3D Scaffolding Pty Limited v Commissioner of Taxation

REASONS FOR JUDGMENT THE COURT Introduction 1 On 25 May 2009, the Court heard these two appeals together. Although the appellants and the grounds of appeal differ, they depend on much the same facts. 2 Some time ago now, the appellants in both appeals raised objections in respect of amended assessments issued by the Commissioner of Taxation. The objections made by 3D Scaffolding Pty Limited were referable to the tax years ending 30 June 1998, 30 June 1999, 30 June 2000 and 30 June 2001. James Docherty's objections were referable to the tax years ending 30 June 1998, 30 June 1999 and 30 June 2000. 3 In the relevant tax years, 3D Scaffolding supplied on-hire scaffolding equipment and claimed to have acquired some scaffolding equipment (for hiring out to others) from Modular Scaffold Hire Pty Ltd. 3D Scaffolding unsuccessfully claimed deductions for expenditure incurred in hiring scaffolding equipment from Modular Scaffold. Mr Docherty unsuccessfully claimed that he was not liable to have the payments made by 3D Scaffolding treated as a dividend in his hands in accordance with s 109C(1) of the Income Tax Assessment Act 1936 (Cth). When the Commissioner disallowed the appellants' objections, they applied to the Administrative Appeals Tribunal for review of the objection decisions. 4 The AAT heard the applications together. Before the Tribunal, 3D Scaffolding "claimed deductions for the hire of scaffolding equipment leased to it by a Mr Tony Borg", rather than Modular Scaffold. It was common ground at the commencement of the Tribunal hearing that Modular Scaffold was not an incorporated entity. James Docherty denied the application to him of s 109C(1). 5 In the AAT, the Commissioner disputed 3D Scaffolding's claim, putting "in issue … whether or not Borg existed at all and received the payments alleged to have been made to him": see Re 3-D Scaffolding Pty Ltd and James Docherty and Commissioner of Taxation [2007] AATA 1884 at [1]. In respect of James Docherty, the AAT said: The amended assessments in respect of Docherty were raised in accordance with Division 7A of the Income Tax Assessment Act 1936 ('the Act'), on the basis that if the deductions claimed by 3-D are disallowed, those payments would have been received in circumstances which permit assessments against Docherty in terms of Division 7A of the Act. The case in respect of Docherty is linked with that in respect of 3-D on the basis that if 3-D succeeds, then Division 7A assessments against Docherty cannot stand. The Tribunal gave detailed reasons for its decision that the objection decisions, whether referable to 3D Scaffolding or James Docherty, should be affirmed. Parts of the Tribunal's reasons are discussed hereafter. 6 Pursuant to s 44(1) of the Administrative Appeals Tribunal Act 1975 (Cth), 3D Scaffolding and James Docherty appealed to this Court on certain questions. A judge of the Court dismissed their appeals, with costs. We are now concerned with the appeals that 3D Scaffolding and James Docherty have brought against the judgments of the learned primary judge. 7 3D Scaffolding and James Docherty each advanced separate and distinct grounds of appeal. We consider, first, the one ground advanced by 3D Scaffolding.

3D SCAFFOLDING'S APPEAL 8 3D Scaffolding appeals against his Honour's judgment on the ground that his Honour: erred in not finding that the Tribunal had failed to accord procedural fairness to Mrs Lynette Montgomery, and the other witnesses for the appellant, by taking into account in its decision a number of assertions/allegations contained in Exhibit RS1 paras [56] to [101] (being the submissions of the respondent) as to the integrity of the Price Spreadsheets and related documentation where those assertions/allegations were not put to the witnesses in cross examination by the respondent.

