August v Commissioner of Taxation

Federal Court of Australia|2012-06-28|Before: Ms J, Mr J, Nicholas J

The appeal be dismissed.
The applicant pay the respondent's costs (not including those dealt with by orders made on 17 February 2011 and 7 April 2011). THE COURT DIRECTS THAT:
Subject to any appeal, the original exhibits be returned to the party by whom they were tendered after 28 days. Note: Entry of orders is dealt with in Rule 39.32 of the Federal Court Rules 2011

IN THE FEDERAL COURT OF AUSTRALIA NEW SOUTH WALES DISTRICT REGISTRY GENERAL DIVISION NSD 420 of 2010

IN THE FEDERAL COURT OF AUSTRALIA NEW SOUTH WALES DISTRICT REGISTRY GENERAL DIVISION NSD 422 of 2010

JUDGE: NICHOLAS J DATE: 28 JUNE 2012 PLACE: SYDNEY

Introduction 1 The applicants, Mr and Mrs August, appeal against the Commissioner's decision refusing to uphold objections to income tax assessments issued to each of them in respect of the financial year ending 30 June 2006. The appeals give rise to two main issues. 2 The first is whether profit derived by Toorak Management Pty Limited (Toorak) as a result of the sale of property at Melba was income according to ordinary concepts or income of a capital nature. The Commissioner assessed Mr and Mrs August on the basis that the profit was income according to ordinary concepts. Mr and Mrs August contend that the property was acquired by Toorak as a long term investment, and that the profit arising as a result of the sale of the property was of a capital nature. 3 The second main issue in the appeal is whether profit made by a company called Dimensional Developments Pty Limited (Dimensional Developments) upon a sale of land at Hume was income according to ordinary concepts or income of a capital nature. Again, the Commissioner assessed Mr and Mrs August on the basis that the profit was income according to ordinary concepts. Mr and Mrs August maintain that the property at Hume was acquired as a long term investment and that the profit arising as a result of the sale was of a capital nature.

The statutory FRAMEWORK 4 As I will later explain, Mr and Mrs August were beneficiaries of a number of trusts of which Toorak was the trustee. The two issues that I have identified arise by reason of the operation of s 97 of the Income Tax Assessment Act 1936 (Cth) (the 1936 Act). Pursuant to s 97, Mr and Mrs August's assessable incomes for the relevant income years included a share of the net income of each trust. The net income of the trust estate is the total assessable income of the trust estate calculated as if the trustee were an individual less certain allowable deductions: see s 95 of the 1936 Act. 5 An individual's assessable income includes income according to ordinary concepts and amounts that are not ordinary income: see s 6-5 and s 6-10 respectively of the Income Tax Assessment Act 1997 (Cth) (the 1997 Act). In particular, assessable income includes any net capital gain in an income year: see s 102-5(1) of the 1997 Act. 6 Where a capital gain is made on the disposal of an asset acquired more than 12 months before the disposal, a discount is applied in calculating the net capital gain: see s 115-25, 115-100 and Div 115 generally of the 1997 Act. If the capital gain is made by a trustee of a trust, then the capital gain may be treated as a capital gain of a beneficiary who is assessed on a share of the trust's net income attributable to the gain. The beneficiary, in calculating his or her own net capital gain or loss, grosses up the tax gain if it is a discount capital gain (that is, he or she adds any discount claimed by the trustee back in) and offsets his or her capital losses or net capital losses and applies the discount percentage relevant to his or her individual circumstances: see Subdiv 115-C of the 1997 Act. 7 If the relevant share of the profits on the disposal of the Melba and Hume properties is properly included in the s 95 net income of each trust pursuant to s 6-5 of the 1997 Act as income according to ordinary concepts, then any capital gain made by the trustee will be reduced correspondingly.

