Confidential and Commissioner of Taxation [2009] AATA 439; (2009) 76 ATR 447 (15 June 2009)

Last Updated: 23 December 2010

Administrative Appeals Tribunal

DECISION AND REASONS FOR DECISION [2009] AATA 439

ADMINISTRATIVE APPEALS TRIBUNAL )

) No WT200600866-868

TAXATION APPEALS DIVISION		)
	Re		CONFIDENTIAL

Applicant

And

COMMISSIONER OF TAXATION

Respondent

DECISION

Tribunal

Mr A Sweidan, Senior Member

Date 15 June 2009

Place Perth

Decision

The Tribunal: sets aside the objection decisions of the respondent made on 13 July 2006 in respect of the Notices of Amended Assessment issued to the applicant on 24 November 2004 and 20 August 2004 for the years ended 30 June 1998 and 30 June 1999 respectively; substitutes decisions that: 2.1 In the year of income ended 30 June 1998 the applicant received a deemed dividend of $36,104 from ABC Pty Ltd; 2.2 In the year of income ended 30 June 1999 the applicant received a deemed dividend of $6,195.91 from ABC Pty Ltd; 2.3 Additional tax of 50% of the tax shortfall is payable in each of the relevant years; and remits the matter to the respondent for further consideration in accordance with a direction that amended assessments be issued to the applicant to give effect to the Tribunal’s decision.

....(sgd) Mr A Sweidan.........
Senior Member

CATCHWORDS

Income Tax - loans by companies to shareholders - deemed dividends - whether legislation applies to treat loans as dividends - whether arrangements were a sham

LEGISLATION

Income Tax Assessment Act 1936 Div 7A

CASES
Federal Commissioner of Taxation v Dalco [1990] HCA 3; (1989) 168 CLR 614
Gauci v Federal Commissioner of Taxation [1975] HCA 54; (1975) 135 CLR 81
Trautwein v FCT [1936] HCA 77; (1936) 56 CLR 63
Danmark Pty Ltd v FCT, Forestwood Pty Ltd v FCT (1944) 7 ATD 333
McCauley v FCT 88 ATC 4605
Symon, Public Trustee v Symon [1944] SASR 102
Emu Brewery Mezzanine Ltd (In Liq) v Australian Securities and Investments Commission [2006] WASCA 105; (2006) 32 WAR 204
Snook v London & West Riding Investments Ltd (1967) 2 Q.B. 786
Raftland Pty Ltd v Commissioner of Taxation [2008] HCA 21
Hart v FCT (2003) 131 FCR 2003
BRK (Bris) Pty Ltd v. Federal Commissioner of Taxation [2001] FCA 164; [2001] ATC 4111
Commissioner of Taxation v Starr and Hopkins [2007] FCAFC 204; (2007) 164 FCR 436
Walstern v Commissioner of Taxation [2003] FCA 1428; (2003) 138 FCR 1

REASONS FOR DECISION

12 June 2009	Mr A Sweidan, Senior Member
BACKGROUND

1. The decisions the subject of this application for review by the Tribunal are the decisions of the Commissioner made on 13 July 2006. By those decisions, the Commissioner:
   • allowed in part the applicant’s objection to a Notice of Amended Assessment for the year ended 30 June 1998 which had been issued on 24 November 2004.
   • allowed in part the applicant’s objection to a Notice of Amended Assessment for the year ended 30 June 1999 which had been issued on 20 August 2004.
2. In these reasons:

“ITAA 1936” means the Income Tax Assessment Act 1936

“ITAA 1997” means Income Tax Assessment Act 1936

“the TAA” means the Tax Administration Act 1953

HISTORY AND RELEVANT FACTS AS FOUND BY TRIBUNAL

3. At all material times the applicant and her husband were directors and shareholders of ABC Pty Ltd (ABC P/L).

1998 Year

4. The applicant alleges that on or about 8 June 1998 she and her husband entered into a loan agreement with ABC P/L by way of “promissory note” and that ABC P/L advanced funds to the applicant and her husband in pursuance of the alleged loan agreement. A copy of the “promissory note” is attached marked “A”. Also attached marked “B” and “C” are copies of letters dated 22 June 1998 and 24 February 2000 to the applicant and her husband from Complete Financial Strategies Pty Ltd and their accountants and tax agents Healey & Co. Further reference is made below to these documents.
5. During 1998 the applicant and her husband jointly borrowed a net amount of $36,104 (“1998 Loan”) from ABC P/L and as at 30 June 1998 the applicant and her husband were jointly indebted to ABC P/L in that amount.