IN THE AAT - 3D SCAFFOLDING 9 Lynette Montgomery gave oral evidence on behalf of 3D Scaffolding and James Docherty at the Tribunal hearing. The other witnesses were James Docherty himself, his brother, Peter Docherty, and their sister, Betty Orel. In addition, 3D Scaffolding and James Docherty called an employee of the Office of State Revenue and an accountant. 10 At the hearing, James Docherty claimed that Mr Borg controlled Modular Scaffold and that 3D Scaffolding hired scaffolding from Borg, to whom payments were made on a regular basis and always in cash. The payments to Mr Borg were said to be allowable deductions. 3D Scaffolding and James Docherty relied heavily on certain business records (being the Price Spreadsheets and related documentation) said to support an alleged arrangement with Mr Borg. 11 The AAT found that Mrs Montgomery prepared the Price Spreadsheets and that these Spreadsheets were not a reliable record of the movement of equipment. Thus, in discussing the accounting evidence, the Tribunal said (at [15]): The evidence was that a computer program designed to cater for [the scaffolding being leased out to, and returned by, customers of 3-D] proved to be faulty. Spreadsheets were originally prepared, but were unhelpful in that they were prepared on the basis that information was entered without saving the information previously prepared. Spreadsheets of a sort were in time reconstructed, and 'reconstructed' is the appropriate term; they cannot be accepted as a correct record of equipment coming in and going out. In the same light, the manner in which payments to Borg were calculated and recorded proved to be open to considerable doubt, and cannot be accepted at face value. At [48], the Tribunal added: Put in very broad terms … the computing system was faulty and did not achieve its desired purpose. Spreadsheets were prepared, but new information was inserted in place of the prior information, without saving the old. Price Spreadsheets were reconstructed comparatively late in the chain of events. 12 Towards the close of hearing, the Commissioner made written submissions, dated 1 June 2007, which included an analysis of alleged fabrications in the Price Spreadsheets. The Tribunal incorporated this analysis in its reasons for decision, as Annexure A. The Tribunal said that Annexure A was "an admirable (and correct) summary of the evidence given in this connection": see Re 3-D Scaffolding [2007] AATA 1884 at [50]. 13 Whilst the Tribunal rejected the Spreadsheet evidence on the basis that it considered the evidence to be fabricated, it is apparent from the Tribunal's reasons that its decision did not depend on its appraisal of this evidence. Instead, the Tribunal's decision rested on its conclusion that Mr Borg did not exist and, as a consequence, it dealt with the Spreadsheets and related documentation "(comparatively) briefly": see Re 3-D Scaffolding [2007] AATA 1884 at [15]; also [49]. 14 The Tribunal made clear findings with respect to Mr Borg, commencing with the observation (at [10]) that "[o]ral evidence was not given by Borg, who during the course of the proceedings took on an almost mythical significance". The Tribunal stated (at [13]): The evidence … as regards Borg was so contradictory that a finding that Borg did not exist is, on the balance of probabilities, mandatory. This being so, much of the evidence before the Tribunal was irrelevant, and it is not necessary for the Tribunal to deal with it. Later in its reasons, the Tribunal noted the Commissioner's contention that Borg was in fact James Docherty. As to this contention, the Tribunal said (at [47]): In my view, the contentions of the [Commissioner] in this context are well-founded. It is likely, on the balance of probabilities, that if Borg never existed, Borg is Docherty. Put at its best for 3-D, it has not discharged the onus upon it under section 14ZZK of the Taxation Administration Act 1953 ... 15 Later in its analysis (in Part K - Findings), the Tribunal concluded (at [137] and [140]) that: The whole transaction is so bizarre that there is only one possible conclusion and that is, as set out earlier in these reasons, that Borg did not ever exist, and that it was Docherty who received the money. The evidence of Ms Hird, in particular, was that Docherty told her that it was he who received the cash because he was concerned that the others should not know, and I accept Ms Hird's version in preference to that of Docherty. If Borg did not exist, then it is Docherty who received the cash. This being so, I draw no inference as to the fact that Borg did not give evidence, if only because it was not possible for a non-existent person to give evidence. I refer in this context to the bizarre and completely incredible evidence as to a transaction between 3-D and a total stranger on terms that were, putting it kindly, not in the faintest degree commercial. The [Commissioner] has cited a host of cases on onus. It is unnecessary for me to refer to any of them. On my findings, 3-D did not hire equipment from Borg, and 3-D has failed to discharge the onus on it under section 14ZZK of the TAA to establish the contrary. The Applicants, in their submissions, pointed to the fact that the Tribunal itself noted that there was equipment, and that it must have come from somewhere. It was reasonable to assume this is so because of the increase in revenue from the hiring of equipment, to which the accounting experts referred. It was not in any way demonstrated as to what equipment there was and where it came from. The probabilities are that the scaffolding equipment in question had been acquired somehow or another by Docherty, but this too is conjecture.

BEFORE THE PRIMARY JUDGE - 3D SCAFFOLDING 16 In dismissing the appeal by 3D Scaffolding under s 44 of the Administrative Appeals Tribunals Act, the learned primary judge held that: (1) appeal grounds claiming that the Tribunal failed to determine, as it should have done, that amounts paid by 3D Scaffolding were for the hire of scaffolding and/or the acquisition of scaffolding did not raise any question of law for the purposes of s 44(1); and, in any case, there was not error of the kind alleged because the identity of the payee was relevant and 3D Scaffolding's case was that the outgoings were paid to Mr Borg: see 3D Scaffolding Pty Ltd v Commissioner of Taxation [2008] FCA 1477 at [12]-[14]. (2) the rule in Browne v Dunn applied to the proceedings in the AAT and the application of the rule depended on the circumstances of the case: see 3D Scaffolding [2008] FCA 1477 at [18]-[21]. (3) there was no breach of the rule in Browne v Dunn or denial of procedural fairness as regards Mrs Montgomery and the Price Spreadsheets because: (a) both Mrs Montgomery and 3D Scaffolding were on notice from the questions put to Mrs Montgomery that the Price Spreadsheets were under challenge; (b) the particular discrepancies identified in Annexure A were identified and apparent from the Price Spreadsheets themselves when compared with 3D Scaffolding's Job Balance records; (c) the Price Spreadsheets were Mrs Montgomery's creation and the Job Balance records were 3D Scaffolding's business records; and (d) while the Price Spreadsheets might have been recognised by the Commissioner as "the central plank in the Applicants' case", they were not the central plank in the Tribunal's decision. See 3D Scaffolding [2008] FCA 1477 at [22]. (4) Even if there had been a denial of procedural fairness, the Tribunal's decision in respect of 3D Scaffolding was clearly correct and there was no utility in remitting the matter: see 3D Scaffolding [2008] FCA 1477 at [24].