THE RELEVANT PRINCIPLES 8 The principles used to determine whether a gain made upon the disposition of property constitutes income according to ordinary concepts were not in dispute. They were explained by Hill J (with whom Lockhart and Gummow JJ agreed) in Westfield Limited v Commissioner of Taxation (1991) 28 FCR 333. 9 In Westfield the Full Court was concerned with the question whether a profit made by the appellant upon the sale of land was income according to ordinary concepts. Hill J referred to Californian Copper Syndicate v Harris (1905) 5 TC 159 as the starting point in his analysis. The test for determining whether a gain constituted assessable income that was applied in Californian Copper (at 166) was as follows: Is the sum of gain that has been made a mere enhancement of value by realising a security, or is it a gain made in an operation of business in carrying out a scheme for profit-making? 10 Hill J observed that in applying this test it is necessary to engage in "a wide survey and an exact scrutiny of the taxpayer's activities". His Honour then turned to the High Court's consideration of the test in Californian Copper. His Honour said (at 341-342): The test in Californian Copper (supra) was applied in more recent times by the High Court in Commissioner of Taxation (Cth) v Myer Emporium Ltd (supra) and GP International Pipecoaters Pty Ltd v Commissioner of Taxation (Cth) (1990) 170 CLR 124. In appreciating what was said in Myer, it is important to recall that an argument for the taxpayer was that the transaction there involved, of selling land, receiving a mortgage back at interest for a long term, and then assigning the income arising under the mortgage for a lump sum, was not income in ordinary concepts, because it was an extraordinary transaction and outside the scope of the taxpayer's business. It was in answering this argument, that the judgment of the court in Myer said (at 209): Although it is well settled that a profit or gain made in the ordinary course of carrying on a business constitutes income, it does not follow that a profit or gain made in a transaction entered into otherwise than in the ordinary course of carrying on the taxpayer's business is not income. Because a business is carried on with a view to profit, a gain made in the ordinary course of carrying on the business is invested with the profit-making purpose, thereby stamping the profit with the character of income. But a gain made otherwise than in the ordinary course of carrying on the business which nevertheless arises from a transaction entered into by the taxpayer with the intention or purpose of making a profit or gain may well constitute income. Whether it does depends very much on the circumstances of the case. Generally speaking, however, it may be said that if the circumstances are such as to give rise to the inference that the taxpayer's intention or purpose in entering into the transaction was to make a profit or gain, the profit or gain will be income, notwithstanding that the transaction was extraordinary judged by reference to the ordinary course of the taxpayer's business. Nor does the fact that a profit or gain is made as the result of an isolated venture or a "one-off" transaction preclude it from being properly characterised as income: see Commissioner of Taxation (Cth) v Whitfords Beach Pty Ltd (1982) 150 CLR 355. The authorities establish that a profit or gain so made will constitute income if the property generating the profit or gain was acquired in a business operation or commercial transaction for the purpose of profit-making by the means giving rise to the profit. The judgment, not only in this passage, but in several later passages (at 211-213), emphasises that where a transaction occurs outside the scope of ordinary business activities, it will be necessary to find, not merely that the transaction is "commercial" but also that there was, at the time it was entered into, the intention or purpose of making a relevant profit. What was said in Myer has been applied in a number of cases in this Court since. Among them are Moana Sand Pty Ltd v Commissioner of Taxation (Cth) (1988) 88 ATC 4897 and Commissioner of Taxation (Cth) v Cooling (1990) 22 FCR 42. It does not, however, follow from the judgment in Myer, or, for that matter, from the judgments in any later cases, that every profit made by a taxpayer in the course of his business activity will be of an income nature. To so express the proposition is to express it too widely, and to eliminate the distinction between an income and a capital profit. A taxpayer carrying on a business might sell its headquarters in order to move to larger premises and make a profit over historical cost. The transaction of sale may be one which arises in the ordinary course of the taxpayer's business, but that profit will not ordinarily be income, particularly where, at the time of acquisition of the site, there was no intention or purpose of profit-making by sale when the premises became too small. The profit in Cooling (supra), the receipt of a leasing incentive payment, was one intended to be made at the time the transaction with the lessor was entered into, just as the profit in Myer was one which underlay the whole transaction. (emphasis added) 11 There are two other passages in his Honour's judgment that are of particular relevance. Having rejected the proposition that the sale of the land by the appellant was in the ordinary course of its business, his Honour said (at 343-344): Once it is clear that the activity of buying and selling, which generated the profit, was not an activity in the ordinary course of business, or, for that matter, an ordinary incident of some other business activity, the profit in question will only form part of the assessable income of the appellant, by virtue of its being income in accordance with the ordinary concepts of mankind, if the appellant had a purpose of profit-making at the time of acquisition. What is meant by "profit-making" in this context? 12 His Honour then addressed certain findings made by the primary judge with which his Honour did not agree. Having done that, his Honour said (at 344-345): There may be a case (the present is not one) where the evidence establishes that the taxpayer has the purpose or intention of making a profit by turning an asset to account, although the means to be adopted to generate that profit have not been determined: cf Steinberg v Commissioner of Taxation (Cth) (1975) 134 CLR 640. Steinberg (supra) was a case decided under the second limb of the then s 26(a) of the Act. The taxpayer had, having obtained an option to purchase some land (the Rockingham land), caused a company to be incorporated, the shareholders of which included his family and himself, intending to turn the land to account in the most advantageous way; in particular, either by selling the shares in the company, or liquidating the companies, distributing the assets in specie, and then selling those assets. It was the latter course that was taken. The court by majority held, affirming Mason J at first instance, that it was not necessary, to fall within the second limb, that every step which culminates in the making of a profit should be planned or foreseen. In the words of Mason J (at 670): In a business transaction of this kind where property is acquired with the intention that a profit should be made out of its anticipated appreciation in value by whichever means prove most suitable, it matters not that the particular means by which the profit is to be made are left for subsequent decision. To the same effect is the judgment of Gibbs J (at 699-700) and of Stephen J (at 704-705). While a profit-making scheme may lack specificity of detail, the mode of achieving that profit must be one contemplated by the taxpayer as at least one of the alternatives by which the profit could be realised. Such was the case in Steinberg. But, even if that go too far, it is difficult to conceive of a case where a taxpayer would be said to have made a profit from the carrying on, or carrying out, of a profit-making scheme, where, in the case of the scheme involving the acquisition and resale of land, there was, at the time of acquisition, no purpose of resale of land, but only the possibility (present, one may observe, in the case of every acquisition of land) that the land may be resold. The same may be said to be the case where s 25(1) of the Act is involved. As the court observed in Myer, in the passage already set out, the property which generates the gain must be acquired in an operation of business or commercial transaction "for the purpose of profit-making by the means giving rise to the profit". [Emphasis added.] (emphasis added) 13 In the present case the Commissioner challenged the evidence given by Mr August and a number of other witnesses whose state of mind is directly relevant to the issues in this case. The significance of such evidence in the present case, whether it be that of Mr and Mrs August in the case of the land at Melba, or that of Mr August and the other directors of Dimensional Developments in the case of the land at Hume, very much depends, obviously enough, on the view I take of its truthfulness and reliability. In McCormack v Federal Commissioner of Taxation (1979) 143 CLR 284 Gibbs J (at 302) said: The taxpayer's evidence must of course be considered on its merits, in the light of the circumstances of the case, without any prepossession, favourable or unfavourable. If the taxpayer gives evidence that the property in question was not acquired by him for the purpose of profit-making by sale, and that evidence is accepted, he of course succeeds. In some cases the taxpayer may establish that the case does not fall within s. 26 (a), even though he does not give evidence or does give evidence but is disbelieved. Of course the fact that the taxpayer did not give evidence, if unexplained, could be taken into account in deciding what inferences should be drawn from the evidence (Jones v. Dunkel [(1959) 101 C.L.R. 298, at pp. 308, 312, 320-322]). And the fact that the taxpayer was disbelieved could, in appropriate circumstances, itself give rise to an inference adverse to the taxpayer's case (Steinberg v. Federal Commissioner of Taxation [(1975) 134 C.L.R. 640, at p. 694]). Nevertheless, if the proper inference to be drawn from the evidence is that the taxpayer bought the property for a purpose other than that of profit-making by sale, the appeal will succeed. An obvious example would be a case in which it clearly appeared that a taxpayer purchased a house and for many years thereafter occupied it as his own home. In those circumstances the natural inference, in the absence of evidence to the contrary, would be that the taxpayer had bought the house for the purpose of dwelling in it, and the fact that the taxpayer was not an honest witness would hardly matter. However, if the taxpayer's evidence of the purpose with which he acquired the property is not accepted, and it does not appear from the other evidence on the balance of probabilities that he did not acquire the property for the purpose of profit-making by sale, he will fail to discharge his onus of proof. When I speak of purpose I mean, of course, the main or dominant purpose actuating the acquisition. 14 In the present case it is accepted by Mr and Mrs August that the relevant profits will constitute income according to ordinary concepts if the properties were acquired for the purpose of profit-making by sale. In this regard, it is now settled that the purpose of profit-making by sale need not be the sole or dominant purpose: Commissioner of Taxation v Cooling (1990) 22 FCR 42 per Hill J (with whom Lockhart and Gummow JJ agreed) at 56-57, and Moana Sand Pty Limited v Federal Commissioner of Taxation (1988) 88 ATC 4897 at 4,902-4,904. It is enough, at least in the case of a commercial or business dealing, that the purpose is a substantial (or a not insubstantial) one.

general background 15 For some years prior to 1994, Mr August carried on business as a trader of coins, bank notes and other collectables. After 1994, a company known as Universal Coin Company Pty Ltd (Universal Coin) carried on that business. At all relevant times Mr August and his wife were the sole directors and shareholders of Universal Coin. 16 In 1995 Mr and Mrs August established various other companies and trusts. In that year they formed Toorak. They are the sole directors and shareholders of Toorak. In the same year they established the Toorak Management Unit Trust (Toorak Unit Trust). Each of them holds 50% of the issued units in the Toorak Unit Trust. Toorak is the sole trustee of the Toorak Unit Trust. 17 In 1995 another unit trust, the Wiz Unit Trust (Wiz Unit Trust), was established. All of the issued units in the Wiz Unit Trust are held by Mr August. Toorak is also the sole trustee of the Wiz Unit Trust. 18 In 1997, Mr and Mrs August sold their principal residence in Windsor, Melbourne. The proceeds of the sale of their house included an amount of $200,000 which they decided to invest. Later that year, Mr August went to Canberra where he spoke with Mr Spiros (Jeff) Konstantinou (Mr Konstantinou) about investing in the Canberra property market. 19 Mr Konstantinou and his wife, who lived in Canberra, were originally friends of Mrs August's parents who also lived there. Mr August met Mr Konstantinou in 1990 at a party to celebrate Mr and Mrs August's engagement. In 1996 Mrs August approached Mrs Konstantinou and asked her to be godmother to Mr and Mrs August's eldest child. Mrs Konstantinou suggested that her eldest son, Harry Konstantinou, be godfather. From that time on the relationship between the two families was particularly close. 20 For many years Mr Konstantinou worked as a property developer in Canberra. At some stage Harry Konstantinou became involved in Mr Konstantinou's business. It is apparent that by 1997, Mr Konstantinou was a very experienced property developer, who was well connected with others involved in the Canberra real estate market. It is also apparent that Mr Konstantinou's business (or, more accurately, those of the various corporate entities he controlled) included buying and developing commercial real estate that would then be sold, preferably on a fully tenanted basis. The evidence indicates Mr Konstantinou completed many such projects, and that he was extremely astute at identifying commercial sites suitable for these types of developments. It is not surprising, therefore, that Mr August turned to Mr Konstantinou for advice on investment opportunities in Canberra.