1999 Year

6. Between 1 July 1998 and 30 June 1999 the applicant and her husband jointly borrowed a further net amount of $6,195.91 (“1999 Loan”) from ABC P/L (excluding the 1999 cheque referred to below).
7. On or about 14 May 1999 the applicant on behalf of herself and her husband executed a document described as a "promissory note” in similar form to Attachment “A”.
8. As at 30 June 1999 the applicant and her husband were jointly indebted to ABC P/L with respect to the 1998 Loan as follows:
   • $36,104 principal owing on 30 June 1998
   • $2,419 interest for the period 1 July 1998 to 30 June 1999

Total: $38,523

9. On or about 3 June 1999 ABC P/L drew a cheque for $38,523 (“1999 Cheque”) in favour of the applicant and her husband, which it provided on condition it would never be banked.
10. The applicant and her husband then purported to endorse that cheque “without recourse” to KB Corporate Solutions Pty Ltd ("KBCS"), a finance company associated with Healey & Co.
11. The applicant and her husband then further purported to endorse that cheque “without recourse” to ABC P/L under a purported authority provided by KBCS.
12. ABC P/L issued a receipt to KBCS acknowledging receipt of the endorsed cheque in the amount of $38,523 which was claimed to be a repayment by the applicant of amounts owed by the applicant and her husband to ABC P/L.
13. The Trial Balance for ABC P/L as at 30 June 1999 shows an amount of $44,718.91 owed by the applicant and her husband to ABC P/L.

2000 Year

14. In her Statement of Facts and Contentions filed in this proceeding the applicant alleges that during the 2000 financial year she entered into a loan agreement with ABC P/L by way of promissory note and that prior to 30 June 2000 ABC P/L advanced funds to the applicant in pursuance of the alleged loan agreement. No copy of such a note has been produced.
15. As at 30 June 2000 the applicant and her husband were indebted to ABC P/L with respect to loans taken out in the period up to 30 June 1999 as follows:
    • $44,718.91 principal owing on 30 June 1999
    • $2,190 interest for the period 1 July 1999 to 30 June 2000

Total: $46,908.91

16. On or about 31 March 2000 ABC P/L drew a cheque for $46,908.91 in favour of the applicant and her husband, which it provided on condition it would never be banked.
17. The applicant and husband purported to endorse the cheque “without recourse” to KB CS.
18. The applicant and her husband then purported to endorse the cheque “without recourse” to ABC P/L under a purported authority provided by KBCS.
19. ABC P/L issued a receipt to KBCS acknowledging receipt of the endorsed cheque, which, was claimed to be a repayment by the applicant and her husband of the amount of $46,908.91 owed by the applicant and her husband.

Subsequent Relevant Events

20. On or about 11 November 2004 the Commissioner made a determination pursuant to s177F(1)(a) of ITAA 1936 that an amount of $19,261 be included in the assessable income of the applicant for the year ended 30 June 1998 under section 44 of ITAA 1936.
21. On or about 24 November 2004 the Commissioner issued a Notice of Amended Assessment for the year ended 30 June 1998 to the applicant including an amount of $19,261 in his assessable income for that year. In addition, a shortfall penalty of 75% of the additional tax was levied.
22. On or about 12 August 2004 the Commissioner made a determination pursuant to s177F(1)(a) of the 1936 Act that an amount of $4,193 be included in the assessable income of the applicant for the year ended 30 June 1999 under section 44 of ITAA 1936.
23. On or about 20 August 2004 the Commissioner issued a Notice of Assessment for the year ended 30 June 1999 to the applicant including amounts of $19,261 and $4,193 in his assessable income for that year. In addition, a shortfall penalty of 75% of the additional tax was levied.
24. On or about 11 July 2006 the Commissioner made a determination pursuant to s177F(1)(a) of ITAA 1936 that an amount of $23,454 be included in the assessable income of the applicant for the year ended 30 June 1999 under section 44 of ITAA 1936.
25. On or about 21 September 2004 and 16 December 2005 the applicant objected to the Notice of Amended Assessment and the Notice of Assessment.
26. By Notice of Decision on Objections dated 13 July 2006 the Commissioner disallowed the applicant’s objections to the additional tax assessed in each year, but allowed the objections to penalty in part, reducing the shortfall penalty from 75% to 50%

ISSUES

27. The above facts give rise to a number of issues. For present purposes and having regard to the Tribunal’s Reasons for Decision these can be confined to the following ie:

(a) Whether the applicant has discharged the burden of proving under section 14ZZK of the TAA that the Amended Assessments are excessive.

