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Administrative Appeals Tribunal of Australia |
Last Updated: 8 October 2009
CATCHWORDS - TAXATION - income tax - failure to declare commission for sale received in Australia and transmitted overseas - whether "income" and "assessable income" within Income Tax Assessment Act 1936 - penalties -omitting income from tax returns and late returns - whether penalty should be remitted.
Auctioneer and Agents Act 1971 (Qld) - s 70
Income
Tax Assessment Act 1936 - s 6, s17, s 19, s 25, s 26, s 47, s 108, s 161, s 170,
s 222, s 223, s 227
Taxation Administration Act 1958 - s
14ZZK
Federal Commissioner of Taxation v Cooke and Sherden [1980] HCA 33; (1980) 80 ATC
4
Revesby Credit Union Co-operative Ltd v Federal
Commissioner of Taxation [1965] HCA 2; (1965) 112 CLR 564
Scott v Federal
Commissioner of Taxation [1966] HCA 48; (1996) 117 CLR 514
DECISION AND REASONS FOR DECISION [1999] AATA 63
ADMINISTRATIVE APPEALS TRIBUNAL )
) No
QT1997/181; QT1997/182
TAXATION DIVISION )
Re DONALD CORTIS
ALEXANDER RODNEY PUTNA
Applicants
And COMMISSIONER OF TAXATION
Respondent
DECISION
Tribunal Miss S A Forgie (Deputy
President)
Date 5 February,
1999
Place Brisbane
Decision The
Tribunal affirms the objection decisions under
review.
S A FORGIE
Deputy
President
REASONS FOR DECISION
On 11 June, 1997, the applicants, Mr Donald Cortis and Mr Rodney Alex Putna, applied for review of objection decisions of the respondent, the Commissioner of Taxation ("Commissioner") dated 9 April, 1997. Those decisions disallowed in full their objections dated 12 July, 1996 to amended assessments which had been issued against them on 13 May, 1996.
2. At the hearing, Mr Cortis and Mr Putna were represented by their accountant, Mr King, and the Commissioner by Mr Hack of counsel. The documents lodged pursuant to section 37 of the Administrative Appeals Tribunal Act 1975 were admitted in evidence ("CT documents", "SCT documents", "PT documents" and "SPT documents") together with documents relating to investigations by Australian Federal Police, statements of Mr Cortis, Mr Putna, Mr Brian Leonard and Mr Kenneth John Lewis and a company search relating to Fylend I.N.C. Pty Ltd. Oral evidence was given by both Mr Cortis and Mr Putna in support of their case and by Mr Kenneth John Lewis and Mr Brian Leonard in support of the Commissioner's case.
BACKGROUND
A brief history of the returns, assessments and decisions
3. There was no dispute between the parties that neither Mr Cortis nor Mr Putna declared any part of a sum of $800,000.00 in their returns for the year ended 30 June, 1991.
Mr Cortis
4. On 23 April, 1992, Mr Cortis completed his taxation return in relation to the year ended 30 June, 1991. His taxable income was stated to be $42,826.00. (CT documents, pages 39-41). The amended assessment showed his amended taxable income to be $202,826.00. That amended taxable income included the sum of $160,000.00 which the Commissioner regarded as Mr Cortis's share of a sum of $800,00.00 which had been paid as commission from a sale of a business. Tax on his taxable income was assessed to be $87,561.09 and penalties of $7647.53 for late return of his return and of $70,770.26 for an incorrect return were imposed. (CT documents, page 240)
Mr Putna
5. On 14 February, 1994, Mr Putna completed his taxation return in relation to the year ended 30 June, 1991. His taxable income was stated to be $25,520.00 (PT documents, pages 34-37). The amended assessment showed his amended taxable income to be $225,520.00. That amended taxable income included the sum of $200,000.00 which the Commissioner assessed as Mr Putna's share of the same sum of $800,00.00. Tax on his taxable income was assessed to be $98,229.15 and a penalties of $42,431.99 for late return of his return and of $70,834.67 for an incorrect return were imposed. (PT documents, page 263)
An outline of the players and the transactions
6. As will be seen from the summary of the evidence set out below and my consideration, these matters arise from a complex transaction involving a web of individuals, companies and trusts. Much of the evidence given by Mr Cortis and Mr Putna and by Mr Lewis is contradictory. In several instances, witnesses contradict themselves either in the course of their oral evidence or when their oral evidence is considered against documents which would seem to relate to the same matters. Despite these inconsistencies, it is possible to set out a "broad brush" picture of the findings of fact which I have made regarding individuals, companies and trusts involved in the transaction and the general nature of that transaction. That seems to be necessary in order to make any sense of the evidence.
7. I am satisfied that, in late 1989 or early 1990, Mr Putna and Mr Cortis, became co-shareholders in a company called Caysand No. 100 Pty Ltd ("Caysand 100") with Mr Alan Lee and another company called Caysand No. 83 Pty Ltd ("Caysand 83"). Caysand 83 was the trustee for the Trinity Beach Trust which is described as the Family Trust for Mr Kenneth Lewis and his family. At the time Mr Lewis was an undischarged bankrupt.
8. At the end of March, 1990 Caysand 100's name was changed to Fylend
I.N.C. Pty Ltd trading as International Network Consultants
("Fylend I.N.C.").
Although Mr Cortis, Mr Putna, Mr Lee and Caysand 83 were shareholders in Caysand
100, I am satisfied that it
is fair to say that Messrs Cortis, Putna and Lee in
fact regarded themselves not as shareholders (together with Caysand 83) but as
partners with Mr Lewis in a business. Their business was to promote the sale of
real estate in and around Cairns to purchasers from
overseas and particularly
from Japan and other parts of Asia. Each of them had a different responsibility
in that business. Their
beneficial interests in Fylend I.N.C. reflected those
varied responsibilities. They were:
Caysand
83 32.5%
Mr Putna 25%
Mr
Lee 22.5%
Mr Cortis 20%
9. In April or May 1990 Mr Lewis approached Mr Brian Sheeran who was the Managing Director of Play and Stay Australia Pty Ltd ("Play and Stay") trading as Sunlover Cruises ("Sunlover") with a proposal for the total or partial sale of the company to a Japanese cruise operator, Nippon Yusen Kaisha ("NYK"). At an earlier time, Sunlover had advertised its two ships for sale and had entered an agreement to sell them to Willingale Limited ('Willingale'), a company incorporated in Jersey. Willingale agreed to sell the ships to Dectar Pty Ltd ('Dectar') which was to be the corporate vehicle for the joint venture between Mr Sheeran and NYK.
10. The arrangement was to be that NYK would purchase Mr Sheeran's interest for $14 million and Fylend I.N.C. would receive a commission of $800,000 for its role in brokering the "sale". Settlement ultimately took place in Canberra in October, 1990 and the commission was paid by Willingale to a solicitor's trust account on behalf of the Fylend I.N.C. interests.
11. Prior to the settlement several other companies had been incorporated or were in the process of being incorporated or purchased off the shelf in Hong Kong and the British Virgin Islands. Kam Sau Engineering Limited ('Kam Sau') was acquired by Siao and Wen, a Hong Kong firm of solicitors acting on the instructions of a Cairns firm of solicitors who acted for Fylend I.N.C., various of its shareholders and NYK in relation to the Sunlover sale. The beneficial owners of Kam Sau were initially Mr Lewis and his wife. Before the settlement of the Sunlover sale, however, share transfers were signed in order to transfer shares to Mr Cortis, Mr Putna and Mr Lee in it in proportion to their holdings in Fylend I.N.C. There is no evidence that the share transfers were ever registered. Tai Dragon Industries Limited ("Tai Dragon") was beneficially owned by Mr and Mrs Lewis, Taklin Developments Limited ("Taklin") was beneficially owned by Mr and Mrs Putna and Ko Fung Resources Limited ("Ko Fung") was in the process of being established for Mr and Mrs Cortis, but it had not been incorporated at the time of the settlement. International Network Consultants Limited ("INC Limited") was a British Virgin Islands company whose beneficial owners were Mr Lewis, Mr Lee, Mr Putna and Mr Cortis. INC Limited had a bank account established in Hong Kong by Siao and Wen. The interrelationship between these companies and the transfers of funds between them becomes apparent from the evidence set out below.
THE ISSUE
12. There were two issues in this case. The first was whether the sums of $160,000.00 in the case of Mr Cortis and $200,000.00 in the case of Mr Putna, or any part of those sums, was income within the meaning of the Income Tax Assessment Act 1936 ("Act"). If those sums are income, the second issue arises and that is whether they have been derived during the particular years of income.
13. If those sums are found to be income in the hands of the taxpayer and so assessable as income, the second issue becomes relevant i.e. whether a penalty should be imposed in view of its omission from the taxation returns of Mr Cortis and Mr Putna and, if so, the amount of that penalty.
THE EVIDENCE
14. I have summarised the evidence by reference to subject matter. In this section, I am aware that there are apparent inconsistencies but I have not attempted to reconcile them.
The management of Caysand No. 100 Pty Ltd
Mr Cortis
15. Mr Cortis said that he had first been employed as a commission salesperson at Raine & Horne, Cairns in either 1988 or 1989. Mr Lewis was the general manager of the office. Late in 1989 or early in 1990, Mr Lewis approached Mr Cortis to join him, Mr Lee and Mr Putna in a new real estate office. His role was to set up the computer network, produce sales material and circulate information to clients and potential clients. Mr Cortis said that he held a Real Estate Salesman's Licence but Mr Lewis was the company President and responsible for all of the sales in the office except one. That one sale was made by Mr Cortis and Mr Lee.
16. The shareholding in the company was: 32.5% held by Mr Lewis (Company President) through Caysand 83 Pty Ltd, 25% by Mr Putna (Office Administrator), 22.5% by Mr Lee (Licensee) and 20% for Mr Cortis (salesperson and computer support).