Purchase and development 21 In late October or early November 1997, Mr August travelled to Canberra to consult with Mr Konstantinou concerning possible investment opportunities. Mr Konstantinou told Mr August that blocks 2 and 12 of Section 40, Melba, a suburb of Canberra, had recently passed in at auction for $155,000 and that both properties were now on the market for a combined price of $165,000. Mr Konstantinou told Mr August that these properties would make a good investment provided that Mr August was prepared to pay for some improvements. In November 1997, Toorak, as trustee of the Toorak Unit Trust, purchased blocks 2 and 12 for $165,000. 22 Block 2 included a vacant shop in a very run down condition. Shortly after it was purchased by Toorak, Mr August was approached by Mr Rourke who wanted to lease most of this space for use as a supermarket. Mr August needed to spend about $100,000 to make the shop ready for Mr Rourke, which Mr August agreed to do. In August 1998, Toorak entered into a five year lease with Mr and Mrs Rourke for most of the available space on block 2. The lease included two five year options to renew. 23 In 1998 Mr August also took steps to obtain extensions of the Crown leases for blocks 2 and 12, and a new and broader purpose clause that would apply to both blocks. In the result, blocks 2 and 12 were consolidated to form block 29, which became the subject of a new Crown lease commencing July 1998. 24 In late 1998 Mr August negotiated the purchase of adjoining block 26 for $95,000. This block, which was purchased by Toorak early the following year, incorporated a takeaway food shop. The area occupied by this shop was the subject of a lease in favour of the shop's operator. This lease was granted in October 1998 for a term of five years with an option to renew for a further five years. 25 In late 1998 or early 1999 Mr August placed advertisements for the lease of another shop within block 26 which was then unoccupied. This shop was leased in June 1999 to a husband and wife who carried on business as hairdressers. The lease was for five years with an option to renew for a further five years. 26 Also in late 1998 or early 1999, Mr August set about looking for a tenant for other unoccupied space in block 29. In March 1999 Toorak granted a lease to butchers who then opened a butcher shop. The lease of the butcher shop was for five years, with an option to renew for a further five years. 27 By mid 1999, Toorak's property holding at Melba consisted of blocks 29 and 26 incorporating four shops, all of which were by then tenanted. Around this time Toorak, as trustee for the Toorak Unit Trust, purchased blocks 30 and 31. These blocks consisted of land formerly used as car parking space for the Melba shops that was not at that time the subject of any Crown lease. Toorak purchased blocks 30 and 31 for $42,000 each at public auction. Mr August and Mr Konstantinou attended the auction. 28 It is necessary to say a little more about blocks 30 and 31. Adjoining the northern end of block 29 was a series of car spaces. There was a similar series of car spaces adjoining block 26 on its eastern side. The car spaces were all situated on Crown land. Blocks 30 and 31 came into existence after the relevant government authority (Chief Minister's Department - Office of Asset Management) decided, in February 1999, to reduce the number of car spaces at each of the northern end of block 29 and at the eastern side of block 26 from approximately 20 to approximately 15. 29 Soon after it acquired blocks 30 and 31, Toorak took steps to deal with what was described in the evidence as a "waste management issue" by combining block 29 and block 30 to form a new block 34. Following this consolidation, Toorak had title to the following blocks: Block 34 (formerly block 30 and 29, block 29 being the consolidation of blocks 2 and 12 the subject of the first purchase); Block 26 (being the block acquired in December 1998); Block 31 (acquired at public auction in June 1999 together with former block 30). 30 In 2000, Toorak spent approximately $120,000 to construct two shops on block 31 and block 30. It is not clear from the evidence when construction work finished. It may have been completed in 2000, although I think it more likely that it was not completed until some time the following year, or perhaps even early in 2002. Mr August gave evidence that: After new premises were constructed on Blocks 30 and 31, and throughout, my intention remained to have Toorak hold the Melba Shops as a long-term investment. I considered that it was now a valuable investment that could be borrowed against. By the time construction of the shops on blocks 30 and 31 was completed, Toorak's property holding at Melba incorporated a total of six shops.

The valuations 31 In 2002, Mr and Mrs August moved from Melbourne to Canberra. In April of that year, Westpac Banking Corporation (Westpac) obtained a valuation (the Westpac Valuation) of the Melba shops. The Westpac Valuation assigned the properties a value of $1.375 million as at April 2002. Mr August gave evidence that "[t]he purpose of the valuation was to use the property as security to borrow money for other purposes". As at the date of the Westpac Valuation, neither block 30 nor block 31 had been leased. 32 According to a Tenancy Schedule attached to another valuation in evidence (see below) block 30 was leased for a term of five years with an option to renew for a further five years to a company that operated a Chinese restaurant. The commencement date of the lease in the Tenancy Schedule is shown as 15 April 2003. Mr August gave evidence that this lease was entered into in 2002. That is quite possible, but he may be mistaken as to the year this lease was entered into. In any event, in understanding the course of relevant events, I see the commencement date of the lease as being of greater significance than the date it was signed. 33 In 2004, block 31 was leased for five years with an option to renew for a further five years for use as an Indian restaurant. The Tenancy Schedule shows that the commencement date of this lease was 21 June 2004. 34 Mr August gave evidence that he was happy at this time with the way things had turned out. He said he was enjoying the rental income the shops were delivering and happy that he now had good security for future borrowings. 35 In early 2005, Mr August approached Bendigo Bank in relation to financing. Bendigo Bank obtained a valuation (the Bendigo Bank Valuation) in respect of the Melba shops as at March 2005 of $1.83 million. Bendigo Bank later made a facility of $1.281 million available to Toorak secured against (inter alia) the Melba shops. The purpose of this facility was, according to the letter of offer, to assist in the refinancing of an existing facility with Westpac. Mr August gave evidence that the loan from Bendigo Bank "came into effect" on 26 June 2005 which I infer was the date on which the facility was drawn down. 36 The facility made available by Bendigo Bank was an interest only loan for a term of five years. The whole of the amount of the facility was required to be drawn down in one lump sum. The interest rate, although not fixed, was calculated by reference to the Bendigo Bank's five year fixed lending rate to which a margin of 1.5% was to be applied. At the time the facility was established, this equated to 7.54% p.a. or about $96,000 p.a. 37 Mr August gave evidence that the facility was used by Toorak "for purposes unrelated to the Melba shops". He said that his intention at this time was to use the rental income from them to service interest on the facility. The Bendigo Bank Valuation shows that in March 2005 the Melba shops were generating net rental income of approximately $170,000 p.a.

Mr Tony Hanley 38 In June 2005, Mr August had a conversation with a real estate agent, Mr Tony Hanley, with whom he had already had some contact in relation to the Melba shops. Mr August gave evidence that it was Mr Hanley who approached him, rather than the other way around. According to Mr August, Mr Hanley told Mr August that the market was going to peak, that it was a prudent time to sell, and that he could obtain more than market value for the Melba shops. 39 On 6 June 2005 Mr Hanley provided Mr August with a letter that included various price estimates. He estimated that the Melba shops could be sold for between $2.0 million and $2.25 million if sold in one line and between $2.4 million and $2.6 million (net) if the shops were sold individually as unit title. 40 In conversations between Mr August and Mr Hanley that occurred in or after June 2005, Mr Hanley advised Mr August that it would be to Mr August's advantage if the shops were converted to unit title (see Unit Titles Act 2001 (ACT)) so that they could be sold individually. According to Mr August, Mr Hanley said that this would not necessarily increase the sale price, but it would broaden the range of potential purchasers. Mr August said that he was persuaded by the agent to pursue this possibility and he did so later that year.

