Horn and Commissioner of Taxation [2003] AATA 449; (2003) 52 ATR 1139; 2003 ATC 2111 (16 May 2003)

Last Updated: 1 October 2009

Administrative

Appeals

Tribunal

DECISION AND REASONS FOR DECISION [2003] AATA 449

ADMINISTRATIVE APPEALS TRIBUNAL )

) No WT2001/1422 - 1425
TAXATION APPEALS DIVISION ) WT2001/1426 - 1429

Re

ALEXANDRA LORRAINE HORN NEVILLE THOMAS HORN

Applicants

And

COMMISSIONER OF TAXATION

Respondent

DECISION

Tribunal

Senior Member M D Allen

Date 16 May 2003

Place Perth

Decision

The decisions under review are affirmed.

(Sgd) M D Allen
....................................
Senior Member

CATCHWORDS

INCOME TAX - money lent against mortgage security via mortgage broker - mortgage provided for interest to be paid periodically - mortgagor failed to raise required amount to complete project - mortgagor failed to carry out mortgage covenants - mortgagor became insolvent - mortgage sum not repaid - whether periodic payments to mortgagee assessable income - whether periodic payments to mortgagee are return of principal sum lent

Taxation Administration Act 1953 - s14ZU, s14ZZK

Income Tax Assessment Act 1936 - s25

Income Tax Assessment Act 1997 - s6-5

Transfer of Lands Act 1893 (WA) - s113

Re Maber and Deputy Commissioner of Taxation [2001] AATA 19

REASONS FOR DECISION

Senior Member M D Allen

1. By application lodged on 15 March 2001 the Applicants sought review of objection decisions made by the Respondent on 7 February 2001 rejecting the Applicants’ claims that:

(I) As to the first Applicant that mortgage interest in the sums of $5,880.12; $25,431.27, $36,827.97 and $18,028.57 paid in respect of the tax years ended 30 June 1996, 1997, 1998 and 1999 respectively was in reality not interest but a return of capital.
(II) As to the second Applicant the claim was that mortgage interest of $5,880.12, $25,431.27, $36,827.97, $18,028.57 and a single investment $7,670.02 paid in respect of the tax years ending 30 June 1996 to 1999 inclusive were in reality non assessable returns of capital.

2. The said applications for review came on for hearing before the Tribunal on 5 September 2002, the presiding member being Senior Member R D Fayle and with him Member S Richardson. Prior to any decision being delivered Senior Member Fayle died and member Richardson terminated her involvement with the Tribunal.
3. At a directions hearing held on 6 September 2002 it was agreed between the parties that the matters could be dealt with by a reconstituted Tribunal without the necessity of a re-hearing using the transcript of and exhibits tendered in the prior hearing.
4. At the outset it must be kept in mind that, as these are applications to review decisions of the Commissioner for Taxation made pursuant to Division 3 of Part IVC of the Taxation Administration Act 1953 s14ZZK of that Act applies. That section reads, inter alia:

“On an application for review of a reviewable objection decision:
(a) the Applicant is, unless the Tribunal orders otherwise, limited to the grounds stated in the taxation objection to which the decision relates; and
(b) the Applicant has the burden of proving that:
(i) if the Taxation decision concerned is an assessment (other than a franking assessment) – the assessment is excessive;
(ii) ...
(iii) ...”

5. Reduced to their fundamentals the facts upon which the Applicants rely are straightforward, and in essence were not controverted by the Respondent. The basis of the Applicants’ case may therefore be summed up as follows:

(I) For a considerable period of time the Applicants had invested with Mortgage Brokers. Upon the retirement of Mr Horn further funds were invested to fund the Applicants’ retirements.
(II) Originally investments were with a firm Blackburn and Dixon but the Applicants later transferred their business to a company called Global Finance Group Pty Ltd of whom a John Margaria was the principal.
(III) The general scheme was that the Applicants deposited monies with the Global Finance Group earmarked to a specific development project. The monies were pooled with those of other investors and secured by a mortgage with one of the Global Finance Group of Companies being nominated as the mortgagee. See for example exhibit A1 (Mortgage between Hillsfield Pty Ltd and Global Mortgage Investments (WA) Pty Ltd).
(IV) Other mortgages apparently were in the name of the Applicants and co-investors and the borrowing company, see for example Exhibit A5(a).