(b) Whether Division 7A of Part III and s 44 of ITAA 1936 operate so as to include additional amounts of $36,104 and $44,718.91 or some other sums in the applicant’s assessable income for the years ended 30 June 1999 and 30 June 2000 respectively; and, if so,

(c) Whether the penalty tax of 50% of the tax shortfall is fair and reasonable in the circumstances or should be remitted either in full or in part.

ONUS OF PROOF

28. The onus is on the applicant to show that the assessments were excessive and the Commissioner is entitled to rely on any deficiency in evidence in support of his position: section 14ZZK(b) of the TAA 1953; Federal Commissioner of Taxation v Dalco [1990] HCA 3; (1989) 168 CLR 614 per Brennan J at 624.
29. The Commissioner does not need to show that the assessments were correctly made: Gauci v Federal Commissioner of Taxation [1975] HCA 54; (1975) 135 CLR 81, per Mason J at 89.
30. The applicant must show, not only negatively that the assessments are wrong, but also positively what corrections should be made in order to make the assessment right: Dalco per Brennan J at 623-625, Toohey J at 632-634; Trautwein v FCT [1936] HCA 77; (1936) 56 CLR 63 per Latham CJ at 88.

In Danmark Pty Ltd v FCT, Forestwood Pty Ltd v FCT (1944) 7 ATD 333, Latham CJ said, at 337: I agree that upon an appeal the onus rests upon the taxpayer of establishing the facts upon which he relies and if it is necessary for him to establish a particular fact in order to displace the assessment he must satisfy the Court with respect to that fact.

31. In commenting on the taxpayer’s absence of records, Lockhart J in McCauley v FCT 88 ATC 4605 at 4612 referred to the judgment of Latham CJ in Trautwein v FC of T [1936] HCA 77; (1936) 56 CLR 63 and said:

I have already made some observations about the effect of the absence of records on the taxpayer’s case and it is pertinent to recite the observation on this matter by Latham CJ in Trautwein’s case (supra) at p 87:

‘In the absence of some record in the mind or in the books of the taxpayer, it would often be impossible to make a correct assessment. The assessment would necessarily be a guess to some extent, and almost certainly inaccurate in fact. There is every reason to assume that the legislature did not intend to confer upon a potential taxpayer the valuable privilege of disqualifying himself in that capacity by the simple and relatively unskilled method of losing either his memory or his books.’

32. Accordingly, it is for the applicant to prove positively the facts necessary to establish that:

(a) in the relevant years of income where prima facie s 109D of Division 7A applies, that the section does not so operate;

(b) the criteria for the imposition of penalty did not exist; or

(c) remission of the penalty is warranted.

33. In the Tribunal’s view, for the reasons which follow, the applicant has failed to discharge the onus which rests on her.

APPLICANT’S CONTENTIONS

34. The applicant contends that s109D of the ITAA 1936 (as to which see below) does not operate in the 1998 and 1999 years because Attachment “A” satisfies the requirements of s109N which is contained in subdivision D of Division 7A of Part III of ITAA 1936. Those requirements are also set out below.
35. For the reasons which follow the Tribunal rejects that contention.

RELEVANT LEGISLATION

36. The relevant legislation is contained in Division 7A, Part III, ITAA 1936.
37. S109D contained in Division 7A reads relevantly as follows:

SECTION 109D LOANS TREATED AS DIVIDENDS
109D(1) Loans treated as dividends in year of making. A private company is taken to pay a dividend to an entity at the end of the private company’s year of income (the current year) if:
(a) the private company makes a loan to the entity during the current year; and
(b) the loan is not fully repaid before the lodgement day for the current year; and
(c) Subdivision D does not prevent the private company from being taken to pay a dividend because of the loan at the end of the current year; and
(d) either:
(i) the entity is a shareholder in the private company, or an associate of such shareholder, when the loan is made; or
(ii) a reasonable person would conclude (having regard to all circumstances) that the loan is made because the entity has been such a shareholder or associate at some time.
Note 1: Some repayments cannot be counted for the purpose of this subsection. See section 109R.
Note 2: A private company is treated as making a loan to a shareholder or shareholder’s associate if an interposed entity makes a loan to the shareholder or associate. See Subdivision E.
109D(1AA) Amount of dividend. The amount of the dividend taken under subsection (1) to have been paid is the amount of the loan that has not been repaid before the lodgment day for the current year, subject to section 109Y.
109D(2) Amount of dividend. The amount of the dividend taken under subsection (1A) to have been paid is the amount of the loan that has not been repaid at the end of the current year, subject to section 109Y
109D(3) What is a loan? In this Division, loan includes:
(a) an advance of money; and
(b) a provision of credit or any other form of financial accommodation; and
(c) a payment of an amount for, on account of, on behalf of or at the request of, an entity, if there is an express or implied obligation to repay the amount; and
(d) a transaction (whatever its terms or form) which in substance effects a loan of money.
109D(4) In which year of income is a loan made? For the purposes of the Division a loan is made to an entity at the time the amount of the loan is paid to the entity by way of loan or anything described in subsection (3) is done in relation to the entity.