The exclusive agency agreement 41 Mr Hanley's company, Location Real Estate Pty Limited, entered into an exclusive agency agreement with Toorak in September or October 2005. The terms of the document recording the exclusive agency agreement are somewhat muddled as a result of the use of a standard form document which was not adequately adapted for the purpose. 42 The exclusive agency agreement was headed "Exclusive Auction/Selling Agency Agreement". It was apparently signed by Mr Hanley and Mr August on or about 5 October 2005 although it refers to 1 September 2005 as the commencement date. Relevantly, it provided: For the sale of: Blocks 26, 31, 34 Section 40 Melba Shopping Centre Melba Place, Melba ACT _________________________________________ With inclusions as follows: AS PER BLOCKS/FREESTANDING OR UNIT TITLED ____________________________________ This agency will begin on 1 September 2005 ________________ and terminate at midnight on ____ 90 days after registration or proposed units plan _______________ Or any later date that the principal may notify in writing provided that after the expiry of the above stipulated dates, this agency will continue as a non-exclusive agency until the agency is either withdrawn in writing or the property is sold. The agent is authorised to sell the property for the price as agreed per the schedule provided or any other price the principal may agree to accept. The sale of the property is to be advertised as follows: As per Marketing agreement dated __ 6th June 2005 __________________ _____________________________________________ Location Real Estate Pty Limited is given exclusive selling rights and shall be entitled to payment of __ 2.5% commission on the total sale price achieved of the property (s) is sold during the currency of this exclusive selling agency agreement or any extension thereof … (emphasis added) There is nothing in the evidence to suggest that the marketing agreement dated 6 June 2005 is anything other than the letter of the same date to which I have previously referred. It will be recalled that the letter of 6 June 2005 contemplated the sale of the Melba shops either in one line or as individual units. As it happened, it was not possible for the Melba shops to be converted to unit title. Mr August became aware of this some time after the exclusive agency agreement was signed. 43 In cross-examination Mr August made reference to the termination of the exclusive agency agreement. Although I accept that the period of the exclusive agency given to Mr Hanley was limited to a period of 90 days, it does not follow that I accept that the exclusive agency agreement was terminated or the Melba shops were withdrawn from sale. In this regard, there are two observations I would make concerning the terms of the exclusive agency agreement. First, the exclusive agency agreement contemplated that the Melba shops might be sold either in one line or as individual units. Secondly, it expressly provided that after 90 days the agency would "continue as a non-exclusive agency until the agency is either withdrawn in writing or the property is sold." 44 It was not until October or November 2006 that Mr Hanley obtained an offer to purchase the Melba shops in one line for $2.35 million. That offer was accepted by Mr August on behalf of Toorak, and contracts of sale providing for a purchase price of $2.33 million were exchanged on 26 March the following year.

The failure to call Mr Hanley 45 It is convenient at this point to deal with a submission made on behalf of Mr and Mrs August in relation to Mr Hanley. It was submitted on their behalf that a Jones v Dunkel (1959) 101 CLR 298 inference should be drawn against the Commissioner as a consequence of his failure to call Mr Hanley. In support of this submission reliance was placed on a notation in the Reasons for Decision issued by the Commissioner that show that in November 2008 the Commissioner's officers interviewed Mr Hanley in connection with their investigation of Mr August's taxation affairs. 46 It is important to observe at the outset that the relevant notation establishes no more than that a meeting of the kind described occurred. In particular, it does not indicate what, if anything, Mr Hanley may have told the Commissioner's officers that is of relevance to the matters presently in issue. 47 In the circumstances, I do not think there is any basis to draw an inference against the Commissioner as a result of him not having called Mr Hanley. In particular, there is no basis for inferring that the Commissioner feared to call Mr Hanley because the Commissioner knew that Mr Hanley's evidence would not assist his defence of the case: see, for example, Fabre v Arenales (1992) 27 NSWLR 437 at 449-450 per Mahoney JA (with whom Priestley JA and Sheller JA agreed at 454). In the circumstances, I decline to draw any Jones v Dunkel inference against the Commissioner. It was not submitted by the Commissioner that I should draw a Jones v Dunkel inference against Mr and Mrs August as a consequence of their failure to call Mr Hanley and for that reason I do not do so. 48 However, the absence of any evidence from Mr Hanley is not without significance. That much of Mr August's evidence of his dealings with Mr Hanley is uncorroborated by other evidence is a matter I regard as quite significant in light of the view I have formed as to Mr August's reliability as a witness, which I will refer to later in these reasons.

Investment in commercial real estate at Centre Place, Melbourne 49 There are three further matters that were dealt with in the evidence that I should mention even though, ultimately, they have had no bearing on my ultimate conclusions. 50 The first concerns Toorak's acquisition of various shops in Centre Place, Melbourne. In 1995 Toorak, as trustee of the Toorak Unit Trust, acquired a property at 11 Centre Place. Mr August said that this property was acquired for the sole purpose of holding it as an investment, and with a view to leasing it to Universal Coin as business premises. After acquisition, the property was leased to Universal Coin under a five year lease with two five year options. Mr August said that in 1998 he sought to expand the business premises and that he caused Toorak to enter negotiations for the purchase of adjacent premises at 7, 9, 13 and 15 of Centre Place. That year, Toorak, as trustee for the Wiz Unit Trust, purchased 15 Centre Place where there was a vacant shop. Mr August said that he was unable to persuade the owner of 13 Centre Place to sell, which meant that 11 Centre Place and 15 Centre Place could not be joined up. He said that he broke off negotiations for the purchase of the other adjoining properties, and leased 15 Centre Place to a third party. In 2000 Toorak sold 15 Centre Place, and in 2001, 11 Centre Place.

Investment in commercial real estate in Little Collins Street, Melbourne 51 The second matter concerns Toorak's investment into commercial real estate in Melbourne in 2001. This matter received little attention in cross-examination. In his affidavit evidence, Mr August explained that in 2001 Toorak, as trustee for the Toorak Unit Trust, invested in a line of fully tenanted shops at 1, 3, 5, 7 and 9 Little Collins Street, Melbourne. According to Mr August, this was his first major investment, being in the amount of $2.0 million, which was borrowed. He said that although he intended this investment to be long term, in 2002, at the instigation of a panicked co-investor, the properties were sold for no material gain or loss.

Investment in residential real estate in Canberra 52 The third matter concerns Mr August's foray into the residential property market in Canberra beginning in 2003. In 2001 Mr August established August Investment Holdings Pty Limited (August Holdings). Toorak is the trustee of five other unit trusts. August Holdings is the sole beneficiary in the case of three such trusts, and a 50% beneficiary in the other two. 53 Between May 2003 and January 2005 Mr August caused Toorak, as trustee for one or other of the five unit trusts, to purchase ten residential properties in suburbs of Canberra for the purpose of resale at a profit. 54 Details of the relevant transactions in residential real estate are as follows: Property Date Acquired Initial Cost Date Sold Sale Value Lambrigg Street, Farrer 20 May 2003 $324,950 7 October 2004 $379,000 Investigator Street, Red Hill 22 May 2003 $479,000 19 November 2003 $600,000 Maranboy Street, Fischer 23 June 2003 $250,000 22 September 2003 $298,000 Raymond Street, Ainslie 27 June 2003 $412,000 30 May 2006 $535,000 Endeavour Street, Red Hill 3 October 2003 $530,000 11 March 2004 $620,000 Hopetoun Crescent, Deakin 10 October 2003 $525,000 23 December 2004 $735,000 Barron Street, Deakin 27 November 2003 $525,000 5 March 2004 $610,000 A'Beckett Street, Watson 2 February 2004 $305,000 8 October 2004 $338,000 Ossa Place, Lyons 10 January 2005 $335,000 21 March 2006 $339,000 Potts Place, Farrer 17 January 2005 $315,000 - -

General approach 55 It is common ground that Toorak's purposes and intentions with respect to the acquisition of the Melba shops will reflect Mr August's purposes and intentions. Although Mrs August was a director of Toorak, her affidavit (upon which she was not cross-examined) made clear that she left all decision making in relation to financial and business matters to her husband. 56 There are no contemporaneous documents that evidence Mr August's purposes or intentions when acquiring the Melba shops. Whether or not they were acquired for the purpose or with the intention of engaging in a scheme of profit-making by sale must be determined by reference to all the surrounding circumstances as well as the evidence of Mr August as to his own purposes and intentions.