Mr Putna
17. Mr Putna said that he has a Bachelor of Arts degree majoring in accountancy and is also a Justice of the Peace. He said that he had been offered a position as a salesman in the Raine and Horne Real Estate agency in Cairns ("Agency") in 1987. That position was offered by Mr Lewis who said that he and Mr Fairbrother owned the Agency. Mr Fairbrother was in Sydney and Mr Lewis was the General Manager. A little later, Mr Putna said, Mr Lewis explained to him that he was an undischarged bankrupt who controlled his interests through a system of trusts set up by his solicitor. Mr Putna said that he understood that Mr Lewis's share of the purchase price of the Agency had been met, in part, by his forgoing his commission on the sale of a Cairns development site which had been sold to Mr Fairbrother's company immediately after the Agency changed hands. Further, it was his understanding, he said, that the purchase price had also been met, in part, by Mr Lewis forgoing a percentage of his future commissions on sales.
18. Mr Putna said that he later became the Administrator of the Agency. In that position, he was required to oversee the general office and property management. He felt relieved as he had not made any sales to that time.
19. Mr Putna, Mr Cortis, Mr Lewis and Mr Lee, then decided to pool the salaries that the first two received with the commissions the last two received on sales and share the total income received. That arrangement was followed, Mr Putna said, on all occasions except one when Mr Lewis wanted to purchase a particular house for $300,000. He used the commission he received on that occasion in purchasing that house.
20. Late in 1988, Mr Putna said, he contacted Mr Fairbrother's accountant to express concern about the expansion of the Agency from one office to three which had not been financed. Overheads had also escalated due to the advertising campaign which Mr Lewis would not curtail.
21. Mr Putna said that he went on holiday and returned to find that Mr Lewis was no longer working at the Agency but had established a separate real estate agency in Cairns. Mr Lee was with him as the licensee of the new agency. The furniture and equipment used in the agency had come from the Agency's premises. Mr Putna said that he continued to work at the Agency for another three weeks and then transferred to Caysand 100 with Mr Cortis.
22. Before he joined Caysand 100, Mr Putna said, agreements were reached amongst all of them as to the manner in which decisions would be made regarding the expenses of the company. The shareholding was agreed as Mr Lewis having 32.5% (held by a trust), Mr Lee 22.5%, Mr Cortis 20% and his own would be 25%. He confirmed that Caysand 100 had operated as "a triangle with Mr. Ken Lewis at the top" (minutes of meeting of Caysand 100, 17 February, 1990, T documents, page 46). It was also agreed that others would be at the top in different dealings but that, Mr Putna said, never occurred. Mr Lewis remained in charge at all times.
23. Many of the documents involving Caysand 100's dealings carried his signature, Mr Putna acknowledged, but said that this was so as he had been appointed as the administrator of the company. That had been agreed at their first meeting on 17 February, 1990 (T documents, page 45). He signed all of the documents as directed by Mr Lewis.
Mr Lewis
24. Mr Lewis said that he had been employed as a real estate salesperson between 1987 and 1989. He had been employed at the Agency where Mr Putna, Mr Lee and Mr Cortis were also employed. Mr Putna was the Agency's financial administrator, Mr Lee held the real estate agent's licence and Mr Cortis was a salesman. At that time, Mr Lee had operated the Agency's trust account in the name of Fylend Pty Ltd ("Fylend").
25. The agency was owned by Mr Geoff Fairbrother who was a part owner of Caysand 100. Caysand 100 was the administration company connected with a development proposal for the Trax Hostel site in Cairns. That site had been purchased by Fairbrother interests.
26. Mr Lewis said that a dispute ensued between Mr Fairbrother on the one side and Mr Lewis, Mr Putna, Mr Cortis and Mr Lee on the other. As a result of that dispute, Mr Putna, Mr Cortis, Mr Lee and a company called Caysand 83 purchased Caysand 100. They decided to continue to use Caysand 100 to operate the real estate agency.
27. Caysand 83 is the corporate trustee for the Trinity Beach Trust which is the Lewis family trust. Mr Lewis said that he used that vehicle to purchase part of Caysand 100 as he had been declared bankrupt on 15 February, 1988. Mr Cortis and another were the nominee shareholders of Caysand 83 at that time. Following Mr Lewis's discharge from bankruptcy, the nominee shareholders transferred their shares to Mr Lewis and his wife.
28. Eighty percent of Caysand 100's shareholding was divided equally among the shareholders. The remaining 20% was then divided to recognise their varying contributions. As a result, Caysand 83 held 32.5%, Mr Lee 22.5%, Mr Putna 25% and Mr Cortis 20%. Mr Lewis said that the variations in shareholdings reflected the various contributions made to the business by each of them: Caysand 83 had the greatest holding in recognition of Mr Lewis's being the major salesman at the Agency and his having created the greatest contacts; Mr Putna had the next largest in view of his being the financial administrator and his having contributed funds to the business; Mr Lee had the next in recognition of the fact that it was his licence which was being used; and Mr Cortis had a base share of 20%.
29. In his oral evidence, Mr Lewis said that he did make some decisions on his own but that the others would make decisions when he was not there. There were decisions which were made by Fylend I.N.C. with which Mr Lewis did not agree.
Documentary evidence
30. It was noted in the minutes of a meeting of Caysand 100 attended by Mr Lewis, Mr Cortis, Mr Putna, Mr Lee and the solicitor, that the directors of the company would be Mr Lee, Mrs Cortis, Mr Putna, Mr Paul Donnelly and the solicitor. The shares were to be issued in accordance with the proportions set out above. Mr Putna was to manage the office on a day to day basis and in accordance with the guidelines agreed upon amongst them. Every person was to accept his directions regarding office expenditure. All decisions relating to policy and budget had to be approved by the group. (T documents, pages 42-49)
31. Under the heading of "philosophy", the minutes recorded:
"The Chairman notes that this company was designed to operate on a professional basis within the true meaning of the word and accordingly it was necessary to define philosophy
IT WAS RESOLVED:-
Fylend I.N.C. Pty Ltd
Mr Putna
32. Mr Putna gave evidence that it was agreed that the name of Caysand 100 would be changed to Fylend I.N.C. and that it would trade as International Network Consultants. That name was chosen to maintain the continuity between the trading name and the name of the licensee Fylend Pty Ltd which was owned by Mr Lee. The name INC was chosen as it was thought to appeal to the Japanese market. Mr Lewis had previously established business relationships with a number of Japanese businessmen.
33. Mr Putna said that he was appointed as the administrator with responsibility for ensuring that the business of the agency was conducted in accordance with what they had agreed and that the trust account and property sales were properly managed.
34. In cross-examination, Mr Putna agreed that the brochure for INC described him as:
"A qualified accountant and an Australian Justice of the Peace, Rod handles all property management, administration and financial matters for INC. His responsibilities regarding the company's consultancy services are to provide for detailed feasibility studies for all development projects." (Exhibit 1, document 71)
Mr Putna described this document as a sales brochure given to prospective clients. He acknowledged that he was the only director who was described as having accounting qualifications and expertise in financial matters. He denied, however, that he undertook any accounting functions in INC. At most, he paid Inch's bills.
35. Mr Putna described various incidents in the management of the agency in which Mr Lewis made decisions about the management of the office and expenditure without consultation with the other shareholders. He felt that Mr Lewis was acquiring large amounts of disposable income which was not available to the others. The other shareholders did not explain, Mr Putna said, because "the business was Mr Lewis" (Exhibit A, paragraph 10).
Mr Lewis
36. In early 1990, all of the shareholders agreed to change the name of Caysand 100 to Fylend I.N.C. Pty Ltd. It was also decided that it would trade as International Network Consultants.
37. Mr Lewis said that it was his recollection that Mr Putna suggested the change of the company name. He also recollected that Mr Putna had suggested that the name of "Fylend" be retained as it had been used at the bank in the past. In using the name of Fylend, rather than that of Fylend I.N.C., Mr Putna thought that there could be some benefit as none of them, other than Mr Lee, was associated with Fylend. The other bank accounts were in the name of Fylend I.N.C.. The business of the Agency was conducted as before.
Documentary evidence
38. On 19 February, 1990, Mr Putna wrote to the solicitor to arrange the change of name from Caysand 100 to Fylend I.N.C.. He also asked that, as soon as Mr Perren had signed his resignation as a director and as a guarantor of debts prior to 14 January, 1990, Mr Cortis and Mr Lee be named as directors of Fylend I.N.C. from 14 January, 1990. (Exhibit 1, document 665)
39. At a meeting attended by Mr Putna, Mr Lee and Mrs Cortis, it was agreed that the name of the company was changed from Caysand 100 to Fylend I.N.C. and the Secretary was directed to file a Notice of Change of Name accordingly (T documents, page 50). That change was registered on 22 March, 1990 (Exhibit 8).
Kam Sau Engineering Limited
Mr Lewis
40. Mr Lewis said that he had decided to move to Hong Kong and establish a real estate business. In order to do that, he had established a company called Kam Sau Engineering Limited. This had taken place before the Sunlover sale.
Documentary evidence
41. Kam Sau was incorporated on 27 February, 1990 (Exhibit 1, documents 136 and 137). Siao and Wen acquired that company on the solicitor's instructions. Directors of the company were appointed and nominee shareholders held all of the company's shares on trust for Mr Lewis (Exhibit 1, documents 641, 643, 141 and 142). Siao and Wen opened a bank account in the name of Kam Sau (Exhibit 1, document 149).
Incorporation of International Network Consultants Limited
Mr Putna
42. Mr Putna stated that INC Limited never held any directors' meetings. The partners were simply told that they were all owners of the company. He agreed that his signature appeared on a document addressed to the Chekiang First Bank Ltd requesting it to open a deposit account in the name of International Consultants Ltd (T documents, pages 79-81). He also acknowledged that his signature appeared on a similar document relating to Kam Sau Engineering Limited (T documents, page 82).