TRIBUNALS’ FINDINGS

38. With regard to the 1998 Year, the Tribunal finds in summary for the reasons set out below that s109D of the ITAA 1936 applies to the 1998 Loan so as to deem it to be a dividend in the amount of $36,104 paid to the applicant in the 1998 Year.
39. With regard to the 1999 Year, the Tribunal similarly finds in summary for the reasons set out below that s109D applies to the 1999 Loan so as to deem it to be a dividend in the amount of $6,195.91 paid to the applicant in the 1999 Year.

DIVISION 7A - 1998 YEAR

40. The Tribunal finds that by reason of s 109D(1) of ITAA 1936 ABC P/L is taken to pay a dividend on 30 June 1998 to the applicant, because –

(a) ABC P/L is a private company for the purposes of Division 7A of Part III of ITAA 1936.

(b) ABC P/L made a loan to the applicant (jointly with her husband) during the year of income ended 30 June 1998 of an amount of $36,104 that the applicant did not fully repay by the end of the year of income.

(c) The 1998 Loan is calculated as the net amount of the loans made jointly to the applicant and her husbandof $36,104 by ABC P/L in the year ending 30 June 1998 referred to above.

(d) None of the exemptions in Subdivision D of Division 7A of Part III applies. In particular, no agreement complying with s 109N was executed. Alternatively any such purported agreement was a sham.

(e) The applicant was at all material times a shareholder of ABC P/L.

109N AGREEMENT

41. During the relevant period Section 109N(1) provided as follows (The provision was amended into its present form with effect from the 2005 income year):

A private company that makes a loan to an entity in one of the private company’s years of income is not taken under section 109D to pay a dividend at the end of the year of income because of the loan if:

(a) the loan is made under a written agreement

(b) the rate of interest payable on the loan for years of income after the year in which the loan is made equals or exceeds the benchmark interest rate for the year; and

(c) the term of the loan does not exceed the term (maximum term) for that kind of loan worked out under subsection (3).

42. For the year of income ending 30 June 1998 a transitional provision was in force. It provided that for that year of income only the provisions of Division 7A would apply as if s109N(1)(a) read as follows:

(a) the loan is covered by a written agreement that was made before 1 July 1998

43. The difference is that for the 1998 year a loan would only qualify if it were “covered” by a subsequent agreement provided the agreement was made before 1 July 1998 whilst for subsequent years in the relevant period the loan must be made under a written agreement, i.e. the loan agreement must be in force before the loan is made.
44. The Commissioner’s views on the interpretation of the phrase “...the loan is made under a written agreement” are set out in Taxation Determination TD 2008/8. The Tribunal refers to and relies upon the contentions and authorities set out in that determination, which in the Tribunal’s view is a correct statement of the law.
45. As noted earlier the applicant relies on Attachment “A” which it is contended is a written agreement for purposes of s109N. This document is an untitled standard form document that is variously described in documents filed by the applicant as a “loan agreement in the form of a promissory note”, “a loan agreement with the Company by way of promissory note” and a “Promissory Note and Loan Facility Agreement”.
46. The Tribunal finds that this document does not satisfy the requirements of s109N(1)(a) for two reasons ie:

(a) First, because the document is not a “written agreement” between ABC Pty Ltd and the applicant. It is unilateral in form and is only executed by the borrower and not by the private company;

(b) Secondly, and in any event, the document in the Tribunal’s opinion is a sham.

Unilateral Document

47. Notwithstanding that it is described in other material as a “loan agreement” or “facility agreement” the document is in fact nothing more than a unilateral promise by the borrower to certain parties, including the private company, with respect to loans already made and/or which may be made in the future. The private company did not execute the agreement so as to signify its agreement to being bound by its terms.
48. By its nature a written agreement must contain the agreement of the relevant parties to be bound by its terms and it must be (at least) bilateral in nature. A person who is not a party to an agreement is not bound by it. In Re Symon, Public Trustee v Symon [1944] SASR 102 Mayo J noted, at 110:

‘Agreement’...signifies primarily a contract, that is a legally binding arrangement between two or more persons, by which rights are acquired by one or more to acts or forebearances on the part of the other.