Mr August's evidence of his purposes and intentions 57 In his affidavit Mr August stated that his sole intention when he acquired blocks 2 and 12 was to find tenants for the shops and hold them as long term investments. He said that at the time those blocks were acquired, he had no intention of selling them. This evidence, and other evidence given by him concerning his intentions, was the subject of extensive cross-examination. 58 In cross-examination Mr August gave evidence that at the time he purchased the Melba shops the possibility of selling them was never in his mind. He said that such a sale "wasn't even a remote possibility". Mr August said that in acquiring blocks 2 and 12, he acted on Mr Konstantinou's recommendation that they were "cheap". He went on to describe the Melba shops as something he wanted to own forever, and an investment which he wanted to hold until he died. 59 At one point in his cross-examination, Mr August described his purchase of blocks 2 and 12 as "a risky investment" though he also said that there were circumstances that "made it seem less risky". One of these, I infer, was the possibility of acquiring additional blocks which would accommodate additional tenants. It is likely that Mr Konstantinou was alive to the possibility of enlarging the initial holding over time, not only through the purchase of block 26 (as occurred in 1998) but also by acquiring additional land to build on through the elimination of some car parking spaces (as occurred in 1999). There is no reason why Mr Konstantinou would not have conveyed his thinking in relation to these possibilities to Mr August at the time blocks 2 and 12 were being acquired and it is likely that he would have done so. 60 When it was put to Mr August that he was aware that his initial investment was a "risky investment" Mr August said that "this is where the extra two blocks which we lobbied the government to put onto the market would actually make it a safer investment by having six tenants as opposed to four tenants". This lobbying (which I infer took place in 1998 or, at the latest, early 1999) had the desired result. By February 1999 the Office of Asset Management had decided to release the land and, by mid 1999, blocks 30 and 31 were controlled by Toorak. 61 The Commissioner submitted that it was significant that in 2004 - the year in which the land and title consolidation, and the renovation, construction and leasing of all six shops had been completed - Mr August began discussing with Mr Hanley the possibility of selling the Melba shops. Since it was Mr August's evidence that he had no intention of selling the Melba shops in 2004 (or at any prior time), his dealings with the real estate agent, Mr Hanley, beginning in that year, are of considerable importance. 62 Mr August's evidence was that his discussions with Mr Hanley commenced in 2004 and that they were initiated by Mr Hanley. Mr August already knew Mr Hanley who he had met through Mr Konstantinou. I am satisfied that Mr August began discussing the value of the Melba shops with Mr Hanley in 2004 once all six shops had been tenanted. 63 In his evidence Mr August said that it was in 2004 that Mr Hanley started "hounding" him both over the telephone and in person. Asked about inquiries he made of Mr Hanley, Mr August gave the following evidence: Now at this point you then made inquiries with Mr Handley [sic], a real estate agent, as to the value of the land? ---Yes. I mean, I looked upon it as if - if I invested in BHP shares, you could just look in the business section and see how much your shares were worth. I look upon talking to a real estate agent the same way. You don't have any intention to sell but still it is just idle curiosity. Asked about Mr Hanley's "hounding" of him Mr August gave the following evidence: Now, he was hounding you to do what? ---Tony would come up with a deal, "I've got a property over here, if you sell Melba I can swap you into this," it was just these really weird convoluted deals that just - you know, I wasn't interested in, it's just like, "Tony, leave me alone, please." And you however, signed an exclusive agency agreement with him in 2005 even though you told him that you weren't at all interested in selling, is that correct? ---Yes, that's correct. Now, surely that's inconsistent with someone who intended to die hanging onto the titles of Melba shops? ---Yes, that's true, in--- And you could have said, "No, go away, I'm not interested in selling"? ---True, but when you compared what he was talking about and compared to the most recent valuation, it was just so far above the recent valuation I thought, mate, if you could - honestly, you know, you can roll it over and put it into another investment if you want to. And I looked at it and he was saying, you know, figures of 2.6 million, "All you have to do is strata title it and dah dah dah" and I'm going, "That's a crazy price, mate, you really think we can do that" and he is going, "Yes, you know, we can do that" and I'm going, "Well, you know, on that basis, yes, I'll sell." 64 I accept that people frequently show an interest in the value of assets which they have no intention of selling. However, Mr August already had the benefit of a recent valuation undertaken in March 2005 that valued the Melba shops at $1.83 million. I consider it unlikely that he would have sought Mr Hanley's opinion as to the value of the Melba shops in June 2005 unless he was considering selling them either then or in the near future. Further, I am not satisfied that Mr August would never have agreed to sell if he had not been offered a price "well over the market value". Nor am I satisfied that it was ever Mr August's intention to hold the Melba shops as a long term investment. 65 I think the most plausible explanation for what occurred commencing in or about June 2005 is that after completing the development and securing long term tenants Mr August began to investigate selling the Melba shops, and that, in doing so, he was acting in accordance with a long standing plan to re-develop a run down shopping centre into a rejuvenated and enlarged complex that he always intended to sell (if he could) for a substantial profit. This was, as I will explain, the principal way in which Mr Konstantinou conducted his business and it was, in my view, an approach that Mr August sought to emulate. 66 I am satisfied that by June 2005 Mr August was preparing to sell the Melba shops subject, of course, to finding a buyer or buyers willing and able to pay an acceptable price for them. Mr Hanley's letter of 6 June 2005 was, Mr August agreed, provided at his request. I do not accept that it was obtained by him out of "idle curiosity". Rather, I am satisfied that Mr August obtained the letter when he did because by that time he was preparing to sell the Melba shops, by then developed and fully tenanted, into a rising market which Mr Hanley was warning him was going to peak. 67 If between late 1997 and 2000 Mr August acquired blocks 2 and 12, then 26, 30 and 31 and redeveloped them solely with a view to holding them for many years to come, then why was he giving consideration to selling them in June 2005? The evidence does not reveal the existence of any change in circumstances that might explain Mr August's decision to sell except for what he described as the "mad price" that he was ultimately offered that was, according to Mr August, "well over the market value". Mr August said that he was "pestered" by Mr Hanley, that he told Mr Hanley on numerous occasions that he was not interested in selling but that, eventually, Mr Hanley told him he had a buyer willing to purchase the Melba shops for $2.35 million. There are no documents in evidence apart from Mr Hanley's letter of 6 June 2005 and the signed exclusive agency agreement that constitute or record communications between Mr August and Mr Hanley in 2004 and 2005. In particular, there is no evidence apart from Mr August's evidence to suggest that he was being "hounded" or "pestered" by Mr Hanley at any time during those years or that Mr August expressed any lack of interest to Mr Hanley in selling the Melba shops. 68 After being asked about the extent of his communications with Mr Hanley between 2004 and 2005, Mr August gave the following evidence: How often were you speaking to the agent in 2005? ---In 2005, when he first spoke to me, this is prior to the signing, there may have been a handful of times. Once we signed, obviously--- What is a handful? Is that half a dozen? ---Half a dozen, less than - five or - less than half a dozen, yes. All right? ---Okay. So from the time that we signed the agency agreement, obviously there was more regular contact, I can't say exactly how many times. Once the regular contact -once the agency agreement was terminated because we couldn't go down the path of strata titling. The phone calls would have been or the communication or contact would have been random in 2006 and that it was only when Mr Handley [sic] - because I'd gone down, you've got to understand, the guy was pestering me to sell. It was like a dog with a bone. Ray [sic] just was relentless so we went down this process of okay, well, let's try it Tony, right, you know,. [sic] We'll go down this path of strata. No, that hasn't worked. Okay. Look, not interested, mate, thank you, good bye. Occasionally I would get a call and eventually he said to me, listen, I've got somebody, in fact I think I've got that in my affidavit where I said, listen, just don't contact me unless, you know, I'm just not interested, right, unless somebody offers me a mad price, I'm not interested. Right. So, you know, that's kind of a go away expression. 69 In the absence of evidence corroborating Mr August's account of his dealings with Mr Hanley, I do not accept that Mr Hanley "hounded" or "pestered" him or that he told Mr Hanley that he was not interested in selling. 70 One point to note about the reference to termination of the agency agreement in Mr August's oral evidence extracted above is that there was no other evidence to show that the exclusive agency agreement was ever terminated. I have already made some observations concerning the terms of the exclusive agency agreement. I am not satisfied that the exclusive agency agreement was ever terminated or that Mr August ever took steps to withdraw the Melba shops from sale. 71 On the matter of Mr August's reasons for agreeing to sell, his evidence that the purchaser who eventually agreed to buy the Melba shops was willing to pay "well over the market value" or "a mad price" is, in my view, not supported by the evidence. 72 If the Melba shops provide a reasonable guide, the property market in Canberra for commercial property was rising steadily between 2002 and 2006. In April 2002 the Westpac Valuation assigned a value of $1.375 million to the Melba shops. The Westpac Valuation described the commercial real estate market in Canberra as: very buoyant with an acute shortage of quality properties and a pool of investors looking at commercial real estate as a preferred investment vehicle. 73 In March 2005 the Bendigo Bank Valuation assigned a value of $1.83 million to the Melba shops. The Bendigo Bank Valuation stated that real estate investment in Canberra had strengthened significantly over the previous 12 months and that there was strong demand for quality commercial real estate. 