Documentary evidence
43. By a letter dated 30 July, 1990, Mr Putna wrote to solicitors in Jersey, P.A. Hooper Valpy, and asked them to settle the sale of an Australian shipping business and to establish a firm called Fylend Pty Ltd trading as International Network Consultants. Stay and Play had transferred ownership of two ships to a Jersey company and it was that company which was the vendor of the ships to Dectar. (T documents, pages 56-57). Dectar was the company formed to purchase Sunlover Cruises. NYK had a two thirds ownership and Mr Sheeran one third (T documents, pages 52-54)
44. On 6 August, 1990, Mr Putna wrote to Siao and Wen referring to previous correspondence regarding the acquisition of a shelf company. The name of that company was to be changed to INC Limited. Siao and Wen confirmed that it had followed Mr Putna's instructions when it wrote to him on 10 August, 1990. Mr Putna said that he could not recall receiving that reply. (Exhibit 1, documents 3 and 4) A further letter from Siao and Wen followed on 19 September, 1990 advising Mr Putna that it would take nearly two months to incorporate a company in Hong Kong. Incorporation would occur much more quickly (within two days) if it were to be undertaken in the British Virgin Islands and the benefits were the same. (Exhibit 1, document 5)
45. Mr Putna wrote to Siao and Wen on 26 September, 1990 asking that International Network Consultants Ltd be incorporated in the British Virgin Islands and that a bank account be opened in the name of that company. (Exhibit 1, document 6) In his oral evidence he said that he did so on the instructions of Mr Lewis.
46. INC Limited was incorporated on 5 October, 1990 (T documents, pages 58-73). On 8 October, 1990, Mr Putna wrote to Siao and Wen advising that the beneficial owners of INC Limited were Mr Lewis, Mr Lee, Mr Cortis and himself. Mr Putna nominated the bank account to which funds for INC Limited were to be transferred in Hong Kong. (T documents, page 88 and Exhibit 1, document 29).
47. The first meeting of the directors of INC Limited was held on 9 October, 1990 in Cairns. It was attended by Mr Putna, Mr Cortis, Mr Lee and Mr Lewis and each was appointed as a director of the company. Shares were issued in the same proportion as they held the shares in Fylend I.N.C. (T documents, page 91).
48. A further meeting was held on 9 October, 1990 and was stated to have been attended by all of the directors. They resolved to open a bank account in the company's name in Hong Kong. It could be operated on the signatures of any two of the directors. (T documents, pages 92-93)
The Sunlover deal
Mr Cortis
49. Mr Cortis said that was not directly involved in the negotiations for the sale of Sunlover. Mr Lewis handled the sale with the assistance of Mr Putna and Mr Lewis's solicitor who was also the company's solicitor. Mr Lee and he attended to other matters in the office.
Mr Putna
51. In cross-examination, Mr Putna said that he had been unaware that Mr Lewis had forwarded to NYK a document outlining the services which INC could offer on a purchase of Sunlover (Exhibit 1, document 2). That document was dated 30 May, 1990 and he had not become aware of the sale of Sunlover until some time before 13 June, 1990. An agenda had been prepared for a visit by personnel from NYK on that day (Exhibit 1, document 1).
52. Mr Putna had said in giving his evidence that Mr Lewis introduced him to Mr Sheeran who was the owner of Sunlover and who wanted to sell it. That had happened in mid 1990. During their meeting, Mr Lewis requested a commission of $800,000.00 irrespective of the eventual purchase price. Mr Sheeran agreed and Mr Putna prepared all of the necessary documentation.
53. In cross-examination, Mr Putna said that the four partners did not discuss the commission at this stage. It was unlikely to eventuate and, in any event, Mr Lewis was always asking for large commissions which did not eventuate.
54. During a trip to Japan, Mr Putna said in giving his evidence, Mr Lewis presented Sunlover to a Japanese shipping company, NYK. NYK engaged Mr Lewis's solicitor and negotiations proceeded largely between that solicitor and those for Mr Sheeran. In the meantime, Mr Lewis became mistrustful of Mr Sheeran and suspected that he would try to avoid paying the commission.
55. Mr Putna said that Mr Lewis began to plan the expansion of INC by opening overseas' offices. In approximately June, 1990, he returned from a trip to Japan and announced that he had established an office in Osaka and another in Tokyo. Later, he announced that he had established a company in Hong Kong for Fylend I.N.C. and himself and said that the was going to reside there for most of the year. The remaining shareholders were to live in Cairns. Finance for the operation would come from the Sunlover sale. Mr Putna said that he and Mr Lee and Mr Cortis were not happy as they wanted to receive a share of the commission.
56. At one time, it was contemplated that settlement of the Sunlover sale would take place in Jersey. Mr Putna considered that was consistent with a proposal to use the commission to establish overseas' offices. As matters turned out, settlement ultimately took place in Canberra. Mr Lewis was increasingly concerned about his commission but he informed NYK of his concerns with the assistance of his solicitor. Mr Sheeran was advised that NYK would not proceed with the sale unless the commission was paid. NYK guaranteed that the commission would be paid. Mr Lewis advised that, in order to prevent any attempt to recover the money, it would be transferred offshore. The commission cheque was delivered to a Canberra bank while the settlement was in progress. It was paid to a solicitor's trust account and then to another in Hong Kong.
Mr Lewis
57. Mr Lewis said that he approached NYK in late 1989 and early 1990 in an attempt to gain business. His initial negotiations to purchase property on NYK's behalf were unsuccessful but Mr Lewis said that he then became aware that Stay and Play Australia Pty Ltd ("Stay and Play") was in serious financial difficulty. Stay and Play traded as Sunlover Cruises and was for sale. Mr Cortis and Mr Lee made the initial enquiries with Mr Sheeran, the Managing Director of Stay and Play, but then withdrew from the negotiations.
58. Mr Lewis said that Mr Putna took over the financial side and Mr Lewis had responsibility for the collection of data to present to NYK as a possible purchase. Mr Lewis also said that he had discussions with Mr Sheeran. During those conversations, a sale price of $14 million was mooted together with a commission on the sale of $800,000.00. That price of $14 million was the sale price which Mr Lewis presented to NYK. Negotiations followed over the next three or four months. Early in 1990, NYK agreed to purchase Stay and Play for $14 million. A contract of sale was prepared by Mr Lewis's solicitor, who had been engaged by NYK as its solicitor, and Mr Stevens, who was Stay and Play's solicitor.
59. In the meantime, Fylend I.N.C. trading as International Network Consultants negotiated with Stay and Play that it would pay a commission of $800,000.00 on completion of the sale of Sunlover. Mr Lewis's solicitor, Mr Putna and a member of the solicitor's staff prepared a written agreement as to the commission of $800,000.00 to be paid by Play and Stay. That agreement was prepared pursuant to section 70 of the Auctioneer and Agents Act 1971 (Qld).
Documentary evidence
60. Various documents relate to the course of negotiations between NYK and Mr Sheeran. Those documents indicate that a cheque for $800,000.00 was deposited on 9 October, 1990 to the trust account of Canberra solicitors to the credit of INC Limited (Exhibit 1, document 711).
61. A letter dated 9 October, 1990 on the letterhead of INC Limited asked the Canberra solicitors to transfer the funds, less their charges, to the trust account of Siao and Wen (Exhibit 1, document 30). That sum was transferred in two transactions and the transfer was completed on 17 October, 1990. (Exhibit 1, documents 697, 698 and 712)
Dealing with the commission
Mr Putna
62. Mr Putna agreed in cross-examination that he had written to Siao and Wen on 3 October, 1990 regarding the commission to be paid to INC Limited in the following week. The fee was to be paid into a Sydney solicitors' trust account in the name of INC Limited. Siao and Wen were instructed to instruct the Sydney solicitors to transfer the funds to their trust account. (Exhibit 1, document 19) Mr Putna said that he wrote the letter at the direction of Mr Lewis. He also wrote a further letter to the Sydney solicitors dated 3 October, 1990 regarding the transfer of the commission and this was followed by replies to him from those solicitors dated 4 October, 1990 (Exhibit 1, documents 22, 23 and 24). He wrote again to those solicitors on 4 October, 1990 (Exhibit 1, document 25).
63. When the location of the settlement was changed from Sydney to Canberra, Mr Putna entered into correspondence with Canberra solicitors whom he had engaged to protect the interests of INC Limited (Exhibit 1, document 26).
64. Mr Putna said that he had written all of the letters at Mr Lewis's direction. He agreed that Mr Lewis refused to sign any documents but denied that he was just providing a facade behind which Mr Lewis could operate. Mr Putna said that he signed the letters as it was his job to do so as the administrator.
65. Mr Putna denied that he had prepared a letter dated 9 October, 1990 from INC Limited to the Canberra solicitors. That letter directed the solicitors to transfer the funds which they held in their trust account to the trust account of Siao and Wen where it would be held in the name of INC Limited. (Exhibit 1, document 30) It had been prepared, Mr Putna said, by Mr Lewis. He denied that the facsimile cover sheet indicating that the letter had been forwarded by him had anything to do with that letter.
66. In cross-examination, Mr Putna confirmed that it was his understanding that, on 10 October, 1990, the sum of $800,000.00 was to be declared as income of Fylend I.N.C. in Cairns. The sum of $200,000.00 to be returned to Fylend I.N.C. was to be used to pay Fylend I.N.C.'s tax on the $800,000.00 which would be declared as part of its taxable income for the financial year 1990/91. He said that it was also to be used to offset general running costs of Fylend I.N.C..
67. When the establishment of the Hong Kong office was postponed, the remaining $600,000.00 was loaned to the partners in proportion to their shareholdings. Mr Putna said that he understood that the money was loaned to each of them on the basis that the funds had to be invested in real estate, three of the four partners could request that the loans be repaid and that the loans were to be returned when required by INC Limited to establish an office in Hong Kong.