PARTIES' SUBMISSIONS ON THE APPEAL - 3D SCAFFOLDING 17 In written submissions relied on before us, 3D Scaffolding argued that the Tribunal's acceptance of the Commissioner's submissions concerning the Price Spreadsheets amounted to "gross unfairness", because the submissions "asserted with some particularity the manner in which the Price Spreadsheets [were] allegedly manipulated" but Mrs Montgomery was not given an opportunity to answer the particular allegations about the Price Spreadsheets since the Commissioner did not put the particular allegations to her in cross-examination. 3D Scaffolding submitted that, in breach of the rule in Browne v Dunn: Mrs Montgomery in particular was confronted in the witness box with an imprecise, generalized and unspecified assertion about 'fudging and fiddling' the contemporaneous records but the final submissions, which she was not offered opportunity to address in evidence, then contained detailed allegations never put to her. In 3D Scaffolding's submission, the Tribunal's decision was vitiated for this reason. 18 Counsel for 3D Scaffolding submitted that the Tribunal should have found that the Price Spreadsheets were evidence of real transactions; that they were evidence of expenditure in respect of scaffolding hire; and that the actual identity of the person or entity that provided the scaffolding was immaterial to the determination of the statutory test under s 8-1 of the Income Tax Assessment Act 1997 (Cth). 19 3D Scaffolding submitted (citing Commissioner of Taxation v Metaskills Pty Ltd (2003) 130 FCR 248 at 274 [147], the cases mentioned there, and Hoskins v Repatriation Commission (1991) 32 FCR 443 at 446) that, in this circumstance, the matter should be remitted to the Tribunal upon the basis that it cannot be positively concluded that, if Mrs Montgomery had been given an opportunity to answer, it could not possibly have produced a different result. 20 The Commissioner argued that there was no denial of procedural fairness in the circumstances of the case because: (a) It was directly put to Mrs Montgomery that she had "fabricated" or "massaged" or "fiddled" the figures in the Price Spreadsheets. (b) The Price Spreadsheets were 3D Scaffolding's own documents and 3D Scaffolding understood at least from the commencement of the proceeding that the Commissioner did not accept their authenticity, or the existence of Mr Borg. (c) The application of the rule in Browne v Dunn depends on the circumstances of the case. Given that 3D Scaffolding was on notice at least from the commencement of the proceeding that the Commissioner challenged the existence of Mr Borg and that the documentation proved the payments had been made to him for scaffolding. (d) The Tribunal's decision did not depend on the Price Spreadsheets and even if this ground of appeal were made out it was an immaterial error of law and would not vitiate the decision. (e) The Tribunal was entitled to look at the Price Spreadsheets and draw its own conclusions where it was obvious that information had been omitted or falsely inserted in order to reach a figure corresponding to the cheques that were drawn. (f) 3D Scaffolding was invited by the Tribunal, during closing submissions, to re- open its case and call further evidence. It was clearly open to it to seek leave to recall Mrs Montgomery in order to overcome any perceived deficiency in the opportunity afforded to her, when cross-examined, to explain discrepancies in the documentation. 3D Scaffolding did not take this opportunity.