74 Neither the Westpac Valuation nor the Bendigo Bank Valuation addressed the possibility of converting the Melba shops to unit title. 75 When read together, the Westpac Valuation and the Bendigo Bank Valuation show that between April 2002 and March 2005 the value of the Melba shops increased by over 30%. They also suggest that a significant proportion of that increase was the result of a strengthening in the market that occurred in the last 12 months of that period. 76 In June 2005, Mr Hanley estimated that the Melba shops would fetch between $2.0 million and $2.25 million if sold in one line or between $2.4 and $2.6 million (net) if converted to unit title and sold individually. Having obtained a sole agency in October 2005, Mr Hanley finally succeeded in finding a buyer for the Melba shops in one line at $2.35 million in November 2006, which was about 18 months after he provided Mr August with his written opinion. The figure at which the Melba shops sold is only slightly above the upper end of the price range specified by Mr Hanley in June 2005 for a sale in one line, and is $250,000 below the $2.6 million that Mr Hanley said he was confident of achieving in the event the Melba shops were sold with unit titles. 77 As is apparent from what I have already said, I do not accept Mr August's evidence that the possibility of selling the Melba shops never occurred to him at the time Toorak acquired them or that it was ever his intention that they be retained as a long term investment. In his evidence Mr August would not even accept that the possibility of a sale entered his mind at the time of the initial acquisition even though it was, as he accepted in his evidence, a risky investment. I do not believe that Mr August would not have turned his mind to the possibility of re-selling the Melba shops at the time of the initial acquisition, given that he was investing $200,000 or more on some run down shops with no tenants at a time when the commercial property market in Canberra was in the midst of a serious downturn. 78 Mr August made the initial purchase of blocks 2 and 12 on the faith of Mr Konstantinou's advice. He understood Mr Konstantinou had a proven track record in purchasing, developing, leasing and selling properties of this kind. Mr Konstantinou advised Mr August that blocks 2 and 12 were cheap even though the buildings on them were run down and unoccupied. In my view, Mr August would have turned his mind to the possibility of selling blocks 2 and 12 if only for the purpose of having an "exit strategy" should his investment not work out. That is, of course, far from determinative of the substantive issue to be decided, but it is nonetheless significant because Mr August's refusal to accept that he ever turned his mind to the possibility of resale − even if only in the context of an exit strategy - raises serious doubts in my mind as to the reliability of his evidence generally. 79 Mr Konstantinou also gave evidence, some of which is relevant to the circumstances in which Toorak came to purchase the Melba shops. Mr Konstantinou said that at $165,000 blocks 2 and 12 were being offered at well below market value primarily because the shops on those blocks were vacant and the Canberra property market was experiencing a downturn. The following evidence of Mr Konstantinou is of particular relevance: … In 1997, when you first became aware of a block at Melba coming up for sale, it was just the one sale which was two small blocks, wasn't it? ---No, no. It was a rundown shopping centre - Yes?--- --- with one takeaway. The butcher was closed, the supermarket was closed. And then he bought it at a very good price because no one wanted it, and beside of each end there was two - two small lands, and then the government put her up for auction, and that's --- Yes. Before you run away with the future of it, at the time, in 1997, there were blocks 2 and 12 which were for sale together---?---Yes. - which had passed in at auction; is that correct? ---Don't remember. If you don't remember, that's fine? ---I don't remember. But the sale price that was being asked was 165,000. Do you remember that? ---No, but it will have been around that price. And I think you said in your evidence just then that it - "buying at a good price". When you say "at a good price", are you referring to the resale value were it developed and made up to scratch?---No, when you buy it for that item, for that land. So ---?---And then what you put on it is what makes it more worthwhile. But at the time you suggested that Peter buy it, it was very rundown, wasn't it? ---It was closed. Yes, and there were no businesses in that particular block? ---Only one takeaway. Which was not in the block for sale? ---That's correct. So there were no tenants in that particular block?---No, no. That's why he bought it at a good price. And when you say "a good price", are you saying that you felt it was less than the market value?---A lot less. What was your view of the market value?---Will have been six, seven, eight hundred thousand. Melba shops? ---Melba shops. That one particular block?---Yes. At that time?---You mean with the building on it? Well, it had a building on it, didn't it---Yes, it had a building on it. And you said that the price that you recall as being around 165,000 was a good price, and I'm saying to you that that would indicate that you felt it was worth more at that time?---Might, yes. HIS HONOUR: It was the six or eight hundred thousand you just mentioned with a new ---?---What --- Redeveloped or in its then condition?---No. I said before it gets redeveloped because we don't know how it's going to be. You know, it - if that was leased, that was how much the shopping centres, they were going at that rate at that time in Canberra because Canberra had a downturn in those - in those years. MS NEEDHAM: So you took the view that if Peter were able to buy the whole shopping centre and redevelop it, it would be worth six to eight hundred thousand; is that right? ---Yes, I think so. … Yes, but I'm just asking at the time when you were giving Peter advice on whether to buy the property, did you say, "Look, I think this is being sold at a lot less than it could be worth with a bit of work," or words to that effect? ---Well, I will call it "cheap". So you said to him, "It's really cheap"? ---Cheap", yes. And did you give him your experienced view of what these kind of matters - what these kind of developments could be worth? ---Well, it had potential. That's what - that's how I looked at it. And did you tell him you felt it had potential to be worth a lot more? ---I think so, must have told him. … That the Melba shops you felt was a good opportunity, where he wouldn't lose his money. Is that right? ---That's correct. Part of that view that you took, that he wouldn't lose his money in Melba, was because he felt it was worth a lot more than what the vendor was asking? ---That was my opinion. Was it also the case that you felt that there were risks in this investment? ---At that price, I don't think it was a risk. There were, as I have said, no tenants as yet? ---No tenants, yes. That was the only thing he's --- … A number of small suburban shopping centres in Canberra ---?---They were - ---were empty at this point? ---They were closing down, yes. Yes. So there was that aspect that Peter was taking on a bit of a risk buying this but you felt that if he couldn't get tenants he would be able to resell it for a better price. Is that right? ---Yes. After you fixed it up. Did you reassure him to that extent? Did you tell him that you felt that the risk was reduced because of that resale value? ---Yes, I did. Now, he took your advice and purchased Melba, at least blocks 2 and 12 and he then found tenants and renovated those properties? ---Correct. 80 Mr Konstantinou's evidence that he told Mr August that the risk was reduced because of the resale value suggests that Mr August gave consideration (contrary to Mr August's denials) to the possibility of sale at the time of acquisition. 81 I am satisfied that Mr August's account of his intentions at relevant times is not reliable. In my view, he embellished and exaggerated his evidence in a manner that he perceived would assist his case. This is true, in my view, not only of his evidence as to his state of mind at relevant times, but also of his evidence about his dealings with Mr Hanley. 82 Of course, the fact that Mr August may have embellished and exaggerated his evidence does not establish that the Melba shops were acquired as part of a profit-making scheme, but it has left me in a situation where I have had to form a view as to Mr August's intentions at relevant times in circumstances where his direct evidence as to his state of mind is unreliable. 83 Mr August gave an account of driving around Canberra on numerous occasions with Mr Konstantinou. Some of these drives are likely to have occurred either prior to or around the time Toorak acquired blocks 2 and 12. According to Mr August's evidence, during the course of these drives Mr Konstantinou would point out to Mr August various commercial and industrial properties which Mr Konstantinou had previously purchased, developed and sold. Mr August gave the following evidence in cross-examination concerning these drives: What kind of developments did he show you?---Commercial developments. And when you say commercial, is that - that includes industrial?---Yes, that's correct. When you say commercial developments, would you put the Melba shops in the same category as a commercial development?---No. Well, not really because he would buy the land, he would build the property, he would lease it out and then he would sell it. So Melba shops was an already built structure that I renovated and leased and held as an investment. Did he have any developments of shops that he pointed out to you on these drives?---Initially I can't recall, he may have. And it's true to say that the impression you gained on your drives around Canberra was that Jeff, if I can call him that, had a very good knowledge of Canberra real estate?---Yes, I would say that would be true. And he had quite an impressive property portfolio at the time when he was driving you around?---No. I didn't know what his portfolio was, all he showed me was properties that he had developed and sold. And sold?---Yes. 84 Mr Konstantinou's own description of his development activities was slightly different to that given by Mr August. Mr Konstantinou said that the properties he purchased were developed so that they might be either sold or leased. As Mr Konstantinou explained, if he got a good price for a property he purchased and developed, he would sell it, but if he did not get a good price he would keep it. Based upon Mr Konstantinou's evidence, I am satisfied that most of the properties that had been developed by him or his related entities were commercial or industrial properties that he developed, leased and then sold. This is the approach to investment in the Canberra commercial real estate market that I consider Mr August was seeking to emulate when he purchased blocks 2 and 12 in November 1997.