68. The change in their plans to establish an office in Hong Kong occurred some weeks before the settlement of the Sunlover sale. When asked why there was any need for the money to be sent to Hong Kong when that decision had already been made, Mr Putna replied that it had been sent because that was what Mr Lewis had wanted. Mr Lewis, he continued, did not trust the vendor and he wanted to put it beyond any legal action for its recovery.
Mr Lewis
69. Mr Lewis said that there were various discussions amongst the four of them as to what should be done with the commission of $800,000.00. He said that he had suggested the purchase of a building to secure their future but that did not meet with general agreement.
70. Mr Lewis said that Mr Putna had proposed a scheme which he recounted in his statement in the following way:
"15. At one meeting, Mr Putna told the rest of us (Mr Lee, Mr Cortis and myself) that he had a scheme. I clearly remember Mr Putna holding up two twenty cent coins and one ten cent coin in one hand, and a one dollar note in his other hand. I recall this because Mr Putna borrowed the coins from me. Mr Putna then referred to the one dollar note and said words to the effect that this is what the four of us were going to get 800,000 times over. He then referred to the coins held in his other hand and said words to the effect that this is what the four of us would get 800,000 times over after the tax man had got his share.
71. Mr Lewis said that they all agreed to implement this scheme and all expressed an opinion on it and had some input into it even though it was Mr Putna's idea. Mr Putna instructed Mr Lewis's solicitor who warned them that what they were doing was highly illegal. Despite his warnings, they proceeded to implement the idea. They received similar warnings from their accountant.
72. When they were about to receive the commission the realised that there was nowhere to place it. Consequently, Mr Lewis offered his company Kam Sau as a place in which to hold the money. In order to alleviate the fears generated in the others by virtue of his having the controlling interest in Kam Sau, Mr Lewis signed share transfers to Mr Lee, Mr Putna, Mr Cortis and his wife and himself through Caysand 83 in the same proportions as their respective holdings in Fylend I.N.C.. Mr Lewis understood that the share transfers have not been registered.
73. Mr Putna, Mr Lewis said, arranged with Siao and Wen for other companies to be established or purchased of the shelf to carry out the scheme: Taklin Development Limited, Ko Fung Resources Limited and Tai Dragon Industries Limited in Hong Kong; INC Limited in the British Virgin Islands; and Fylend I.N.C. in Australia. Mr Putna, said Mr Lewis, had responsibility for the day to day operation of the companies. That required him to undertake the banking, maintain financial statements and minutes of directors' meetings and implement office procedures. A further company, INC Limited was established in the British Virgin Islands. The shareholding in that company was the same as that in Fylend I.N.C..
74. In cross-examination, Mr Lewis agreed with Mr King that the arrangements which he made in Hong Kong began with his visit to the offices of Siao and Wen in August, 1990. That visit was the subject of a letter written by Siao and Wen to Mr Putna on 19 September, 1990 and referred to the incorporation of (Exhibit 1, document 5). He did not, however, agree with him that those arrangements had anything to do with Fylend I.N.C.. Rather, those arrangements concerned his re-locating to Hong Kong.
75. Equally, Mr Lewis said, the commission of $800,000.00 did not determine his location. He had commissions pending from other sales. This was so even though Fylend I.N.C. had shown an operating loss before tax of $21,074.00 in the financial year ending 30 June, 1991 (Exhibit 1, document 73).
Documentary evidence
76. A handwritten note signed by Mr Lee on 11 October, 1990 and headed "Meeting INC Partners" stated that:
"(1) All parties agreed not to investigate the share purchase in NYK.
(2) All parties agreed to draw down the total amount $800K. to be distributed proportion.
(3) The partners agreed to loan the company the amount of $50K each." (Exhibit 1, document 797)
Settlement of Sunlover sale
Mr Lewis
77. Mr Lewis said that the settlement of the Sunlover sale took place in the offices of Canberra lawyers. It was attended by Mr Lewis, Mr Sheeran from Stay and Play, Mr Sheeran's brother and girlfriend, Mr Sheeran's solicitor, Mr Lewis's solicitor and Ms English, a solicitor with his firm, directors and representatives of NYK, the Canberra lawyers and a representative from Westpac Bank.
78. Mr Lewis said that he continually telephoned Mr Putna during the day to let him know what was going on, to take instructions from him and to let him talk to the Canberra lawyers.
79. Difficulties arose on the morning of the settlement when it was discovered that there were no arrangements to pay the commission of $800,000.00 into the account of INC Limited. This was overcome by Mr Lewis's speaking to Mr Sheeran's solicitor. Later in the day, Mr Lewis received a bank cheque made out to International Network Consultants. That cheque, Mr Lewis said, he gave to the Canberra lawyers.
Distribution of the commission
Mr Cortis
80. After the sale of Sunlover, Mr Cortis said, Mr Lewis said that he was going to use the proceeds of the sale to establish an office in Hong Kong and that he and his family would move to Hong Kong to run it. The others were to remain in Cairns. Mr Cortis said that he and the others were dissatisfied with the manner in which Mr Lewis had been making decisions and spending without consultation with them or explanation to them. There was some heated discussion amongst them all before it was decided that the Hong Kong office would be deferred, $200,000 would be brought back to Fylend I.N.C. for its running costs and the remainder divided according to their shareholding in the company.
81. Mr Lewis returned from Hong Kong to tell them that bank accounts could not be established for them there as they were not residents. A company would have to be established for each of them so that the funds could be transferred to bank accounts opened by the companies. Mr Lee did not need to make those arrangements as he could use the bank account of a relative. They agreed with this proposal. It was also agreed that, if a majority of the shareholders agreed to open a Hong Kong office, the funds were to be returned.
82. Mr Cortis said that he used his share to purchase a house and marina berth. He thought that he would be able to sell these assets should the time come to invest in Hong Kong.
Mr Putna
83. Mr Putna said that Mr Lee, Mr Cortis and he became increasingly concerned about the expenditures made by Mr Lewis, his inability to explain them and his creation of certain companies. Matters came to a head and they agreed that $600,000.00 would be distributed to the shareholders in proportion to their individual shareholding in Fylend I.N.C., provided always that the distributions would be returned when and if it was required to establish a Hong Kong office. Only $600,000.00 was to be shared as the remaining $200,000 would be returned to Fylend I.N.C. for operational expenses.
84. Mr Lewis came to them with a list of company names which had been supplied to him by Siao and Wen, solicitors in Hong Kong. He told them that each had to have a company in Hong Kong so that the company could establish a bank account to which each share of the $600,000.00 could be transferred to that account. Mr Putna said that, as the company administrator, he willingly assisted in providing Siao and Wen with all of the necessary details to enable the money ultimately to be transferred to them. Mr Lee did not need a company as he had a relative who permitted the funds to be transferred through his account.
85. Mr Putna's share of the commission amounted to $150,000.00. The bulk of that sum was transferred from the Chekiang Bank (Siao and Wen's bankers) to the solicitor's trust account in Cairns. He used it to purchase real estate in Cairns.
86. In cross-examination, Mr Putna said that the decision to deal with the commission in the manner he had described was made some weeks before the settlement of the Sunlover sale. It had been Mr Lewis's decision to do so as he was mistrustful of the vendor. He wanted to put it beyond recovery by the vendor in any legal action.
87. An unsigned letter was sent on the letterhead of International Network Consultants to Mr Lewis. It was also marked for the attention of Mr Cortis. (Exhibit 1, document 39) The letter began:
"[1] I have just spoken to Carson Wen re the transfers of the funds and he assures me that there is a secrecy act covering the actions of his firm and their trust account. The result is that it will be impossible for anyone to obtain details of movements of moneys within his Trust account.
[2] I now suggest that we avoid the transfer to the bank account for the International Network Consultants Ltd and transfer from the Siao and Wen Trust Account AUD$200,000 direct to Kam Sau Ltd and from there to 'Fylend INC Pty Ltd T/A International Network Consultants, Cash Management Account' [Westpac Bank Lake St Cairns Act No.390996]
We should put it firstly into Kam Sau Ltd so as to firmly establish the Loan from that company to ours. Kam Sau Engineering Ltd Bank Account is 09-12-17884-9 Chekiang First Bank Ltd Kowloon Branch. [contact Ms Ho.]
[3] The other funds you should leave in Saio & Wen Trust account and transfer direct to the individual company account when the bank account for each individual has been established." (Exhibit 1, document 39)
The letter went on to discuss a possible cause of action against the Canberra solicitors due to changes in the exchange rate between Hong Kong and Australia between the two transfers of portions of the commission.
88. Mr Putna denied that he had written the letter. He said that it was possible that Mr Lewis's solicitor had written it. The solicitor was always walking into their offices. He agreed that the solicitor did not help himself to the paper and the petty cash but that he did help himself to the cakes and biscuits. The solicitor regularly wrote letters for Mr Lewis.
89. When asked why the author of the letter would suggest a loan from Kam Sau, Mr Putna said that Mr Lewis might have wanted to do that as Kam Sau was his company. He could see no reason to disguise the sum as a loan. There was no need for pretence and it did not matter how the money came back as long as it came back for running expenses.
90. Mr Putna said in evidence that he had never previously seen an undated document headed "Deed of Loan" between Kam Sau and Fylend I.N.C. (Exhibit 1, document 49). He said that the document had been prepared after he and Mr Cortis had left Fylend I.N.C. as had a draft document evidencing a loan and dated 22 August, 1990 (Exhibit 1, document 52), another dated 14 September, 1990 (Exhibit 1, document 152 and see also documents 153, 155 and 156).
91. Mr Putna agreed that the balance sheet prepared for Fylend I.N.C. as at 30 June, 1991 showed a non-current liability of $202,411.00 to Kam Sau. It was described as a loan from Kam Sau. (Exhibit 1, document 73). That balance sheet had, Mr Putna said, been prepared after he had left Fylend I.N.C.. He knew that the sum shown was not a loan. Although the accounts had been signed off on 30 October, 1991 and so five days after his resignation, he said that in the months prior to his resignation he had spent only two hours in the office. For the rest of the time, he had been working for Sunlover.