CONSIDERATION OF 3D SCAFFOLDING'S APPEAL 21 It is clear from a reading of the transcript of the cross-examination of Mrs Montgomery that, at the Tribunal hearing, the Commissioner directly challenged the reliability and authenticity of the Price Spreadsheets that she had prepared. At the time of her cross-examination, if not earlier, Mrs Montgomery and 3D Scaffolding must, therefore, have been aware that the Commissioner was alleging that she had fabricated the Price Spreadsheets. Mrs Montgomery's cross-examination specifically established that she had created a Price Spreadsheet in respect of items that had not been for hire but for sale. Moreover, the Commissioner specifically put to her that the relevant documents had been fabricated so as to arrive at numbers corresponding to the cashed cheques: see AAT transcript, pp 274-275. 22 We agree with the primary judge that both Mrs Montgomery and 3D Scaffolding were on notice from the questions put to Mrs Montgomery in cross-examination that the Price Spreadsheets were challenged as having been fabricated and that there were ample opportunities at the hearing to respond to this allegation. If Mrs Montgomery had an answer to the allegation, counsel for 3D Scaffolding might have elicited the answer in re-examination. Alternatively, it would have been open to 3D Scaffolding to seek the Tribunal's leave to adduce additional evidence in chief: see s 33(1)(c) of the Administrative Appeals Tribunal Act, discussed in Re Kowalski and Military Rehabilitation and Compensation Commission (2007) 47 AAR 300; [2007] AATA 1988 at [35]-[40]; Re Groom and Secretary, Department of Families, Housing, Community Services and Indigenous Affairs [2008] AATA 202; and Sullivan v Department of Transport (1978) 1 ALD 383, at 403-404 per Deane J. 23 Further, the Commissioner's submissions of 1 June 2007 made a clear, direct and detailed attack on the reliability and genuineness of the Price Spreadsheets. It would have been open to 3D Scaffolding to respond to the allegation of fabrication in its reply submissions. The document prepared for us, headed "Price Spreadsheets - Annexure A", shows that some response of this kind might have been given at that earlier time. 3D Scaffolding made no such response, however, but merely made the complaint rejected by the Tribunal and advanced here - that there had been a denial of procedural fairness. The allegation of fabrication was clearly and directly made, however, and there was plainly an opportunity to respond to the allegation. Accordingly, there was no denial of procedural fairness. 24 3D Scaffolding relied on Commissioner of Taxation v Metaskills Pty Ltd (2003) 130 FCR 248 in support of its denial of procedural fairness argument. This case is clearly distinguishable. In Metaskills, an issue as to "Whose income?" was raised only on the eve of the Tribunal hearing. Lindgren J concluded that, "[i]n the circumstances, it is to set the standard too high to require that, at its peril, Metaskills must, through Mr Strong [a non-lawyer], appreciate the significance of what was happening and take the initiative of seeking an adjournment": see Metaskills 130 FCR at 273 [144]. His Honour considered that, if there had been an adjournment, then Metaskills might have been able to lead additional relevant evidence. 25 In the present case, it was clear at the commencement of the Tribunal hearing that the Commissioner had successfully challenged the existence of Modular Scaffold and was continuing to challenge the existence of Mr Borg. It followed that, as the Commissioner submitted on the appeal, any documentation that 3D Scaffolding put forward in support of an account involving Mr Borg was also under challenge. It is to be borne in mind that 3D Scaffolding was represented by experienced counsel. Further, it is abundantly clear that, after the oral hearing had concluded (and before the Commissioner made the submissions the subject of complaint), 3D Scaffolding appreciated that the Commissioner was alleging that Mrs Montgomery had fabricated the Price Spreadsheets. This is evident from [14] and [15] of the Submissions of the Applicant dated at 1 June 2007: compare the Commissioner's Submissions also dated 1 June 2007, part of which became the Annexure A. These circumstances make the present case entirely different from Metaskills. 26 3D Scaffolding also relied on the decision in Hoskins, in which the Court found that "topics which were the subject of important findings against the applicant were not directly put to him", noting that "[t]he essence of the unfairness, if there was any, was that it was never suggested to the applicant that he was exaggerating his condition, as the Tribunal found": see Hoskins 32 FCR at 446 per Pincus J. The Court held that the applicant was entitled to have the decision set aside "unless the question of exaggeration should be taken to have been inherently in issue": Hoskins 32 FCR at 446. In the circumstances of that case, the Court found that "a claimant must, especially when represented professionally, surely appreciate that his or her task is to convince the Tribunal of the reality and seriousness of the complaints made" and, accordingly, the failure to cross-examine the applicant in the way alleged did not amount to a breach of procedural fairness: see Hoskins 32 FCR at 447. 27 We can accept the analysis made by Pincus J in Hoskins. The result in this case must be the same as in Hoskins, because, as in Hoskins, having regard to the matters already outlined, 3D Scaffolding and Mrs Montgomery were on notice and must be taken to have appreciated that the authenticity and reliability of the Price Spreadsheets were in issue. 