Conclusion in relation to the Melba shops 85 I am not satisfied that the Melba shops were acquired as long term investments. Rather, I think it more likely than not that they were acquired by Toorak as part of a profit-making scheme with the principal intention that they be developed, tenanted and sold for a profit.

The Purchase of Block 55 Section 6 Mitchell 86 In 2001 Dimensional Developments was formed for the purpose of acting as the manager of a joint venture which, according to a deed dated 6 August 2001, was established by Konstantinou Developments Pty Limited (Konstantinou Developments) as trustee for the S&F Konstantinou Family Trust and Toorak. At all relevant times Mr August and Mr Konstantinou and his sons were the directors and shareholders of Dimensional Developments. 87 Mr August gave evidence that in or around June 2001 he was aware that what he considered to be the best commercial property available in Mitchell in the ACT - Block 55 Section 6 Mitchell - (Block 55 Mitchell) was scheduled to go to auction. He said that the day before the auction he had a conversation with Mr Konstantinou and Harry Konstantinou which, according to his affidavit, was to this effect: [Mr August]: Jeff, I expect that you will be bidding on the Mitchell block of land tomorrow? Jeff: No. I am keeping my powder dry because I am tendering for a big project in Belconnen. I think I am the front runner. [Mr August]: Well, the Mitchell property would be a high quality investment for when you wind down. Would you be interested in it on that basis if I paid for the land and you did the building for investment? That is, we would go halves and I would provide the initial purchase price. We could then think about do [sic] the same thing with future properties later on. Jeff: I will get Harry on speaker to see what he thinks. Harry, Peter proposes a joint venture over the Mitchell block with us [on the above basis]. What do you think? Harry: That is a good idea. I agree. Jeff: I agree. 88 Mr Konstantinou gave an account of a conversation he had with Mr August in 2001 concerning the Block 55 Mitchell property. According to his affidavit, a conversation to the following effect occurred: [Mr Konstantinou]: Peter, a block at the most prominent corner in Mitchell is coming up for auction in a few weeks. I would like to buy it but I have three blocks that I must develop under the Crown leases so cannot afford it at the moment. Peter: How about if I put up the money to buy the block and you can develop it. We can then lease it. We can go 50/50. [Mr Konstantinou]: This is a good idea. I will discuss it with the kids to see what they think. 89 Mr Konstantinou said that he then had a conversation with his son, Harry, after which he spoke to Mr August. According to Mr Konstantinou, he told Mr August that his children agreed, and that they would do a 50/50 venture with Mr August. 90 In June 2001 Mr August, Mr Konstantinou and Harry Konstantinou went to the auction. One or other of them was the successful bidder, at $560,000. The identity of the purchaser is not clear from the evidence but it was Mr August who paid the deposit.

