assessment of the tax payable thereon extant at any one time. The Court in that case discussed the statutory scheme relating to assessments and noted a distinction between the case where there were alternative or conflicting assessments on the one hand as was the case in Stokes and the case where the Commissioner issued an amended assessment after issuing a prior assessment where the amended assessment operated to amend an assessment and did not operate to produce an alternative or conflicting assessment.

89 It may be noted that the Court in Stokes discussed the problem, which had arisen before it, of alternative determinations under s 177F of the Act. The Court noted that the language of s 177F contemplated, as was indeed said in Commissioner of Taxation v Jackson (1990) 27 FCR 1 that the Commissioner, after making a determination must take such action as he considers necessary to give effect to that determination. Ordinarily, as the Court noted, it will be the case that a consequence of the determination will be the disallowance of a deduction or the inclusion of some amount in assessable income. In other words, it will ordinarily be the case that it will be necessary to make an amended assessment to give effect to the determination which amended assessment would show an increased taxable income and an increased tax payable. The Court commented, that the use of the word "necessary" in s 177 F(2) might suggest that there would be occasions when no action at all was required to give effect to a determination. However, it was not necessary in Stokes to consider that case. However, clearly what was averted to was a case where at the least, the making of a determination did not have the effect of increasing the taxable income or tax payable under a previous assessment.

90 In Jackson a full Court of this Court, (Burchett, Von Doussa and Hill JJ) considered and rejected a submission of the Commissioner that no amendment of an assessment was necessary where the consequence of a determination under s 177F(1) was that a taxpayer's taxable income and the tax payable thereon remained the same. It was said that the Commissioner was obliged, after making a determination, to give effect to it but that the words "give effect to" did not necessarily mean the same thing as assess. There were other ways, discussed in the judgment, whereby the Commissioner could give effect to the determination. However, the Court was of the view that for a number of reasons it was necessary for the Commissioner to issue an assessment even where the assessment produced no difference in either taxable income or tax payable.

91 It might be thought that what was said in Stokes could be opposed to what was said in Jackson, although two Judges, Burchett J and Hill J sat on both cases. It is not necessary to resolve that question here. If Jackson is correct, then clearly the second assessment in the present appeal was necessary and it operated as an amended assessment even if the amounts of taxable income and tax payable were the same as those shown in the notice of the first assessment. Once this is appreciated it can not then be argued that there were extant two alternative assessments against the one taxpayer in respect of the tax payable in the same year of income. The first assessment when it issued was clearly not in any way tentative. On its face what was notified was a definitive liability to pay tax. The assessment made after the determination under Part IVA was an amended assessment and hence the case was distinguishable from Stokes.

92 If Jackson is wrong and it was not possible for the Commissioner to issue an amended assessment where the taxable income and tax payable remained the same (although the ingredient in the assessment differed) then it would follow that the second assessment would be void because there would then be two alternative assessments, albeit each was for the same amount of tax payable. However, the determination must then be capable of being relied upon to justify the assessment which was first in time. That assessment, as noted, was clearly definitive and not tentative. The result for the taxpayer would be that while technically he would succeed in having the second assessment set aside as invalid, the first assessment, would be upheld because the consequence of the determination would be that amounts otherwise deductible would, as a result of the making of the determination no longer be deductible. In other words, while the argument would affect the orders we would make, the practical consequence to the taxpayer would be the same.

93 We were not asked here to overrule Jackson. The decision was not clearly wrong and, in the absence of argument, it would be inappropriate to do so. In those circumstances we should follow it with the consequence that the argument of the taxpayer that either assessment was tentative must fail. There is no substance in an argument, apparently advanced before the learned Primary Judge, that under s 170(1) an assessment must increase or reduce the taxable income before it could be an amended assessment. As the learned Primary Judge said at [12] Puzey v Commissioner of Taxation [2002] FCA 1615:

"The amendment of an assessment pursuant to s 170(1) by `alterations therein' or `additions thereto' describes changes in the process of assessment by which the liability to tax has been calculated. It may or may not, result in variation of the amount of tax payable pursuant to the amended manner of assessment, (See: Meredith v Commissioner of Taxation [2002] FCAFC 271 at [43]- [45].)"