28 3D Scaffolding also sought to propound submissions in reliance on the rule in Browne v Dunn. The primary judge held that the rule in Browne v Dunn applied in a proceeding before the AAT. Neither party contested this ruling before us. 29 What is commonly called the rule in Browne v Dunn refers to the rule of practice established in the decision of the House of Lords in Browne v Dunn (1893) 6 R 67. The rule is an aspect of procedural fairness. In Allied Pastoral Holdings Pty Ltd v Commissioner of Taxation [1983] 1 NSWLR 1 at 16, Hunt J conveniently re-stated the rule: … unless notice has already clearly been given of the cross-examiner's intention to rely upon such matters, it is necessary to put to an opponent's witness in cross-examination the nature of the case upon which it is proposed to rely in contradiction of his evidence, particularly where that case relies upon inferences to be drawn from other evidence in the proceedings. 30 We accept that, as Hill J said in Jagelman v Federal Commissioner of Taxation (1995) 31 ATR 463 at 473: Where the issues in a case are such that it would readily be apparent to a party that a particular imputation has been made, there will be no necessity to put that imputation to a witness who denies it and, in consequence, there will have been no denial of procedural fairness … 31 Also pertinent to the present case are certain observations of Hunt J in Allied Pastoral. His Honour said (at [1983] 1 NSWLR at 22-23) that: A challenge made to the evidence of a witness in the course of a final address may take place in various ways. The opposing party may ask the tribunal of fact simply to disbelieve that evidence; if he has led evidence in direct contradiction of the evidence of that witness, he may then ask the tribunal of fact to accept the evidence of his own witnesses in preference to that of the witness in question; or he may point to other evidence in the case, led by either party, which tends either to contradict the evidence of that witness or to destroy his credit. There are many reasons why it should be made clear, prior to final addresses and by way of cross-examination or otherwise, not only that the evidence of the witness is to be challenged but also how it is to be challenged. Firstly, it gives the witness the opportunity to deny the challenge on oath, to show his mettle under attack (so to speak), although this may often be of little value. Secondly, and far more significantly, it gives the party calling the witness the opportunity to call corroborative evidence which in the absence of such a challenge is unlikely to have been called. Thirdly, it gives the witness the opportunity both to explain or to qualify his own evidence in the light of the contradiction of which warning has been given and also, if he can, to explain or to qualify the other evidence upon which the challenge is to be based. … In many cases, of course, counsel for the party calling the witness in question will be alert to the relevance of the other material in the case to be relied upon for the challenge to the truth of the evidence given by his witness or to the credit of that witness, and in those circumstances counsel will be able to give his witness the opportunity to deal with that other material in his own evidence in chief. 32 In the present case, in the course of the Tribunal hearing and in cross-examining Mrs Montgomery, the Commissioner very clearly challenged the genuineness and reliability of the Price Spreadsheets and related documentation. The imputation as to the fabrication of the Price Spreadsheets was directly put to Mrs Montgomery, who denied the allegation. Having regard to the authorities, there was no breach of the rule in Browne v Dunn and no denial of procedural fairness on such a basis. 33 Having regard to the evidence and the submissions before it, it was plainly open to the Tribunal to take the view that Mrs Montgomery had manipulated the figures on the Price Spreadsheets in order to make them correspond with the amount on the cheques as cashed. It must be borne in mind that, in its written submissions dated 1 June 2007, 3D Scaffolding invited the Tribunal to treat the Price Spreadsheets as reliable and genuinely derived from other business records. 3D Scaffolding argued in these submissions that fabrication was not a tenable imputation, having regard to the entirety of the documents. In this circumstance, there was nothing remarkable about the Commissioner's contrary submission to the effect that fabrication was evident from the face of the documents and, in particular, that the figures on the Price Spreadsheets had been manipulated by either omitting or falsely inserting information in order to reach figures corresponding with the cheques that had been drawn. 34 In any event, the Tribunal's decision did not turn on the Price Spreadsheets. Ultimately, as we have seen, the Tribunal discussed them very briefly (whilst adopting the Commissioner's analysis set out in Annexure A as its own). This is because, once the Tribunal found that not only Modular Scaffold but also Mr Borg did not exist, then 3D Scaffolding had to fail because it could not discharge the onus that lay on it. Further, once the Tribunal found that Mr Borg did not exist and that Mr Borg was James Docherty, the alleged arrangements for paying Mr Borg were very largely irrelevant. The Price Spreadsheets and collateral documentation that 3D Scaffolding relied on to demonstrate Mr Borg's existence and the arrangements made to pay him also ceased to have any significance. 35 It follows from this that, even if the alleged breach of procedural fairness were established, the error could not have affected the result. It is well accepted that an immaterial error of law will not vitiate a Tribunal's decision: see BTR PLC v Westinghouse Brake and Signal Co (Australia) Ltd (1992) 34 FCR 246 at 253-254 per Lockhart and Hill JJ and Klinkert v Australian Postal Corporation (1992) 16 AAR 86 at 92 per Hill J. It is apparent that the Tribunal would have reached the same result, whether or not an error of the kind alleged were made by it: compare Stead v State Government Insurance Commission (1986) 161 CLR 141 at 145 per Mason, Wilson, Brennan, Deane and Dawson JJ. 36 For these reasons, we would dismiss the appeal brought by 3D Scaffolding, with costs.