49. The mere execution of a written promise to pay on certain terms by the borrower does not constitute the document as a “written agreement” between the borrower and the company. It is thus not a “written agreement” for the purposes of s109N(1)(a) between the private company and the borrower, or indeed any sort of agreement.
50. Further, the counterparties to the borrower to whom that promise is being made are not clearly identified, which is essential for a written agreement between parties. The introductory words record a promise to pay:

...to [name of company inserted] and/or its associates

51. Clause 12 of the document defines “associate” by reference to the definition in “The Act” as defined in Clause 9, presumably the ITAA 1936 and the ITAA 1997. The word “associate” is defined for the purposes of “this Act” in s995-1 ITAA 1997 by reference to the definition of “associate” in s318 and as “this Act” is itself defined in s995-1 to include ITAA 1936 then the definition in s318 applies to ITAA 1936 as well.
52. Section 318(2) applies a very wide definition to “associate”. In the context of companies, it can comprehend a wide range of associated persons, trusts and companies, including the applicant as a director or shareholder of the company. This leads to the peculiar situation where the applicant is promising to repay the loan to herself, among other persons.
53. A different, clearly contradictory and much wider definition of the counterparty is given in Clause 13 of the document:

“’Lender’ is the party to whom this promissory note is given and is all or any company or companies in which the borrower or his associates has any shareholding”

54. The clause purports first to define the “Lender” by reference to the person to whom the document is given and then purports, potentially contradictorily, to define it by reference to a potentially wider range of companies.
55. Because the two definitions are different the document can result in the borrower borrowing from the Lender as defined but then promising to repay all such loans to the company listed in the introductory words “and/or its associates”.
56. Not only is the document not a “written agreement” between the borrower and the private company it is in the Tribunal’s view hopelessly uncertain as to who the recipient of the unilateral promise is.
57. The Tribunal notes that the document is described as a “promissory note”. Whether it be a promissory note or not is irrelevant to the interpretation of s109N(1)(a) which requires the loan to be made under a “written agreement”, not a promissory note. However, the Tribunal notes in passing that the document is not a promissory note. Promissory note is defined in s89 of the Bills of Exchange Act 1989 as follows:

A promissory note is an unconditional promise in writing made by one person to another, signed by the maker, engaging to pay, on demand or at a fixed or determinable future time, a sum certain in money, to or to the order of a specified person, or to bearer.

58. Attachment “A” is not a promissory note for a variety of reasons, inter alia, it is not a promise to pay a “sum certain in money” “on demand or at a fixed or determinable future time”. See for example, Emu Brewery Mezzanine Ltd (In Liq) v Australian Securities and Investments Commission [2006] WASCA 105; (2006) 32 WAR 204.

Sham

59. As well, and further or alternatively, the Tribunal finds that the evidence, clearly shows that Attachment “A” was a sham. A sham arises where there is a:

“common intention that the acts or documents are not to create the legal rights and obligations which they give the appearance of creating.”

Snook v London & West Riding Investments Ltd (1967) 2 Q.B. 786 at 802

60. See also Raftland Pty Ltd v Commissioner of Taxation [2008] HCA 21, at [33-36] and [134-137], where the majority of the High Court noted, at [34]:

“One such case is where other evidence of the intentions of the relevant actors shows that the document was brought into existence "as a mere piece of machinery" for serving some purpose other than that of constituting the whole of the arrangement”

61. In this case the applicant has executed a document which purports to create obligations with respect to the repayment of loans by the making of principal and interest repayments over periods of seven or 25 years. However, it is apparent from the surrounding circumstances that there was never any intention that these repayments would occur and that the document was clearly merely a mechanism that formed part of a larger arrangement by which outstanding loans would be “repaid” in their entirety in each succeeding year by “new loans” so as to avoid the application of Division 7A. This is amply demonstrated by the evidence before the Tribunal including Attachments “B” and “C”.
62. The Tribunal finds that pursuant to s109D the dividend that ABC P/L is taken to pay to the applicant is an amount of $36,104. Pursuant to s44 ITAA36 that deemed dividend forms part of the applicant’s assessable income in the year ended 30 June 1998.

DIVISION 7A - 1999 YEAR

63. The Tribunal finds further that by reason of s109D(1) of ITAA 1936 ABC P/L was taken to pay a dividend on 30 June 2000 to the applicant, because –

(a) ABC P/L is a private company for the purposes of Division 7A of Part III of ITAA 1936.

(b) ABC P/L made a loan to the applicant during the year of income ended 30 June 1999 of an amount of $6,195.91 that the applicant did not fully repay by the end of the year of income.

(c) For the reasons set out above none of the exemptions in Subdivision D of Division 7A of Part III applies, in particular, no agreement complying with s109N was executed. Alternatively any such agreement was a sham.