92. In cross-examination, Mr Putna said that the loans made to each partner were not evidenced in writing. That did not arise as they were all partners and all were working together. Mr Putna said that he believed that he and his wife each held the beneficial ownership of one of the two shares in Taklin (Exhibit 1, document 720). When asked whether he had control over the funds of Taklin, Mr Putna replied that he had control of its bank account (Exhibit 1, document 188). Taklin Development was created so that he could have a bank account. Mr Lewis created it for that purpose. He was the beneficial owner of the funds held by Taklin but he was not Taklin's controller. The money paid to Taklin Development was a loan and he said that he did not know from which money Mr Lewis had created the funds. It was a loan from funds which had been intended for use in the establishment of the Hong Kong office. It was always the money of Fylend I.N.C..
93. Mr Putna agreed in cross-examination that he wrote a letter dated 20 April, 1992 to Taklin Development stating:
"I note from the loan agreement that interest is not due to be paid until October of 1992.
In this regard I wish to amend the agreement by an early payment of interest in May 1992.
Please determine and advise if this variation is acceptable to Taklin Develolpment Ltd.
Naturally I assume that this interest payment will be taken into consideration when calculating future interest charges." (PT documents, page 251)
94. Mr Putna said that he doubted that the letter had been sent as it had not been signed. He did not know the purpose of the letter. At about that time, he had heard that Mr Lewis was trying to get the money back. He did not know why he had inserted the first paragraph as there was no formal loan agreement. Mr Putna denied that the sole purpose of the letter was to create the impression that there was a loan from Taklin Development to him. It could not have been created with that purpose in mind, said Mr Putna, as the letter did not go anywhere. He did not know, however, why it had been generated and a copy made if it was not intended to go anywhere in the first place. Mr Putna did not know what his intentions had been on 20 April, 1992. He rejected Mr Hack's suggestion that the letter would explain the basis on which he had received the money were the Australian Federal Police or the Australian Taxation Office ever to seize documents. Mr Putna said that he never believed that either would raid the house.
95. Mr Putna identified a document stating that an interest in a Trinity Beach property had been purchased on 30 November, 1990 from funds borrowed from Taklin (PT documents, page 254). Interest on the loans had been paid in February, 1993 from funds which had been borrowed from the Commonwealth Bank. He said that the document was written in his handwriting. While the document stated that the money had been borrowed from Taklin, Mr Putna said that he had always said that there had been no loan agreement. The document may have been written because he had heard in passing that Mr Lewis was trying to force them to repay the money. He would have heard that at about the time he wrote the letter on 20 April, 1992.
96. In cross-examination, Mr Putna said that he had paid interest on the loans. He had done so by transferring money to a bank account should Mr Lewis ask for it. Mr Putna said that he attempted to send $20,000.00 or $25,000.00 but Mr Lewis refused to talk to him. He attempted to send it to Taklin's account in Hong Kong.
97. The amount which he sent could have been the sum of $16,000.00 borrowed as a Home Improvement Loan from the Commonwealth Bank on 9 February, 1993 (PT documents, page 255). A handwritten note on the bank's letter noted that the purpose of the loan had been to pay the interest due on the loan which had been used to purchase the Trinity Beach property and repay the amount outstanding on another loan. In doing so, the effective interest rate would be reduced and better terms would be obtained.
98. After unsuccessfully attempting to give Mr Lewis the money, Mr Putna said, he brought the money back to Australia and spent it. He did not know how long the money had been in Hong Kong or when he brought it back. Mr Putna could not say when he asked for it to be returned. It might have been that he gave instructions to the bank as to its return at the same time as he sent the money. By the time that the money arrived in Hong Kong, he knew that Mr Lewis was not talking to him. Mr Putna said that "things must have happened" before he sent the money. When asked why he had sent the money at all in that case, he replied that he had been committed to doing it and had already given the bank instructions to send it. When asked why he had not countermanded his original instructions, Mr Putna said that he could possibly have done so but was working for Sunlover at the same time.
99. When the money was returned, he spent it on re-building the kitchen as he "had to". Mr Putna denied that he had lied to the bank in applying for a home improvement loan. He had requested a home loan, he said, with the house as security so that he could obtain a lower interest rate. When asked what he had told the bank of his purpose in applying for the loan, Mr Putna replied that he thought that his wife had seen the bank and then that he did not know who had seen the bank. At the time he had applied for the loan, he intended to send the money to Hong Kong but doubted that he told the bank of his intention. Ultimately in cross-examination, Mr Putna said that he had told the bank that he wanted to improve the home; he wanted to pay the interest.
100. Mr Putna said that he did not recall a meeting at which he had held up a $1 coin, which he said represented $800,000.00, and a 50 cent coin, which he said represented the commission they would receive if the ATO were involved. He did not recall explaining that the commission could be sent offshore and no tax would be payable. Mr Putna said that he did not recall their solicitor saying that it was illegal. He rejected the suggestion that he was the "brains behind the scheme".
101. Mr Putna rejected the suggestion that the sum of $200,000.00 lent by Kam Sau to Fylend I.N.C. represented the sum of $50,000.00 for each of the four of them. The money was transferred in order to pay bills. He rejected the suggestion that each had invested that sum in order to keep the company running. It was, he said, to maintain a positive cash flow.
Mr Lewis
102. Mr Lewis said that he, Mr Putna, Mr Cortis and Mr Lee had decided to divide the commission in a way which reflected their shareholding in Fylend I.N.C.. The commission had to be dealt with in a manner in which its source could not be traced. That meant that "the chain had to be broken". He said that his instructions were to take the commission in cash in order to "break the chain". This had been Mr Putna's express instruction, he added.
103. In order to implement the scheme, Mr Lewis said in his statement, he and Mr Cortis flew to Japan and Hong Kong two days after the settlement. They visited clients in Japan, including NYK. In Hong Kong, Mr Lewis met with solicitors and then withdrew from INC Limited's account with the Chekiang First Bank the entire commission monies in cash in Hong Kong dollars. This accorded with Mr Putna's instructions, he said. Mr Lewis then arranged to deposit the money in the bank accounts of the various Hong Kong companies which had been created for them.
104. Mr Lewis said that his share of $209,000.00 was deposited in the bank account of Tai Dragon. He had not realised at the time that he still owned Kam Sau as he thought that it was now owned by Fylend I.N.C. or by all four men. Mr Lewis said that a further sum of $106,000.00 was paid into the account of Tai Dragon. That represented a portion of Mr Cortis's share of the commission and was paid into that rather than into Ko Fung (which was Mr Cortis's company) as that company had not then been established. That money was later transferred back to Mr Cortis in Australia.
105. Mr Lewis said that Fylend I.N.C. was starting to run short of funds. Consequently, Mr Putna suggested that each of the four of them contribute $50,000.00 to Fylend I.N.C. from his share of the commission. The money would be sent first to Kam Sau to "break the chain" and then lent from Kam Sau to Fylend I.N.C.. A high rate of interest was charged as Fylend I.N.C. could claim a tax deduction for that interest. At all times, Messrs Cortis, Putna, Lee and he considered the $50,000.00 which each had contributed as his own money.
106. In cross-examination, Mr Lewis said that he did not think that the Deed of Loan for $200,000.00 between Kam Sau and Fylend I.N.C. had ever been executed (Exhibit 1, document 49). There were other drafts of such deeds but they too had not been executed to his knowledge, Mr Lewis said (Exhibit 1, document 50). There had, however, been a loan of $200.000.00 from Kam Sau.
107. Mr Lewis agreed with Mr King that the balance sheet for Fylend I.N.C. for the financial year ending 30 June, 1991 showed a loan from Kam Sau to it of $202,411.00. Mr Lewis said that the accounts had been prepared by Mr Putna whom he and his wife had trusted.
108. Mr Lewis identified a letter dated 21 October, 1991 from Kam Sau to Fylend I.N.C. as a letter which had been prepared by Mr Putna. The letter concluded with the signature block "C.H. Tan" and appears to be signed in Chinese characters. The letter states that Kam Sau could not forgive the debt in return for the company shares offered to him. Instead, it agreed to waive all interest payments on the loan in return for a 25% interest in Fylend I.N.C.. The principal of the loan would still have to be paid but Kam Sau would direct work to the company. (Exhibit 1, document 398)
109. Mr Lewis said that Mr Putna had also written a second letter with the same date to Mr Lewis (Exhibit 1, document 399). In that letter, Kam Sau said that Mr Lewis's arguments had been most convincing and that the debt of $200,000.00 was now forgiven together with all interest accrued, provided that certain shares in Fylend I.N.C. were transferred to Kam Sau, Kam Sau was given the option of purchasing 25% of any future share issues at face value and that Mr Lewis personally represented Kam Sau's interests at board meetings of Fylend I.N.C..
110. Mr Lewis said that he had written a letter himself to Mr Tan of Kam Sau dated 7 June, 1993 (Exhibit 1, document 400). That was to continue the paper trail set by Mr Putna. It reported on the company's progress and responded to the letter from Kam Sau dated 31 May, 1993. In that letter, Kam Sau had written that it no longer wished to hold shares in Fylend I.N.C. and that it wanted to transfer them back. In the meantime, it would not recall the loan and Fylend I.N.C. could offset its debt to Kam Sau by continuing to do any work it referred (Exhibit 1, document 402). Kam Sau stated that it had returned the executed share transfers in its letter of 14 June, 1993 (Exhibit 1, document 403).
Documentary evidence
111. On 16 October, 1990, a letter was written on INC letterhead to advise Siao and Wen that two new companies were required: one in which the shares were held in trust for Mr and Mrs Cortis and one in which the shares were held for Mr and Mr Putna. The letter went on to notify Siao and Wen that Mr Lewis would arrange to transfer funds held in the account of INC to be transferred to Kam Sau. From that account, he would arrange for:
"(a) AUD$200,000 to be transferred to Australia the Westpac Bank Lake Street Cairns
account no. 034-612:39-0906
International Network Consultants Cash Management Account.