6. Particular investments entered into by the Applicants can be summarised as follows:

(I) Perrymead Investments Pty Ltd

This was a company owned by a Mr and Mrs Casella. The sum of $60,000.00 was advanced on 21 August 1995 with security held by a mortgage over property in Banksia Downs Estate, Wellard. Mr and Mrs Casella were guarantors of the said loan but they are now both bankrupt. Initially the loan was for a period of 12 months however the Applicants agreed to roll this over for another 12 months. No new mortgage or agreements were drawn up.

The mortgage continued to be rolled over until 1999 although no payments of interest were received after 28 November 1998.

(II) Garon Pty Ltd

On 11 October 1995 a loan of $10,000.00 was advanced with security held by way of mortgage over a property at Lot 5395 Cowalla Road, Gin Gin and a Dominic and Lillian Casella were directors of the said company and guarantors of the loan. As stated above the Casella’s are now both bankrupt. Initially the loan was for 12 months and at the end of that term the loan was extended. On 20 November 1996 a further amount of $10,000 was advanced. The loan continued to be extended until 1999, the last payment of interest being January 1999.

(III) Garon Pty Ltd Kalgoorlie

An advance of $60,000.00 was security over a Lot 8 Great Eastern Highway, Kalgoorlie was advanced on 26 February 1996. The term of the loan was extended in 1997 and 1998 and the last payment of interest was in January 1999.

The Applicants have obtained copies of Trust Ledgers from the liquidators of the company and these show that in August 1998 amounts of money from this project were used to pay other projects being conducted by Dominic Casella.

(IV) Unit 9, The Gateway, Joondalup

Again a project undertaken by Dominic Casella. An advance of $20,000 was made on 1 January 1998 with security by way of mortgage over the said property. No payment of interest was received after November 1998 and it appears from information subsequently obtained by the Applicants that at the time of the advance Dominic Casella was not in a position to service his debts, contrary to representations by Global Finance Pty Ltd.

(V) Westbid Pty Ltd

An advance of $170,000.00 was made in August 1996 with security held by way of mortgage over a property at 115 Smith Street, Highgate. The directors of the said company and guarantors of the loan were a Nabil Sadek and Elias Bahbah. The original term was for 12 months but the advance was rolled over in 1997, 1998 and 1999 although the last payment of interest was in October 1998.

The Applicants took possession of this property as unpaid mortgagees and discovered that although their contract had stated three units were to be built on the said property only two had been constructed, the local Council not permitting more development on the side. The Applicants as mortgagees were never informed of this.

Apparently fraud charges have been laid against Messrs Sadek and Margaria as a result of their dealings with this property.

(VI) Kentucky Nominees Pty Ltd

Nabil Sadek (refer to a paragraph five above) was a director of this company and also a guarantor of the advance which was in the sum of $60,000.00 with security by way of mortgage over property at 24 Trafalgar Road East Perth. The purported purpose of the development was to purchase land and build four luxury units. The advance was rolled over in 1998 and 1999 however no interest was paid after February 1999.

The Trust Account Ledger relating to this property shows that funds were diverted to other projects undertaken by Mr Sadek. Apparently fraud charges have been laid against Messr Sadek and Margaria in relation to their dealings concerning this property.

(VII) Riverland Heights Pty Ltd

On 27 March 1998 Mr Horn advanced $100,000.00 to that company with a Mr T Lauwers as guarantor. The Global Finance Group had not arranged for Mr Horn to be registered as a mortgagee at the Lands Title Office at the time that company went into liquidation. Subsequent court action has rectified this.

Apparently although the property was to have been subdivided into 81 lots that subdivision is still incomplete. In October 1998 five lots were sold and the monies received used to pay interest on advances until February 1999.

(VIII) Hillsfield Pty Ltd

A sum of $15,000 was advanced on 10 June 1998. Interest continued to be paid until the liquidation of Global Finance Group Pty Ltd.

7. Having regard to the Applicants' oral evidence and their Statement of Facts and Contentions which was taken in as Exhibit A6 it is clear that the facts and circumstances of the Applicants' cases are on all fours with those in Re Maber and Deputy Commissioner of Taxation [2001] AATA 19.

8. As in that case the Applicants deposited monies with the Global Finance Group Pty Ltd and in particular on the advice of Mr Margaria. Global Finance Group Pty Ltd then arranged for those monies to be lent to third party pursuant to a mortgage.