(d) The applicant was at all material times a shareholder of ABC P/L.

64. The Tribunal finds accordingly that pursuant to s109D the dividend that ABC P/L is taken to have paid the applicant is an amount of $6,195.91. Pursuant to s44 ITAA36 that deemed dividend forms part of the applicant’s assessable income in the year ended 30 June 1999.

PENALTY

65. The Commissioner has imposed a penalty of 50% of the tax shortfall for each of the relevant years of income on the basis that the shortfall was caused by the recklessness of the applicant or her tax agent regarding the correct operation of the income tax law, see s226H ITAA 1936.
66. The Full Federal Court in Hart v FCT (2003) 131 FCR 2003 at [33] and [34] endorsed the following comments of Cooper J in BRK (Bris) Pty Ltd v. Federal Commissioner of Taxation [2001] FCA 164; [2001] ATC 4111 at paragraph 77:

Recklessness in this context means to include in a tax statement material upon which the Act or regulations are to operate, knowing that there is a real, as opposed to a fanciful risk that the material may be incorrect, and a reasonable person in the position of the statement-maker would see there was a real risk that the Act and regulations may not operate correctly to lead to the assessment of the proper tax payable because of the content of the tax statement. So understood the proscribed conduct is more than mere negligence and must amount to gross carelessness.

67. In the circumstances and based on the evidence before the Tribunal, the applicant, or the applicant’s tax agent, ought to have known that there was a real and not fanciful risk that the scheme devised by the applicant’s tax agent would be ineffective to avoid the application of Division 7A.

PART IVA

68. The Tribunal’s findings as set out above are in accordance with the Commissioner’s primary contentions before the Tribunal. However it should be noted that the Tribunal is of the view that the general anti-avoidance provisions contained in Part IVA of the ITAA 1936 would have applied except for the scheme outlined above being, as found by the Tribunal, ineffective to avoid the application of Division 7A.
69. Accordingly, in the alternative, if the tax shortfall was not due to the applicant’s, or his tax agent’s, reckless disregard of the correct operation of the tax law, the applicant is nevertheless liable to pay a penalty of 50% of the tax shortfall for the year of income on the grounds that if Part IVA would have applied except for the scheme being ineffective to avoid the application of Division 7A, s 226L ITAA 1936 imposes a penalty of 50% of the tax shortfall.
70. Subsection 226L(c) refers to a “tax avoidance scheme”, and incorporates the definition of that phrase to be found in s224(2):

“...means a scheme within the meaning of Part IVA that was entered into or carried out for the sole or dominant purpose of enabling a person to pay no tax or less tax.”

71. In Commissioner of Taxation v Starr and Hopkins [2007] FCAFC 204; (2007) 164 FCR 436, the Full Federal Court held that the reference to “purpose” in that subsection referred to the actual purpose of the taxpayer. In the present case it is clear that the actual, indeed the only, purpose of the applicant in entering the scheme was to enable the applicant to pay less tax in each of the relevant years.
72. The expression “reasonably arguable” is defined in s222C(1) ITAA36 as follows:

For the purposes of this Part:

(a) The correctness of the treatment of the application of a law; or

(b) another matter is reasonably arguable if, having regard to the relevant authorities and the matter in relation to which the law is applied or the other matter, it would be concluded that what is argued for is about as likely as not correct.

73. The leading authority on the meaning of the expression “reasonably arguable” as defined in s222C and used in the penalty tax provisions of Part VII of the ITAA36 is Walstern v Commissioner of Taxation [2003] FCA 1428; (2003) 138 FCR 1, per Hill J at [103-108].
74. In the circumstances of this case, it was not in the Tribunal’s opinion reasonably arguable that the taxpayer had treated the application of the law correctly and the Tribunal is of the view that the penalty has been correctly assessed at 50%.
75. In the alternative s226G ITAA 1936 applies on the basis that the taxpayer, or her tax agent, failed to take reasonable care to comply with the Act.
76. There are in the opinion of the Tribunal no further proper or valid grounds that entitle the applicant to have the amounts of additional tax by way of penalty imposed for the relevant years wholly or further remitted under subsection 227(3) ITAA 1936.

DECISION

77. The Tribunal is of the view that the correct or preferable decision in these applications is that:

77.1 The objection decisions of the respondent made on 13 July 2006 in respect of the Notices of Amended Assessment issued to the applicant on 24 November 2004 and 20 August 2004 for the years ended 30 June 1998 and 30 June 1999 be set aside;

77.2 There be substituted decisions that:

77.2.1 In the year of income ended 30 June 1998 the applicant

received a deemed dividend of $36,104 from ABC Pty Ltd;

77.2.2 In the year of income ended 30 June 1999 the applicant

received a deemed dividend of $6,105.91 from ABC Pty Ltd;

77.2.3 Additional tax of 50% of the tax shortfall is payable in each year of the relevant years; and

77.3 The matter be remitted to the respondent for further consideration in accordance with a direction that amended assessments be issued to the applicant to give effect to the Tribunal’s decision.