(b) Of the remaining funds; 25% is to be transferred to the Bank Account of the company created for Mr. & Mrs. Putna.
(c) 20% is to be transferred to the Bank Account of the company created for Mr. & Mrs. Cortis.
(d) 22.5% is to be transferred to your trust account and then to await instruction from John Bottoms of Bottoms Davies Nash Solicitors.
(e) 32.5% is to be transferred to the Bank Account of TAI Dragon Industries Limited for Mr. Lewis." (CT documents, page 75)
112. Mr Putna's name appears in typed form on a letter to Siao and Wen on 16 October, 1990 (PT documents, pages 70-71). In cross-examination, Mr Putna denied that he had sent the letter as it was not signed. At that time, Mr Lewis would have been in Hong Kong.
113. That letter noted that $800,000.00 had been transferred to the solicitors' trust account and asked that they transmit it to the bank account of INC in Hong Kong. He said that Mr Lewis and Mr Cortis were to arrive in Hong Kong on 21-22 October, 1990 and would attend to the creation of two new companies and to the transfer of the money from the bank account of INC Limited. The names of the two companies which were to be created were unimportant. The shares in the first company were to be held on trust for Mr and Mrs Cortis. Those in the second were to be held on trust for Mr and Mrs Putna.
114. A facsimile sent on the letterhead of International Network Consultants in the name of Mr Putna and dated 17 October, 1990 advised that only part of the funds had been transferred. The remainder would follow. (Exhibit 1, document 36) Siao and Wen acknowledged receipt of the balance of the funds on 18 October, 1990 (Exhibit 1, document 37).
115. Siao and Wen made arrangements and, on 19 October, 1990, Seconom Limited and Stutterham Limited declared that the single shares each held in Taklin Development Limited ("Taklin") were held in trust: one for Mr Putna and the other for Mrs Putna. On the same day, similar declarations of trust were made in respect of Mr and Mrs Lewis in shares held in Tai Dragon Industries Limited ("Tai Dragon") and in respect of Mr and Mrs Cortis in Ko Fung Resources Limited ("Ko Fung"). (Exhibit 1, document 720).
116. Mr Putna advised Siao and Wen that $200,000.00 was to be transferred to the INC cash management account in Cairns. The remaining funds were to be transferred to each of the bank accounts opened for the companies created for Mr and Mrs Putna, Mr and Mrs Cortis and Mr Lewis and to Siao and Wen's trust account. The funds were to be transferred in proportion to the shares each held in Fylend I.N.C..
117. On 22 October, 1990, Mr Putna signed a letter on INC letterhead and addressed to Siao and Wen. Mr Putna advised Siao and Wen that Mr Cortis, who was then in Hong Kong, would arrange for the transfer of $797, 026.29 from their trust account to that of INC Limited. The balance would be transferred to Kam Sau. Mr Putna noted that it was the intention to transfer the bulk of the funds back to Australia. (Exhibit 1, document 38)
118. A letter from Siao and Wen dated 24 October, 1990 was addressed to the Chekiang First Bank Ltd. It directed the bank to uplift funds held in deposit, transfer the funds to its account and then, after conversion into Australian dollars, to transfer the money to accounts as follows:
. $209,033.54 to Tai Dragon;
. $106,994.94 to Tai Dragon;
. $146,846.25 to Taklin;
. $129,330.92 to Mr Lee; and
. $200,000.00 to Kam Sau. (Exhibit 1, document 41)
119. On the same day, $200,000.00 was sent by telegraphic transfer to a cash management account held by Fylend I.N.C. with Westpac in Cairns (Exhibit 1, document 167). It was received on 25 October, 1990 (Exhibit 1, documents 166, 763 and 858).
120. On 12 November, 1990, Mr Putna wrote to Siao and Wen and enclosed a signed and sealed authority to transfer funds and duly authorised nominee forms from himself and his wife in relation to Taklin. He also asked that all four be listed as directors of INC Limited and as signatories of the bank account and that all four be listed as shareholders of Kam Sau and signatories of the account. (Exhibit 1, document 42)
121. On 17 December, 1990, the sum of $80,000.00 was telegraphically transferred from Tai Dragon to the solicitor's account in Cairns on behalf of Caysand No. 139 Pty Ltd ("Caysand 139") (CT documents, page 219). Caysand 139 had two issued shares of which one was held by Mr Cortis and one by Mrs Cortis (CT documents, pages 229-231). The sum of $27,000.00 was transferred from Ko Fung to the solicitor's trust account from Ko Fung on 10 May, 1991 (CT documents, pages 233-235). A file note indicated that instructions had been given to the solicitor to prepare a loan agreement between Ko Fung and Mr and Mrs Cortis but no action was taken (CT documents, pages 236-237).
Events after the sale of Sunlover
Mr Cortis
122. Mr Cortis said that he was concerned about Mr Lewis's dominating ways. He had seen them before when they had led to Mr Lewis's bankruptcy. At that time, he had, as Mr Lewis's brother in law, given him money to help support his young family. After the Sunlover deal they had a heated argument and Mr Lewis demanded Mr Cortis's resignation. Mr Cortis agreed to sell his shares to Mr Lewis in exchange for the price of the computer which he, Mr Cortis, had brought to the company.
123. Mr Cortis said that he believed that he had resigned in June, 1991 but that it took until August for Mr Lewis's solicitor to advise him that the transfer of shares had been completed. The company extract from Fylend I.N.C. shows that Mr Cortis ceased to be a director on 25 October, 1991 (Exhibit 8).
Mr Putna
124. Mr Putna said that he worked primarily on the affairs of Sunlover by establishing their management and accounting systems. Mr Cortis told him that he wanted to leave Fylend I.N.C. and asked for his assistance. His main concern was the dictatorial conduct of Mr Lewis and his ideas for expansion. Mr Cortis, said Mr Putna, sold his shares to Mr Lewis for 2 or 3 thousand dollars. The company extract shows that Mr Putna resigned as a director of Fylend I.N.C. on 25 October, 1991 (Exhibit 8).
125. Mr Putna said that he was dismissed from Fylend I.N.C. and another employee, engaged by Fylend I.N.C. without his knowledge, presented to Sunlover as his replacement. That employee was rejected and Mr Putna was engaged by Sunlover. Mr Putna resigned as a director of Fylend I.N.C. and sold his shares to Mr Lewis or one of his companies in return for an assurance that Mr Lewis would not interfere in his work with Sunlover, and would return a laptop computer and a modem.
126. Some time later, Mr Putna said that he heard that Mr Lewis wanted to recall some of the monies which he and Mr Cortis had received. He tried to contact Siao and Wen but his calls were not returned and his correspondence unanswered.
127. Mr Putna said that he had viewed documents purporting to establish the sum of $200,000.00 returned to INC as a loan. He understood from Mr Lee that he, Mr Lee, had been instructed by Mr Lewis to sign those documents as licensee.
Mr Lewis
128. Mr Lewis said that, after their return from Hong Kong and Japan, Fylend I.N.C. began to run short of funds. This was caused by the costs of the trips, the salary of $500.00 which each man was drawing each week and the general operating costs of the company. Mr Putna, Mr Lewis continued, suggested that each of the four should give $50,000.00 to Fylend I.N.C.. That would be paid from the commission each had received. The money was paid to Kam Sau in order to "break the chain". It was then lent to Fylend I.N.C. at a high rate of interest. Fylend I.N.C. claimed the interest payments as a tax deduction. Mr Lewis said that each regarded the $50,000.00 he gave to Kam Sau to be his own money. It did not become that of Kam Sau.
LEGISLATIVE FRAMEWORK
129. Pursuant to section 17 of the Income Tax Assessment Act 1936 ("the Act"), taxation is payable at the rates levied by Parliament in respect of each financial year from 1 July, 1964 until 30 June, 1997. That taxation is payable on taxable income derived during the year of income by any person, whether a resident or a non-resident. The expression "taxable income" is defined in part and so far as it is relevant to this case as "the amount remaining after deducting from the assessable income all allowable deductions" (paragraph (a) of the definition in sub-section 6(1AA)).
130. "Assessable income" means all the amounts which are included in assessable income under the provisions of the Act. In that regard, several sections are relevant. The first is sub-section 25(1) which provides that:
"The assessable income of a taxpayer shall include -
(a) where the taxpayer is a resident -
the gross income derived directly or indirectly from all sources whether in or out of Australia; and
(b) where the taxpayer is a non-resident -
the gross income derived directly or indirectly from all sources in Australia,
which is not exempt income, an amount to which section 26AC or 26AD applies or an eligible termination payment within the meaning of Subdivision AA."
131. There was no suggestion in this case that the amounts in issue are exempt income, amounts to which either section 26AC or section 26AD applies or that it is an eligible termination payment.
132. The second section to which regard needs to be had is paragraph 26(e):
"Subject to section 25B, the assessable income of a taxpayer shall include -
...
(e) the value to the taxpayer of all allowances, gratuities, compensations, benefits, bonuses and premiums allowed, given or granted to him in respect of, or for or in relation directly or indirectly to, any employment of or services rendered by him, whether so allowed, given or granted in money, goods, land, meals, sustenance, the use of premises or quarters or otherwise ..."
133. The sub-section then goes on to exclude certain payments. The only exclusion which is relevant is sub-paragraph 26(e)(iii) which excludes:
"an amount that, under any provision of this Act, is deemed to be a dividend paid to the recipient".
134. Section 25B is concerned with certain amounts paid, received or applied during the financial year ending 30 June, 1998 and is not relevant in this case.