JAMES DOCHERTY'S APPEAL 37 James Docherty advanced two grounds of appeal. They were: 1. The Court erred in not holding that the Tribunal erred in holding that the appellant was the only director of 3 D Scaffolding Pty Ltd. There was no evidence to support the finding that the appellant was the sole director of 3D Scaffolding Pty Ltd. The undisputed evidence was that there were two directors of 3 D Scaffolding Pty Ltd during the relevant period namely the appellant and Mr Robert Docherty. 2. The Court erred in not holding that the Tribunal erred in holding that because the appellant was the sole director he was also the controller of 3D Scaffolding Pty Ltd and, accordingly, the payments made by 3D Scaffolding Pty Ltd to the appellant were made with the acquiescence of 3D Scaffolding Pty Ltd. We deal with these grounds together.

In the AAT - James Docherty 38 The Commissioner assessed James Docherty to income tax under Division 7A of the ITAA 1936. Relevantly, s 109C(1) provides: A private company is taken to pay a dividend to an entity at the end of the private company's year of income if the private company pays an amount to the entity during the year and either: (a) the payments is made when the entity is a shareholder in the private company or an associate of such a shareholder; or (b) a reasonable person would conclude (having regard to all the circumstances) that the payment is made because the entity has been such a shareholder or associate at some time. Note 1:Some payments do not give rise to dividends. See Subdivision D. Note 2:A private company is treated as making a payment to a shareholder or shareholder's associate if an interposed entity makes a payment to the shareholder or associate. See Subdivision E. 39 Subsection 109C(3) further provides: In this Division, payment to an entity means: (a) a payment to the extent that it is to the entity, on behalf of the entity or for the benefit of the entity; and (b) a credit of an amount to the extent that it is: (i) to the entity; or (ii) on behalf of the entity; or (iii) for the benefit of the entity; and (c) a transfer of property to the entity. 40 At the Tribunal hearing, counsel for James Docherty argued that there was no evidence that any relevant payments were made to him. As to this, the Tribunal said (Re 3-D Scaffolding [2007] AATA 1884 at [144]): Leaving aside the admissions made by [James] Docherty to Ms Hird, I do not consider that it is necessary for me to deal with this contention further, simply because my finding is that Docherty is Borg. 41 The Tribunal subsequently stated (at [150]-[152]) that: The evidence before the Tribunal in relation to 3-D … indicates that [James] Docherty and another brother, Charlie, were the shareholders during the relevant years. Clearly 3-D was controlled by [James] Docherty who was its only director. Equally clearly, Peter and Orel were only employees of 3-D. With the consent of the Applicants, these applications were heard together. The hearings turned almost entirely on whether 3-D was entitled to the deductions claimed in respect of payments alleged to have been made to Borg. The Tribunal accepts that Docherty could not reasonably, in these circumstances, be expected to give evidence to the effect that the alleged Borg payments were in fact made to some other person or persons who are not caught under Division 7A, and in other words, a person or persons who were not Docherty or any associate of Docherty … The result is that there is no evidence of any kind before the Tribunal as to where the monies went if they did not go to Borg (and they could not and did not), and so the onus cannot be discharged; it must be said that there was little, or no attempt, to do so. Generally, as to the onus in respect of Division 7A matters, the Tribunal refers to the recent Full Court judgment in Epov v Commissioner of Taxation 2007 ATC 5009. As I have indicated, I cannot draw a Jones v Dunkel inference as to the failure by Borg to give evidence since … he did not exist. But the same cannot be said of Charlie Docherty. If he was a shareholder, and if he did play any part in the running of 3-D (although there was no evidence of any sort to suggest any involvement of any kind), why did he not give evidence as to this most important transaction? The failure to call Charlie must lead to an inference that his evidence would not have been of assistance to the Applicants. On the evidence before me, and on the basis that there never was a transaction with Borg as alleged, it is clear that Docherty treated 3-D as his own entity. 3-D did exactly as he directed; as I have noted he was its only director. His own evidence as to the fact that it was his Trust which bought the equipment must mean that Docherty did not, in relation to 3-D, need or seek the consent of Charlie, given that it would appear that payments referable to the equipment were made by 3-D, even though it was the Trust which acquired the equipment. There was … no evidence whatsoever as to the Trust, and in particular as to the identity of its beneficiaries. Even if some of the cash which figured in this case found its way, somehow or other (perhaps through Docherty), to Charlie or, for that matter, Orel or Peter, they were all associates within section 109C of the Act. 42 The Tribunal summarised its findings (Re 3-D Scaffolding [2007] AATA 1884 at [153]), stating, amongst other things, that: In effect, Docherty treated 3-D as his own and took its money for his own use. I do not accept that it can be suggested that Docherty stole the money from 3-D. He was its controlling mind as its only director, and he plainly considered that he could do what he pleased in relation to 3-D. On the basis of these findings, the Tribunal determined that Division 7A applied.

Before the primary judge - James Docherty 43 It was common ground that the Tribunal was mistaken in finding that James Docherty was the sole director of 3D Scaffolding during the relevant tax years. The primary judge also acknowledged that the Tribunal had fallen into error in this regard, noting that "[i]n the years of income 1998 - 2000, there was a second director, Robert Docherty, who held that position from 6 November 1996 to 18 October 2002": see 3D Scaffolding [2008] FCA 1477 at [25]. His Honour did not, however, accept that the Tribunal's error in finding that James Docherty was the sole director of 3D Scaffolding during the years of income 1998 - 2000 was material to its decision. Thus, his Honour said (at [28]): In my view, its findings that Mr Docherty controlled 3D, that '3D did exactly as he directed' [152], and that 'Docherty treated 3D as his own and took its money for his own use': [153], were made independently of and did not depend upon the Tribunal's erroneous finding that Mr [James] Docherty was the sole director of 3D during the relevant years. In other words, the Tribunal's erroneous finding merely fortified the Tribunal's anterior findings as to Mr Docherty's control of 3D's operations. 44 The primary judge considered that "the Tribunal found that Mr [James] Docherty was the controller of 3D independently of its finding that he was the sole director of 3D" and that "its erroneous finding as to Mr Docherty's status as the sole director of 3D during the relevant years did not contribute to its conclusion that Mr Docherty was the controller of 3D": see 3D Scaffolding [2008] FCA 1477 at [31]. 45 As his Honour said, implicit in the argument advanced on James Docherty's behalf was the contention that, in deciding whether 3D Scaffolding had "paid an amount" for the purposes of s 109C and Div 7A of the ITAA 1936, the Tribunal was obliged to take into account the fact that James Docherty was not the sole director of 3D Scaffolding in the relevant tax years because there could be no payment unless there was consensus between the company and James Docherty about the payment. If there were two directors, then, so the argument went, there could be no consensus. As appears below, counsel for James Docherty took issue with the use of the word "consensus" but nothing turns on this for present purposes. 46 The primary judge rejected this argument and the underlying contention, upon the basis that "there was ample evidence to support the conclusion of the Tribunal that Mr [James] Docherty controlled 3D and that, when he caused payments out to himself, they were payments by 3D and not a misappropriation of its moneys" and that "[t]he Tribunal's incorrect finding that Mr Docherty was the sole director was not necessary or relevant to the decision of the Tribunal that there had been payments made by 3D and Div 7A should apply": see 3D Scaffolding [2008] FCA 1477 at [37].