I certify that the 77 preceding paragraphs are a true copy of the reasons for the decision herein of Mr A Sweidan, Senior Member

Signed: ..(sgd) T Freeman.................

Associate

Date/s of Hearing 9, 12 and 13 March 2009

Date of Decision 12 June 2009

Counsel for the Applicant Dr J Hockley

Instructed by Desborough Accountants

Counsel for the Respondent Mr S Sharpley and Mr T Burrows

Solicitor for the Respondent Australian Government Solicitor
Attachment “A”
8 June 1998

We promise to pay the sum advanced, paid, or deemed as such under “the Act” (as later defined herein) to ACN and/or its associates value received on or before the date provided for herein and subject to the following Loan Facility Agreement.

The Lender and Borrower agree that if the Borrower borrows any money from the Lender after the date of this agreement, it will be on the following terms:

1. Each unsecured borrowing must be repaid in full within seven years after it is received by the Borrower (Note 1).
2. Each secured borrowing (Note 2) must be repaid in full within 25 years (Note 1) after it is received by the Borrower.
3. Interest is to be paid on the outstanding balance of any borrowed amount at the benchmark interest rate prescribed by or under Section 109N of the Act (Note 3). The interest is to be computed daily and paid:

3.1 annually in arrears on the 30th day of June in each year; or

3.2 at the written request of the Lender, monthly in arrears on the last day of each calendar month.

Any interest accrued on any amount repaid between the last day for payment of interest and the date of repayment shall be paid in full on the date of payment.

4. Notwithstanding clauses 1,2 and 3:

4.1 the Borrower must make the minimum repayments of principal and interest prescribed by or under Division 7A of the Act (Note 4) in each financial year after the year in which the first borrowing under this agreement is made;

4.2 the Borrower may repay any borrowing in full or make payments greater than the minimum repayments specified in clause 4.1. above on the last day of any calendar month in which the borrowing remains outstanding.

5. Interest on any amount repaid in reduction of a borrowing shall abate from the date of such repayment.
6. All moneys paid by the Borrower to the Lender under this agreement will be applied firstly in payment of any outstanding interest, secondly in payment of other moneys owing under this agreement and thirdly in reduction of the borrowed amount.
7. All payments to 61 3 9225 8307 under this agreement must be made at the address of the Lender unless otherwise advised by the Lender in writing.
8. All borrowings and accrued but unpaid interest will immediately become due and payable in full on demand if:

8.1 the Borrower does not pay interest or repay any borrowing by the due date for each payment;

8.2 the Borrower becomes insolvent or commits an Act of bankruptcy;

8.3 an order is made or a resolution is passed to wind up the Borrower or appoint a voluntary administrator;

8.4 any receiver, agent for a mortgagee in possession or other external; administrator takes possession or contract of any of the assets of the Borrower.

9. “The Act” means the Income Tax Assessment Act and any amending or substituted legislation which prescribes a minimum interest rate and/or minimum repayments to be made by recipients of loans from private companies. Any reference to a section of the Act includes a reference to the section as amended or any substituted section.
10. Subject to clause 11 below, this agreement supersedes all prior agreements and understandings in relation to any advances to be made by the Lender to the Borrower and may only be varied by a further agreement signed by both parties.
11. Nothing contained herein affects any loan or advance or payment made before 4 December 1997 which remain payable to the Lender.
12. In this agreement the word “associate” shall be given the meaning of this word under “the Act” referred to in clause 9.
13. In this agreement the “Borrower” is the party giving the promise to pay and the “Lender” is the party to whom this promissory note is given and is all or any company or companies in which the borrower or his or her associates has any shareholding.

Signature – Signature –

Note 1 The maximum term for a loan prescribed in Section 109N(3) in the amending bill (in order for the loan not to be deemed a dividend) may be varied by regulation.

Note 2 A loan will only be a secured borrowing for the purposes of this agreement and Section 109N(3) in the amending bill if:

(a) 100% of the loan is secured by registered mortgage over real estate, and

(b) the market value of the mortgaged property (after deducting any mortgages on the property which have priority) is at least than 110% of the amount lent at the time the loan is made.