135. The third section of relevance is section 47 and particularly sub-section 47A(2) which provides that:
"Where:
(a) the business of a company has been, or is in the course of being, discontinued otherwise than in the course of a winding up of the company under any law relating to companies;
(b) in connexion with the discontinuance, any moneys of the company have been or other property of the company has been, on or after 19 October 1967, distributed, otherwise than by the company, to shareholders of the company; and
(c) the moneys or other property so distributed are not, for the purposes of this Act, dividends;
the distribution shall, subject to subsection (2B), be deemed to be, for the purposes of this section, a distribution to the shareholders by a liquidator in the course of winding up the company."
136. Finally, section 108 has been referred to by the parties. In essence, it deems certain amounts paid by a company to associated person by way of an advance or a loan to be dividends paid by the company out of its profits to that person.
137. The term "income" is not defined in the Act but the terms "income from personal exertion" and "income derived from personal exertion" are defined to mean, in part:
"... income consisting of earnings, salaries, wages, commissions, fees, bonuses, pensions, superannuation allowances, retiring allowances and retiring gratuities, allowances and gratuities received in the capacity of the employee or in relation to any services rendered, the proceeds of any business carried on by the taxpayer either alone or as a partner with any other person, any amount received as a bounty or a subsidy in carrying on a business ..." (sub-section 6(1))
The term "income from property is defined to mean "all income not being income from personal exertion" (sub-section 6(1)).
138. The term "income" been considered in a great number of cases. The width attributed to its meaning is apparent from the words of Jordan CJ:
"The word `income' is not a term of art, and what forms receipts are comprehended within it, and what principles are to be applied to ascertain how much of those receipts ought to be treated as income, must be determined in accordance with the ordinary concept and usages of mankind, except in so far as the statute states or indicates an intention ... [to the contrary]." (Scott v Commissioner of Taxation (NSW) (1935) 35 SR (NSW) 215 (Jordan CJ, Stephen and Street JJ) at 219)
139. This passage has frequently been quoted with approval by various courts. Among them is the High Court which considered the term in Federal Commissioner of Taxation v Cooke and Sherden [1980] HCA 33; (1980) 80 ATC 4,140 (Brennan, Deane and Toohey JJ). Citing Scott v Federal Commissioner of Taxation ((1966) [1966] HCA 48; 117 CLR 514 per Windeyer JJ at 524), the Court noted that the definitions of "income from personal exertion" and "income from property" do "... not bring into the statutory concept of income what would not be found within the concept according to ordinary notions." (page 4,147)
140. After considering the structure of the Act their Honours said:
"So the Act sufficiently shows that the items of income are to be money or to be reckoned as money. Consistently with this notion, the Act makes particular provision for sole non-pecuniary receipts by including within assessable income the value to the taxpayer of those receipts (see sec. 26(e) and (ea)), and thus brings a pecuniary amount to tax. The notion that the items of income are money or are to be reckoned as money accords with the ordinary concepts of income as `what comes into (the) pocket' to adapt Lord Macnaghten's phrase in Tennant v. Smith [1892] UKHL 1; (1892) A.C. 150 at p.164. That is not to say that income must be received as money; it is sufficient if what is received is in the form of money's worth (Cross v. London and Provincial Trust Ltd. (1938) 1 All E.R. 428 per Greene M.R. at p. 430). Nor is it necessary that an item of income be paid over to the taxpayer: it is sufficient, according to ordinary concepts and usages, that it be dealt with on his behalf or as he directs, as sec. 19 of the Act recognizes." (pages 4,147-4,148)
141. The High Court also considered whether the ordinary meaning of the word "income" had been extended when it is used in paragraph 26(e). It referred to the judgement of Windeyer J in Scott v Federal Commissioner of Taxation in which he had said:
"As I read sec. 26(e) its meaning and purpose is to ensure that certain receipts and advantages which are in truth rewards of a taxpayer's employment or calling are recognized as part of his income. In other words, the enactment makes it clear that the income of a taxpayer who is engaged in any employment or in the rendering of any services for remuneration includes the value to him of everything that he in fact gets, whether in money or in kind and however it be described, which is a product or incident of his employment or a reward for his services. If, instead of being paid fully in money, he is remunerated, in whole or in part, by allowances or advantages having a money value for him they must be taken into account. The enactment does not bring within the tax-gatherer's net moneys or money's worth that are not income according to general concepts. Rather, it prevents receipts of moneys or moneys' worth that are in reality part of a taxpayer's income from escaping the net." (pages 525-526)
142. The High Court did not find it necessary to consider further whether paragraph 26(e) widens or strengthens the net cast by sub-section 25(1). It did, however, consider further what was meant by the expression "services rendered by him". In doing so, it referred to the judgement of McTiernan J in Revesby Credit Union Co-operative Ltd v Federal Commissioner of Taxation [1965] HCA 2; (1965) 112 CLR 564 when he said:
"I consider that `the rendering of services' should consist of the doing of an act for the benefit of another, which more that the mere making of a contract and which goes beyond the performance of an obligation undertaken in the course of an ordinary commercial contract." (page 578)
143. If the amounts are assessable income and to be taken into account in assessing taxable income, the next issue to consider is when they have been derived. That follows from the fact that section 17 provides that tax is levied on taxable income derived during the year of income. Section 19 determines when income or money is deemed to have been derived. Sub-section 19(1) provides:
"Income or money shall be deemed to have been derived by a person although it is not actually paid over to him but is reinvested, accumulated, capitalized, carried to any reserve, sinking fund or insurance fund however designated, or otherwise dealt with on his behalf or as he directs."
144. Penalty tax is payable in certain circumstances. Under section 161, a person must, unless exempt under the provisions of sub-sections 161(1) and (2), give the Commissioner a return for a year of income if the Commissioner so requires it. The period within which the return must be given is the period specified by the Commissioner in the notice he gives in the Commonwealth Gazette requiring the return. In the case of the financial year ending 30 June, 1991, the date by which the return had to be given was 31 October, 1991.
145. Where a return is given late or not given at all, penalty tax may be payable. Sub-section 222(1) of the Act provides:
"Where a taxpayer refuses or fails to furnish, when and as required under or pursuant to this Act or the regulations to do so, a return, or any information, relating to a year of income, being a return relating to or information relating to, or to the affairs of, the taxpayer, the taxpayer is liable to pay, by way of penalty, additional tax equal to double the amount of tax payable by the taxpayer in respect of the year of income."
There are qualifications to this sub-section but none is relevant in this case.
146. Penalty tax may also be imposed under section 223. Of relevance in this case is sub-section 223(1) which provides that:
"Where -
(a) a taxpayer -
(i) makes a statement to a taxation officer, or to a person other than a taxation officer for a purpose in connection with the operation of this Act or the regulations, that is false or misleading in a material particular; or
(ii) omits from a statement made to a taxation officer, or to a person other than a taxation officer for a purpose in connection with the operation of this Act or the regulations, any matter or thing without which the statement is misleading in a material particular; and
(b) the tax properly payable by the taxpayer exceeds the tax that would have been payable by the taxpayer if it were assessed on the basis that the statement were not false or misleading, as the case may be,
the taxpayer is liable to pay, by way of penalty, additional tax equal to double the amount of the excess."
147. The Commissioner is required to make an assessment of any additional tax payable by way of penalty (sub-section 227(1)). He has, however, a discretion to remit the whole or any part of the additional tax payable (sub-section 227(3)). The Commissioner has issued guidelines in relation to the manner in which he will exercise his discretion under section 222 (Taxation Ruling IT 2372) and section 223(1) (Taxation Ruling IT 2517).
CONSIDERATION
148. There is no disagreement amongst the witnesses, and I am satisfied on the basis of the evidence, that the sum of $800,000.00 was paid in respect of the sale of Sunlover when that business was sold to Dectar. I also find that the payment of that sum was negotiated by Mr Lewis.
149. Mr King submitted that the total sum is properly commission income of Fylend I.N.C. and should have been included in its assessable income. Indeed, he submitted, the Commissioner has taken that view and issued an amended assessment to Fylend I.N.C. on 13 May, 1996. In view of that amended assessment, Mr King continued, the income cannot be the taxpayers' income by virtue of section 25 and, because it is not income, section 19 cannot apply.
150. In considering whether or not money is income in the hands of Mr Cortis and Mr Putna alone, it seems to me that it is not relevant to consider the manner in which the same sum has been treated in the hands of Fylend I.N.C.. It would be relevant were I also to be considering an application to review the Commissioner's amended assessment issued to Fylend I.N.C.. If that were the case, there would need to be consistency in the manner in which the sum is treated. As it is, I am not considering an application made by Fylend I.N.C. and it is a matter for Fylend I.N.C. and the Commissioner should there be an inconsistency as a result of my decision.
151. The essence of the case presented on behalf of Mr Cortis and Mr Putna is that the total sum was intended as income of Fylend I.N.C. in Cairns and to be declared as such in its taxable income for the financial year ending 30 June, 1991. From the total of $800,000.00, the sum of $200,000.00 was to be transferred to Fylend I.N.C. to pay the taxation due on the total sum. The remaining $600,000.00 was to be used to establish an office outside Australia. When that proposal was postponed, that sum was loaned to the partners of Fylend I.N.C. in proportion to their shareholdings. The sum was not allocated according to any services performed by any of the four shareholders of Fylend I.N.C.. Once the funds were in the shareholders' hands, they were to be invested in real estate and repaid on demand by three of the four shareholders.
152. Mr King submitted that all arrangements regarding the transfer of the money to Hong Kong were made by Mr Lewis or at his instigation. It was Mr Lewis who was the controlling mind of Fylend I.N.C. and the related companies. Companies were created in Hong Kong solely to enable the transfer of loan funds to Australia.
153. With regard to section 19, Mr King submitted that it cannot have any relevance in relation to funds that are applied to a group of people. It cannot apply until the funds are divided into their individual allotments. In any event, the sum of $50,000.00 could not be regarded as having been derived by either Mr Cortis nor Mr Putna as neither had sole or absolute control of such amounts.