Parties' submissions on the appeal - James Docherty 47 Counsel for James Docherty contended before us that the primary judge erred in his findings that the issue of James Docherty being the sole director was not relevant to the Tribunal's decision. Counsel noted that the error was restated a number of times throughout the Tribunal's reasons. It was clear enough, so counsel submitted, that the factual finding that James Docherty was the controller of 3D Scaffolding was "coupled with, and depended at least in part upon" the erroneous finding that James Docherty was the sole director. Counsel argued that the mistake on the Tribunal's part "meant that factual matters which may have played a significant role in the Tribunal's decision were ignored". Further, counsel contended that the reference in s 109C(1) to the private company "paying" an amount to an entity required some consent or concurrence on the company's part in the paying of the monies or, as counsel put it in oral argument, there must be some decision within the company itself that is manifested in the distribution. Citing Stephens v T Pittas Ltd 56 TC 722 and MacFarlane v Commissioner of Taxation (1986) 13 FCR 356, counsel argued that it was not enough that the person who obtained the money from the company was a shareholder. Moreover, so counsel said, there was ample evidence to the effect that, during the relevant tax years, Robert Docherty, also a director of 3D Scaffolding, participated in the business and that James Docherty was accountable to him in respect of the proper disbursement of funds by the company. Particular reference was made to the Tribunal's finding that James Docherty was concerned to hide the receipt of funds by him and that the moneys were for his own use. 48 The Commissioner sought to uphold the judgment of the primary judge, arguing, first, that the error in finding that James Docherty was the sole director of 3D Scaffolding was an immaterial error; and, secondly, s 109C(1) and Div 7A applied, irrespective of the Tribunal's mistake.

Consideration of James Docherty's appeal 49 We agree with the primary judge that, read as a whole, the Tribunal's reasons show that it made a number of separate and distinct findings about James Docherty's control of 3D Scaffolding and that they did not depend on the mistaken finding that James Docherty was the sole director of the company. These findings were that: (1) James Docherty controlled 3D Scaffolding; (2) James Docherty treated 3D Scaffolding as his own entity; (3) 3D Scaffolding did exactly as he directed; and (4) James Docherty took 3D Scaffolding's money for his own use. Whilst the Tribunal used the mistaken reference to James Docherty as the sole director to fortify these findings, these findings did not depend on his status as the sole director. It is important to note that the Tribunal did not hold that James Docherty was to be taken to control 3D Scaffolding because he was the sole director. As the Commissioner submitted in argument, the Tribunal's recognition that Robert Docherty was the second director of the company would not have entailed a different conclusion in this case. 50 Accordingly, the error on the Tribunal's part amounted to an immaterial factual error that does not vitiate the Tribunal's decision: see Kumagai Gumi Co Ltd v Commissioner of Taxation (1999) 90 FCR 274 at 285-286 per Hill J and Stead 161 CLR at 145. 51 Secondly, we agree with the primary judge that, on the facts as found by the Tribunal, the application of s 109C and Div 7A did not depend on the finding that James Docherty was the sole director of the company. The findings of fact that led the Tribunal to determine that s 109C and Div 7A applied were as follows: (a) James Docherty was Mr Borg and the payments were in fact made to James Docherty (Re 3-D Scaffolding [2007] AATA 1884 at [144], [153]). (b) James Docherty made admissions to Ms Hird, the Commissioner's auditor, that he cashed the cheques (Re 3-D Scaffolding [2007] AATA 1884 at [137]). (c) James Docherty was the last person holding the cash (Re 3-D Scaffolding [2007] AATA 1884 at [147]). (d) James and Charlie Docherty were the shareholders during the relevant tax years (Re 3-D Scaffolding [2007] AATA 1884 at [150]). (e) James Docherty treated 3D Scaffolding as his own entity. The company did as James Docherty directed. James Docherty controlled the company. James Docherty did not need or seek the consent of Charlie Docherty. James Docherty took the company's money for his own use and plainly considered that he could do what he pleased in relation to the company: see Re 3-D Scaffolding [2007] AATA 1884 at [152], [153]. (f) On the evidence, it cannot be accepted that James Docherty stole the money from 3D Scaffolding or that there was any relevant misfeasance: see Re 3-D Scaffolding [2007] AATA 1884 at [153]. (g) There was no evidence that Charlie Docherty played a part in running the company: see Re 3-D Scaffolding [2007] AATA 1884 at [151]. (h) In any case, a Jones v Dunkel inference should be drawn from the failure to call Charlie Docherty. That is, it should be inferred from this failure that Charlie Docherty's evidence would not have assisted the taxpayers: see Re 3- D Scaffolding [2007] AATA 1884 at [151]. 52 Lindgren J discussed the background and purpose of Div 7A in Di Lorenzo Ceramics Pty Ltd v Federal Commissioner of Taxation (2007) 161 FCR 198 at 201-202 [23]-[27], observing: Prior to the introduction of Div 7A, s 108 of the [Income Tax Assessment Act 1936 (Cth)] was an anti-avoidance provision intended to prevent private companies from distributing profits to shareholders and their associates tax free in the form of loans or other payments. Generally speaking, s 108 also operated to capture amounts paid or credited to a shareholder or a person associated with a shareholder, deeming such amounts to be dividends, which would therefore be included in assessable income of the recipient under s 44(1) of the [Income Tax Assessment Act 1936 (Cth)]. The deemed dividend was not, however, subject to dividend withholding tax and was unfrankable (that is, could not carry imputation credits to allow a rebate to the recipients for tax paid by the company). Importantly, however, s 108 operated only when the Commissioner formed the opinion that the amount lent or paid represented a distribution of profits. In order to be in a position to form that opinion, the Commissioner needed to consider many factors and to analyse much information, which usually would not be available unless the Commissioner conducted an audit. It was believed that many amounts paid or credited that should have been assessed as dividend income were escaping taxation. Division 7A was introduced by the Taxation Laws Amendment Act (No 3) 1998 (Cth). In the Explanatory Memorandum for the Bill for the amending Act, it was explained that the new measures would operate automatically rather than depend on the formation of an opinion by the Commissioner. On the Second Reading Speech for the Bill, the Assistant Treasurer, Senator the Hon Rod Kemp, stated: The Income Tax Assessment Act 1936 is being amended to ensure that payments and loans made by a private company to a shareholder or a shareholder's associate are treated as assessable dividends to the extent that there are realised or unrealised profits in the company. Generally speaking, the amendments applied from 4 December 1997, the date of their introduction into the Parliament. Section 109B, the first section within Div 7A, explained that the Division treated three kinds of amounts as dividends paid by a private company:

• amounts paid by the company to a shareholder or shareholder's associate (s 109C);
• amounts lent by the company to a shareholder or shareholder's associate (ss 109D, 109E);
• amounts of debts owed by a shareholder or shareholder's associate to the company that the company forgave (s 109F). The amounts were made assessable income of the shareholder or associate (under s 44(1)…) and provided a basis for reducing the company's franking account credit (under s 160AQCNC). As noted, the present appeal concerns s 109C. 53 As this passage makes plain, Div 7A is intended to operate according to objective criteria, deeming loans, advances and other amounts paid or credited by private companies to shareholders and their associates to be assessable dividends. The company's reason for making the payment, loan or advance is immaterial. 54 In this statutory context, the English case of Stephens v T Pittas Ltd 56 TC 722 offers minimal, if any, guidance. The issue in that case was whether the amounts acquired by Mr Pittas from the company were to be regarded as loans or advances by the company to him. Goulding J, sitting in the Chancery Division of the English High Court of Justice, found that these amounts could not be so regarded since there had been an outright misappropriation of the company's money by Mr Pittas that could not be treated as the act of the company: see 56 TC at 737. In any event, s 109C (unlike s 109D) is not concerned with loans or advances: see s 109C (3A). Rather, it is concerned with the bare "payment" of some amount by the company to a shareholder, irrespective of the occasion for such payment. To adopt the language of Beaumont J in MacFarlane v Commissioner of Taxation 13 FCR at 373: "[p]ayments were made by the company out of its funds which were for the individual benefit of one of its shareholders". 55 In determining whether or not s 109C(1) applied, the critical question for the Tribunal was whether 3D Scaffolding "paid an amount" to James Docherty, there being no dispute that he was in fact a shareholder in the relevant tax years. Section 109C operates in relation to payments to shareholders, not directors. The Tribunal's findings of fact were entirely sufficient to justify its conclusion that 3D Scaffolding "paid an amount" to James Docherty in the relevant tax years and, therefore, that s 109C(1) and Div 7A applied. Whether or not James Docherty was the sole director was immaterial to the conclusion reached by the Tribunal, that 3D Scaffolding had "paid an amount" to him. 56 For these reason, the appeal by James Docherty should be dismissed, with costs.
• I certify that the preceding fifty-six (56) numbered paragraphs are a true copy of the Reasons for Judgment herein of the Honourable Justices Emmett, Kenny & McKerracher.

Associate: Dated: 22 June 2009

• Counsel for the Appellant: Mr D McGovern SC with Mr A O'Brien

Counsel for the Respondent: Mr D Fagan SC with Mr R Quinn

Solicitor for the Respondent: Australian Government Solicitor