Note 3 The benchmark interest rate which is currently prescribed by Section 109N(2) of the amending bill is the Indicator Lending Rate – Bank variable housing loans interest rate last published by the Reserve Bank of Australia before the start of each year of income or any other rate prescribed by the regulations.

Note 4 The formula for the calculation of the minimum repayments is set out in Section 109E(6) in the amending bill.

Attachment “B”

COMPLETE FINANCIAL STRATEGIES

Strategic Advice in
Tax 22 June 1998
Business
Banking & Finance
Investments
Asset Protection
Superannuation
Rollovers
Business Valuation

Accountants & Advisers: The Hidden new Tax
Section 108 Amendments – Division 7A
Andrew Cleghorn
Director – Technical Services As foreshadowed in previous advices to you, and following

the new legislation affecting private companies introduced
Raelene DeBoer into parliament on and effective from 4 December 1997, we
Lisa Harris now enclose documentation designed to limit the impact of
Ed Eikelboom what is, in effect, a new tax.
Valerio Conetta
Grant Dashwood Also enclosed is an example of the tax savings to be gained
Christine Cloughey from our approach, and alternatively the serious tax consequences
Marcus Bundesen if you adopt a “do nothing” approach.
Sheridan Farrow

Daniel del Borello Please note that action must be taken prior to 30 June 1998 or
Amould Oudin you will pay significantly more tax.
Christine Longo
Please sign and evidence by faxing back the enclosed
Director – Promissory Note and Loan Facility Agreement before 30 June
Admin & Management 1998. No reminder or follow-up will issue. Please do not post or
Eire Baginski deliver this document to us. Only by faxing will we have
independent evidence of the dates being prior to 30 June.
Consultants Please retain the original on file for 5 years. You may need
Kevin Healey to produce it in the event of a tax audit.
C. Dale Lyon
If you do not think this applies to you, please sign and fax in any

case and then when we complete your 1997 tax returns we can

explain to you and show you fully why this document is protection

of your position.

21 Railway Road The form of this document results form a combination of a
PO Box 414 promissory note drawn for us by our solicitor and a loan facility

Kalamunda 6926 agreement drafted by solicitors for the National Tax Accountants’
Association specifically for compliance with the new sections
Ph: 9293 4622 109N and 109E of the Income Tax Assessment Act. However, we
Fax: [phone] are obliged to advise you that you should obtain your own legal
Email: complete@ and stamp duty advice with regard to this document and

advisernet.com.au particularly on the issue as to whether sufficient duty has been paid because if it has not then penalties may apply.

Complete Financial Having said this, we appreciate that many clients do not follow
Strategies Pty Ltd such advice and will likely simply sign and fax. In this event we
ACN: 080 558 710 do not accept responsibility with regard to stamp duty and we do
not give stamp duty advice.
Registered Tax Agent
No 64 037 000 Yours sincerely


ASC Dealers Licence K E Healey for Complete Financial Strategies Pty Ltd
No. 175113
Attachment “C”

Healey & Co

Strategic Advice in ACCOUNTANTS
Tax
GST 24 February 2000
Business
Banking & Finance
Investments
Asset Protection
Superannuation
Rollovers
Business Valuation
DIVISION 7A
Accountants & Advisers:
We have been advised by KB Corporate Solutions Pty Ltd (KBCS)
Andrew Cleghorn that the facility and underwriting fee has been received by them.
Director – Technical Services KBCS have forwarded to this office the necessary instructions
and authorities to proceed with the repayment of the loans extended
Raelene DeBoer by to you and your associated entities.
Lisa Harris
Ed Eikelboom Please find enclosed various documents requiring your signature.
Valerio Conetta Please return the documents to us as soon as possible and before
Grant Dashwood 31 March 2000 so that we can complete the necessary documents
Christine Cloughey effect the arrangement.
Marcus Bundesen
Sheridan Farrow You will also need to draw a cheque
Daniel del Borello or on behalf of (on your ordinary business

Natasha Muller account) and negotiate the cheque to KBCS and then to

Robert Prior An example of the cheque is attached. Please complete the cheque
Paul Scudds exactly as per the example. Once you have completed the cheque
Lloyd Orchard please place the cheque in a safe place (do not bank it) and retain

Lyn Walters for 5 years so that in the event if a tax audit you will have the necessary evidence of the repayment of the loan.

Director –

Admin & Management Thank you for your instructions.

Eire Baginski

Consultants
Kevin Healey Yours sincerely
C. Dale Lyon
for Healey & Co
21 Railway Road
PO Box 414
Kalamunda 6926

Ph: 9293 4622
Fax: [phone]
Email: complete@
advisernet.com.au

Complete Accountants
Pty Ltd
ACN: 090 552 266