154. Mr King also submitted that paragraph 26(e) on the one hand and sections 47 and 108 on the other are mutually exclusive. I agree with him that sums which are deemed to be dividends cannot be regarded as coming within paragraph 26(e) for they are specifically excluded by sub-paragraph 26(e)(iiii) (see paragraph 133 above). I do not, however, consider that it is relevant to consider sections 47 and 108 for I am satisfied that the sums in issue in relation to both Mr Cortis and Mr Putna are income within the ordinary meaning of that word and so are included within their assessable income pursuant to section 25.
155. The oral evidence of Mr Cortis and Mr Putna contradicts that of Mr Lewis. In effect, Mr Lewis is painted by Mr Cortis and Mr Putna as being the controlling force in the financial arrangements and they but the instruments he used to achieve his ends. Mr Cortis and Mr Putna are painted by Mr Lewis as participants in a scheme to avoid taxation and, indeed, Mr Putna is painted as the driving force. Normally, I could expect to find a more consistent picture in the documentary material. In this case, however, there is a picture of contradictory instructions to solicitors, incomplete loan agreements and confusion generally. Having regard to the whole of the evidence, I have come to the conclusion that the picture of confusion is one which was deliberately painted, if not by them, then at least on behalf of all four shareholders of Fylend I.N.C.
156. As I have already found, I am satisfied that a commission of $800,000.00 was paid on behalf of the vendor of Sunlover. Although that commission was negotiated by Mr Lewis, I am satisfied that it was regarded by each of the four partners of Fylend I.N.C. as "their" commission. Whether it was more accurately regarded as the commission of Fylend I.N.C. is not a matter which I must decide. I am satisfied that each of the four partners, Mr Lewis, Mr Cortis and Mr Putna and Mr Lee reached an agreement as to the manner in which it would be divided amongst themselves without regard to whether or not it was more properly the income of Fylend I.N.C. which should be accounted for by that company in the first instance.
157. I am satisfied that the commission was transmitted to Hong Kong to INC Limited after the sale of Sunlover. None of the evidence supports it as being the income of that company for INC Limited did not do anything which could be said to warrant its receiving the money. I am satisfied that the account of INC was simply used as a place in which to hold the funds until they could be divided amongst the four.
158. I am satisfied that all but $200,000.00 of the commission was then divided amongst the four shareholders. I base that finding on the oral evidence of Mr Lewis, Mr Cortis and Mr Putna as well as on the documentary evidence. Although I am satisfied of the final distribution, the time at which it was done was not so clear. I find that companies were established in Hong Kong for the benefit of each of Mr Cortis, Mr Putna and Mr Lewis. Mr Lee did not require a company to be established for his benefit as he had direct access to a bank account in Hong Kong through other means. I am satisfied on the basis of the telegraphic transfer to the solicitor's trust account in Cairns and of the letter written by Siao and Wen on 24 October, 1990 as to the transfer of the monies, for example, that Mr Cortis's share of that part of the commission was not initially transferred to Ko Fung in which he and his wife were the sole shareholders. I accept his evidence that it was transferred at first to Tai Dragon as Ko Fung had not then been formed. Part of his share of that part of the commission was later transferred directly to him by Tai Dragon. He also received funds from Ko Fung at a later time but the initial transfer to that company must have occurred at some indeterminate earlier.
159. Mr Cortis and Mr Putna claim that the money was divided on the basis that it was a loan only and to be used for the purchase of real estate. I do not accept that. It is contrary to the evidence of Mr Lewis. More importantly, it is not consistent with the transfer of the monies to the companies (Tai Dragon, Taklin and Ko Fung) in which either Mr Lewis, Mr Putna or Mr Cortis and their respective spouses, were the sole shareholders and had the controlling interests. It is not consistent with the absence of loan agreements between the companies and each of them in respect of the funds. The evidence of Mr Cortis and Mr Putna that the money was a loan and had to be used to purchase real estate is not consistent with the indirect evidence that Mr Lee used his share to pay outstanding debts. I do not accept the evidence of Mr Putna that he tried to repay interest due on the loan but could not do so as Mr Lewis would not talk to him. The fact that his attempt to repay the loan required him to use funds borrowed as a home improvement loan militates against the evidence as does the fact that he in fact used the funds for the purpose for which they were borrowed (i.e. home improvement). The fact that he gave up his attempt when Mr Lewis would not talk to him also militates against his view of events. Even on his own evidence, any such loan could not be recalled without the agreement of three of the four partners and yet there is no evidence of any discussion with any of the other partners to enquire as to their view on repayment.
160. In the books of Fylend I.N.C., the remaining sum of $200,000.00 was treated as a loan from Kam Sau to it. I accept the evidence of Mr Lewis that this was done in order for Fylend I.N.C. to be able to claim the interest on the loan as a deduction. I do not accept the effect of the evidence of Mr Cortis or Mr Putna which was that this was the money of Fylend I.N.C. sent back to sent back from Hong Kong in order to enable it to pay its own taxation liabilities. The only evidence of the arrival of such an amount in the accounts of Fylend I.N.C. is as a loan from Kam Sau. That is despite instructions in the letter written to Siao and Wen on 16 October, 1990 to transfer funds to INC Ltd. I am satisfied that the only money which was sent to Fylend I.N.C. were the monies ostensibly lent by Kam Sau.
161. I am also satisfied that the funds lent by Kam Sau to Fylend I.N.C. were monies which the four partners regarded as their own to distribute as they pleased. They distributed some $200,000.00 into the account of Kam Sau. Although the shareholders of Kam Sau were Mr Lewis and his wife, I am equally satisfied that there had been an agreement that all four would become shareholders. That is evidenced by the oral evidence of Mr Lewis but more particularly by the letter of 12 November, 1990 under the signature block of Mr Putna that arrangements be made for the shares in Kam Sau to be held equally for all four of the partners of INC. I am satisfied that each of the four partners treated themselves as having a 25% beneficial ownership of Kam Sau and so of the funds which were lent to Fylend I.N.C..
162. Section 14ZZK of the Taxation Administration Act 1958 places the burden of proving that an assessment is excessive or that the decision should have been made differently upon the taxpayer. In this case, I am not satisfied that either Mr Cortis or Mr Putna has satisfied that burden. I am satisfied that they have both treated their shares of the total commission of $800,000.00 as their personal gain from their personal exertions regardless of how it might be viewed by Fylend I.N.C. of which they were partners. I am satisfied that they received shares of that total commission reflecting their shareholding in Fylend I.N.C.. I am satisfied that, on the ordinary meaning of income as that term is used in sub-section 25(1), the amount of the commission which each received was income and so assessable income.
163. That brings me to the penalty tax which has been imposed. In relation to late lodgement, the rate of penalty is imposed by the Act. Certainly, sub-section 227(3) confers upon the Commissioner a discretion to remit that amount or part of it. IT 2475 indicates that the Commissioner is prepared to remit the penalty or part of it where the circumstances leading to the delay in lodgement were exceptional or unpredictable. Mr Cortis was only some six months late in lodging his return while Mr Putna was some twenty eight months late. In Mr Cortis's case, a double penalty might be thought to be excessive when he was only a few months late. The problem that I have is that I do not know for I have not been given any evidence as to the reasons for his being late. Equally, Mr Putna's might be excessive even though he was substantially later in lodging his return but, again, I have no evidence to assist me. There must be some basis for exercising the discretion. Clearly, it cannot be based simply on the fact that a taxpayer was only a few months late for the legislation is quite clear that the penalty is applicable if he or she is late in lodgement. There must be some basis which takes a taxpayer out of the normal range of case. In this case, I have no evidentiary basis upon which I can make such a finding.
164. Turning to the penalty tax payable under sub-section 223(1), I am satisfied that Mr Cortis and Mr Putna have made false or misleading statements in relation to the operation of the Act. They have not simply made inaccurate statements to the officers of the ATO and at the hearing but have sought to obfuscate the transactions which they either devised, or acquiesced in, to avoid the taxation which was payable. Although I do not consider Mr Cortis to have been a principal creator of the scheme, he did acquiesce in it and did use the money he received to his own benefit. That makes him no less responsible for the scheme than Mr Putna whom I am satisfied was one of its principal creators. I am not satisfied that either of them acted as the mere instruments of Mr Lewis or that the will of either of them was overborne by Mr Lewis so that his culpability was in some way lessened. This is a case of deliberate evasion of the Act and I find no grounds upon which I should remit the penalty tax payable under sub-section 223(1).
165. Finally, I should deal with the issue of the amended assessments issued by the Commissioner to Mr Cortis and Mr Putna. Sub-section 170(1) provides that:
"The Commissioner may, subject to this section, at any time amend any assessment by making such alterations therein or additions thereto as he thinks necessary, notwithstanding that tax may have been paid in respect of the assessment."
The Commissioner's power is subject to time limits and, pursuant to sub-section 170(3),
"An amendment effecting a reduction in the liability of a taxpayer under an assessment is not to be made after the end of 4 years from:
(a) where the taxpayer is a relevant entity within the meaning of Division 1B of Part VI and the assessment is deemed by section 166A to have been made - the date upon which the assessment is so deemed to have been made; or
(b) in any other case - the date upon which the tax become due and payable under the assessment."
166. I am satisfied that the Commissioner issued the amended assessments within the time limit specified in this sub-section. Even if he had not, I am also satisfied on the basis of the findings that I have already made and of the evidence generally that Mr Cortis and Mr Putna attempted to evade the taxation which was payable on the commission. The Commissioner, therefore, would not have been confined by the time limits set out in sub-section 170(3) but could have issued the amended assessments at any time under paragraph 170(2)(a).
167. For the reasons I have given, I affirm the objection decisions under review.
I certify that this and the forty nine preceding pages are a true copy of the decision and reasons for decision herein of Miss S A Forgie (Deputy President)
Signed: .........................................................
Merissa Martinez Associate
Date/s of Hearing 28 and 29 May, 1998
Date of Decision 5 February, 1999
Representative for Applicant Mr D King
Counsel for the Respondent Mr P Hack
Solicitor for the Respondent Australian Government Solicitor
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