94 The alternative argument advanced was that the validity of the second assessment was affected by the fact that the Commissioner was of the view when making it that the whole, or part of the deductions claimed by Mr Puzey were not allowable deductions. Being of this view, it was submitted, the Commissioner could not then make a determination under Part IVA. With respect, the argument is misconceived. Part IVA is not predicated upon the Commissioner forming the opinion that a deduction is allowable before making a determination that operates to disallow the deduction. All that is necessary for the power in the Commissioner to make a determination under Part IVA to disallow a deduction is that there is a deduction which is allowable to a taxpayer in the year of income which would not have been allowable to the taxpayer in the year of income if the relevant scheme has not been entered into or carried out: see s 177C (b). It is only once the Part applies that is to say, it is only once there is objectively a tax benefit, that any question of discretion or power to make a determination under s 177F arises: cf Federal Commissioner of Taxation v Peabody [1994] HCA 43; (1993-4) 181 CLR 359 at 382.

95 Nor could it be argued (and it was not) that by making the determination the Commissioner was bound to allow the objection to the first assessment on the basis that he had formed the view that the amounts claimed as a deduction by Mr Puzey were in fact deductible.

ORDERS

96 The question then arises as to the orders that should be made in the present case, and particularly the orders as to costs.

97 The learned Primary Judge dismissed Mr Puzey's first application to the Court but ordered the Commissioner to pay the costs of that appeal up to and including the date upon which the Commissioner issued the second and amended assessments, namely 12 November 2001. His Honour did so on the basis that it became apparent from that date that the proceedings thereafter had no utility. It will be recalled that his Honour was of the view that but for Part IVA all of the deductions claimed were allowable but that this changed once the determination and assessment pursuant to it had been made.

98 His Honour dismissed the second application save in respect of amounts of $2,000 for plantation establishment fees and $800 for plantation management fees (incurred in the 1998 year of income) which his Honour was of the view were nevertheless deductible. His Honour ordered Mr Puzey to pay one half of the Commissioner's costs. His Honour did so because his Honour was of the view that the question of deductions (on which Mr Puzey succeeded before his Honour, but for the Part IVA determination) was a substantial and inseparable part of the appeal argued and that the order on the second appeal should take into account the partial success of Mr Puzey in the argument, notwithstanding that that success really related to the first appeal.

99 Before us Mr Puzey was successful in arguing the deductibility of the amounts he claimed in the 1997 year of income before the effect of the determination under Part IVA was considered. He was, however, unsuccessful in arguing the deductibility of the amounts he claimed in the 1998 year for the purchase of seedlings on the basis that those amounts were capital. No separate argument was addressed before us to the two amounts of $2,000 and $800, although there seems to be no reason why the latter, at least, would not be deductible but for the determination. The former, however, would for the reasons already given be capital. However, Mr Puzey failed ultimately as a result of Part IVA to deduct the amounts which were otherwise deductible in the 1997 year of income. An argument that Mr Puzey should be entitled to his costs of the first appeals, on the basis that but for the Part IVA determination he had been successful clearly has no chance now of success.

100 An order which takes into account the partial success in argument of the deductibility in the first year of income and that the Commissioner should bear some of the costs, having regard to the fact that the determination and assessment following upon it changed the course of the appeal as and from 12 November 2001 would be that in respect of the first set of appeals, the orders of the learned Primary Judge as to costs should be varied and in lieu thereof it should be ordered that each party bear its own costs other than the costs of and incidental to the hearing. The costs of the hearing should be paid by Mr Puzey. In respect of the second set of appeals the orders of the learned Primary Judge should stand other than so much of the order as allowed a deduction for the plantation establishment fee. That is to say, the application would be dismissed and Mr Puzey should pay the Commissioner's costs of it. In case either party should wish to make submissions concerning the plantation management fees and the plantation establishment fees, they should do so in writing within seven days of the publication of these reasons. To enable this to be done the orders made by the Court should be suspended for 10 days or such further time as the court may order to enable any further submissions as the parties may wish to file to be considered.

I certify that the preceding ninety nine (99) numbered paragraphs are a true copy of the Reasons for Judgment herein of the Honourable Justices Hill and Carr JJ.

Associate:

Dated: 26 August 2003

Counsel for the Applicant:	Mr J W De Wijn QC and Mr SHP Steward
Solicitor for the Applicant:	Wilson & Atkinson
Counsel for the Respondent:	Mr G Davies QC, Ms H Symon SC and Ms L Price
Solicitor for the Respondent:	Australian Government Solicitor
Date of Hearing:	26 May 2003
Date of Judgment:	26 August 2003