9. Interest payments were made to the Applicants in accordance with the provisions of the Deeds of Mortgage. In some cases the date for repayment of capital expired but the advances were "rolled over" and the mortgagor continued to pay interest.

10. In all cases the mortgagors defaulted. In most cases there is evidence that the mortgagors acted outside the provisions of the Deeds of Mortgage. Funds were intermingled and funds from one project used to pay for other projects. Investors were on occasions misled as to the viability and nature of the project. Suffice to say that fraud charges have apparently been laid against Mr Margaria and at least one of the persons to whom and to whose group of companies advances were made mainly Mr Sadek.

11. In these circumstances, as did the Applicant in Re Maber supra, it is claimed that the monies received by the Applicants was not interest and hence accessible income but a return of capital.

12. Commencing at paragraph 18 of his reasons for decision in Re Maber supra Senior Member Fayle said:

"18. In the opinion of the Tribunal, it is not sustained that what the mortgagees received each month under the mortgage was in fact a repayment to them of money which already belonged to them. For, in the opinion of the Tribunal, the doctrine of mutuality would not otherwise operate to alter the character of the periodic payments to something other than interest income. The money paid by the mortgagees to Global as agent and broker (if not trustee) for Newrose, the mortgagor, once paid and received lost its original character. Those moneys then became the property of the mortgagor and represented a loan by each mortgagee to it. Each mortgagee's loan amount was paid into a common pool of funds managed by Global. As such the individual loans became a fungible sum in the hands of Global. And thereafter, it could not be said to comprise any specific or identifiable part advance by any particular lender. The money was no longer property of the mortgagees. It had become the property of the mortgagor, subject to the trusts created by and contractual obligations under, the mortgage deed. Any payment from that fungible sum was therefore characterised as to its purpose. The objective purpose of the payment was to meet the mortgagor's obligations to pay interest under the mortgage deed on the money borrowed. The objective purpose of the receipt in the hands of the mortgagee was to satisfy the mortgagor's obligations to pay interest on the money lent.
19. In the opinion of the Tribunal the mortgage was not a sham. Despite the evidence that some payments were unauthorised and some payments allegedly excessive or unwarranted in the circumstances, the intention of Global and the mortgagor was to raise $5,275,000 for the stated purposes (T3). In the Tribunal's opinion the evidence is that they set out to do that even though the parties may not have been acting entirely ethically and in all likelihood had good reason to doubt whether 14 apartments would ever be approved for development on the land to be mortgaged. The fact that subsequent events prevented a realisation of the objectives as originally intended does not, of itself, make the original mortgage agreement a sham. In the Tribunal's opinion the agreement was enforceable and the mortgagees' rights under the agreement were preserved should the mortgagor default. That being the case, the periodic payments under the agreement are and have the character of interest. The fact that the mortgagees are likely to lose all or some of their principal does not alter the character of those periodical contractual payments in the hands of the mortgagees.
20. Mr Macliver, for the Respondent, provided the Tribunal with an extract from the Transfer of Land Act 1893 (WA). Section 113 of that Act provides inter alia that an implied covenant in every mortgage made under that Act is that the mortgagor
....will pay the principal money therein mentioned on the day therein appointed and will so long as the principal money or any part thereof shall remain unpaid pay interest thereon...
He submitted that for that reason it cannot be sustained that a payment of interest pursuant to a registered mortgage, as is the case in point, is anything other than interest, and therefore, income according to ordinary concepts. The Tribunal accepts this as a further reason in support of the Respondent's primary contentions."

12. As stated above I consider this matter on all fours with Re Maber supra. The late Senior Member Fayle was an acknowledged expert in the Taxation Division of the Tribunal and I would need to be absolutely convinced that his reasons for decision revealed error before I declined to follow them not only as a matter of comity, but in recognition of his expertise in the field.

13. The decisions under review are affirmed.

I certify that the 13 preceding paragraphs are a true copy of the reasons for the decision herein of Senior Member M D Allen

Signed: Nathaniel Wills .......................................................................................

Associate

Date of Hearing 5 September 2002

Date of Decision 16 May 2003

Solicitor for the Applicants self-represented

Advocate for the Respondent Mr F Maloney, ATO Legal Practice