The Joint Venture Agreement 91 In early August 2001, Mr Bill Allen, solicitor, who is now deceased, was instructed to prepare a joint venture agreement. At the time Mr Allen was practising in partnership under the name Bradley Allen. He prepared a deed (the Deed) which was signed on behalf of Konstantinou Developments, Toorak (together described therein as "Syndicate Members"), Dimensional Developments (described as "Manager"), Mr Konstantinou and Mr August (together described as "Principals"). 92 The recitals to the Deed are as follows: A. The Syndicate Members have agreed to form a syndicate called the DIMENSIONAL DEVELOPMENTS AUSTRALIA SYNDICATE ("the Syndicate") for the purposes of acquiring properties, entering into joint ventures and undertaking various property developments and also other business ventures. B. Each of the Principals is a director and shareholder of the Manager. For administrative reasons other persons are also directors and shareholders of the Manager. C. Each Syndicate member has a corresponding Principal and vice versa as set out in Schedule 1. Each Principal is a director of the corresponding Syndicate Member. D. The Syndicate Members have agreed to equally contribute certain moneys to the Syndicate and to make certain future contributions of income and capital to enable the objectives of the Syndicate to be achieved and to be fully and effectively managed, and to enable the Syndicate to participate in those other activities which the manager deems desirable from time to time. E. The Syndicate Members have agreed to appoint the Manager to act as sole and exclusive manager of the Syndicate for the purposes and objectives of the Syndicate and the Manager has agreed to accept such appointment as Manager of the Syndicate. F. As at the date of this Deed, the Manager has ratified the act of the Principals to agree to acquire, on its behalf and before its incorporation, land being Block 55 Section 6 Mitchell. The manager will on the date of this Deed formally acquire that property and hold it on behalf of the Syndicate under the terms of this Deed. G. The Syndicate Members, the Principals and the Manager have agreed to enter into this Deed to record their respective rights, obligations and duties in the ownership of the Syndicate Assets, the management of the Syndicate, and the membership of the Syndicate. 93 Clauses 2 and 3 of the Deed provided: 2. Wide Objective and Purposes of the Syndicate and Manager's Power 2.1 The purposes and objectives of the Syndicate are for the Manager to conduct an investment programme and strategy for the ultimate benefit of the Syndicate Members. 2.2 The Manager is expressly empowered by this Deed to carry out that investment programme and strategy and to exercise any of its powers whatsoever in its absolute discretion without the requirement for any consent, endorsement, approval or ratification whatsoever from any Syndicate Member. 2.3 The purposes and objectives and the Manager's powers as set out in this Deed and the term "Syndicate Assets" have deliberately been set out in expansive language with the express intention of the parties being that each of those terms or concepts be given the broadest possible meaning in order to give the greatest flexibility to the Syndicate investment programme and strategy and to ensure the Manager has the widest power possible to conduct that programme and strategy in a completely unfettered manner. 3. Commencement and Term of Syndicate 3.1 The Manager and the Members of the Syndicate agree and declare that the Syndicate commenced on 6 August 2001 (being the date the Manager formally acquired the first Syndicate Asset) and shall continue until determined by a Simple Majority of Syndicate Members. 94 Clause 10 of the Deed provided: 10 Distribution of Syndicate Capital 10.1 In this Clause 10: "Capital Proceeds" shall mean the Net Proceeds of Sale of the Syndicate Assets received by the Manager. "Net Proceeds of Sale" shall mean the sale price of the Syndicate Assets less: the agent's commission and expenses, advertising costs on sale, legal costs and disbursements incurred, repayment of the Bank Loan and all interest and charges associated therewith, the repayment of all other liabilities of the Syndicate, accountant's fees, all other Syndicate Outgoings, and, if applicable the Manager's Loan, Contributing Members' Loans and any accrued interest and fees calculated in accordance with Clause 6.3 and Clause 6.4. 10.2 Unless otherwise agreed between the Syndicate Members, the Manager must repay any loans made by any Syndicate Member in respect of any Syndicate Asset which is sold, before any payment of the Capital Proceeds. 10.3 The Manager shall distribute the Capital Proceeds to each Member of the Syndicate within twenty eight (28) days of the completion of the sale of the Syndicate Assets. 10.4 The Manager makes no warranty whatsoever as to the treatment of Capital Proceeds or Net Proceeds of Sale for income tax or capital gains tax purposes and each Syndicate Member shall rely on its independent advice in this regard. 95 There is nothing particularly remarkable about other provisions of the Deed. However, in light of other evidence, it is relevant to note that the Deed says nothing at all as to whether properties acquired by the joint venture would be held as long term investments. 96 There was considerable cross-examination of Mr August, Mr Konstantinou and Harry Konstantinou concerning the circumstances in which the Deed was signed. During the course of the trial, the applicants served an affidavit sworn by Mr George Bouhalis. Mr Bouhalis was a solicitor in Melbourne who acted for Mr August and his associated entities in 2001. Mr Bouhalis' affidavit was read, but he was not cross-examined. 97 Mr Bouhalis' evidence, which was not challenged, is that he has no actual recollection of any advice he gave to Mr August in relation to the Dimensional Developments Syndicate in 2001. However, he was able to produce copies of his time sheet relating to the giving of such advice, three handwritten file notes made by him on 6 August 2001 and a facsimile transmission of the same date sent to him by Mr Allen. 98 According to Mr Bouhalis' time sheet, on 6 August 2001 he was engaged to work for Mr and Mrs August on a matter described as "Property Development Venture". The time spent by him on the matter on 6 August 2001 involved an initial telephone conversation with Mr August (1 unit), a review of a draft syndicate agreement (15 units), a further telephone conversation with Mr August (2 units) and a telephone conversation with Mr Allen (3 units). His evidence also establishes that a draft version of the Deed was sent to him by Mr Allen by facsimile a little after 1 pm on that day. 99 Mr Bouhalis' three file notes are brief, but they confirm that he spoke with Mr August twice on 6 August 2001 before he spoke to Mr Allen later the same day. The third file note records that Mr Bouhalis spoke with Mr Allen to discuss "amendments and issues". 100 The evidence also includes a detailed statement account of work carried out by Mr Allen in the period between 2 August 2001 and 5 November 2001 for Dimensional Developments. There are various entries that show that on 6 August 2001 Mr Allen was engaged in the preparation of the Dimensional Developments Syndicate agreement. One entry shows that he spent four hours drafting a deed "on an urgent basis for execution that day but heavily based on Efkon Property Syndicate documentation". Another entry indicated that he spoke with Mr Bouhalis and discussed the terms of the draft deed. It records, amongst other things, that they discussed "…the proposed loan by Peter August and issues of documenting that, whether security was involved, adding a new clause 10.2 giving priority to that payment…". Other entries show that Mr Allen spent about half an hour drafting amendments after his discussion with Mr Bouhalis and that he then spent one and a quarter hours with Mr Konstantinou, Mr August and Harry Konstantinou explaining and executing documents. 101 It seems clear that cl 10.2 of the Deed was included in the document at the request of Mr Bouhalis acting on the instructions of Mr August. The amendment is significant for two reasons. First, it suggests that Mr August was concerned to ensure that funds advanced by Toorak to purchase Block 55 Mitchell would be repaid by the joint venture upon a sale of the asset acquired with such funds before there could be any return of capital to syndicate members. Secondly, it makes clear that the form of the Deed was the subject of negotiation, and that there was a willingness on the part of Mr Allen and Mr Konstantinou and his sons to make amendments to the draft if requested to do so. 102 In cross-examination Mr August said that the Deed executed at Mr Allen's office "didn't accurately reflect what we wanted to do and so that is why we had a further meeting". Asked why it was not amended at the meeting with Mr Allen, he said that "…at the time we thought it easier and on Bill Allen's suggestion to just write a note outlining what we wanted to do." A little later the following exchanges took place in Mr August's cross-examination: MS NEEDHAM: You said to this court yesterday---?---Yes. ---that the reason you went to Mr Allen was that you weren't lawyers. Do you remember that evidence? ---If I said that, yes. And indeed you went to Mr Allen having instructed your own lawyer on this deed? ---Yes. And Mr Allen spent some four hours, it appears from the time sheet, drafting changes to the deed that he already had? ---Right. And then after speaking to your lawyer he spent another 35 minutes drafting changes. And you still say to this court that this - you were unable at that meeting of 6 August to insist on any changes to reflect the intention? ---Well, the way we discussed it, and again I am going from recollection here, is that we had a specific purpose of what we wanted to do which was to invest in properties for the long term. And the particular syndicate deed didn't accurately reflect - we could have gone through more changes at the time but I - one thing that I do recollect quite vividly was it was going to cost a lot more money and it was much simpler to just write a note. So you are saying it was simpler to sign a deed which you say did not reflect your intentions at the time---?---Well, did not entirely. ---and then go away and write a note---?---Yes. ---which you say did? ---Yes, that is correct. And you say you had legal advice to do that from the lawyer who drafted this deed? ---Well, if we wanted to save money, yes. I mean it was only a note to just say, listen, this is what you want to do; this is what we want to do; this is what Jeff's wants to do; what his responsibilities are; mine, if any; that kind of thing. It wasn't formal legal advice. (emphasis added) 103 Mr August also said in cross-examination that he raised with Mr Allen the fact that the Deed "didn't necessarily reflect what we wanted to do" and that Mr Allen responded, "well, if you want to I can change it, it will cost you $12,000 or, if you do this and just do a handwritten addendum, it will cost you $5000." 104 Harry Konstantinou gave evidence concerning the Deed and the meeting at which it was signed. He said that the Deed was incorrect in identifying Konstantinou Developments as the trustee of the S&F Konstantinou Family Trust. According to Harry Konstantinou, the trustee was Konstantinou Holdings Pty Limited. A Deed of Settlement dated 13 August 1996 is in evidence, and it shows that at the time the trust was created in 1996, Konstantinou Holdings Pty Limited was the sole trustee. 105 Harry Konstantinou gave evidence that the Deed was prepared in something of a rush, but he also accepted that Mr Allen was a "thorough man" and "pretty good" at his job. He said that those present at the meeting were taken through the Deed by Mr Allen before it was signed. He had very little recollection of what was said but he did give this evidence: MR RUSSELL: You have no additional recollection?---Yes, we would have gone through the deed and - I think it was discussed briefly about the - anything that was incorrect. We didn't have enough time to change it on the day and he says you can change it. You can change it by an addendum, which we did later on, about a week later. HIS HONOUR: Did you say that you didn't have enough time to change anything on the day?---He didn't have enough time to change it because it was all rushed on the day. Who is that, Mr Allen?---Yes. How long were you there?---About an hour. But there was - like, we had to go through the whole deed and he explained it. All right?---Changing it would - you know, it would have to go back obviously for processing, retyping and editing and stuff like that. It was just in his boardroom. 106 I will return to this evidence later in these reasons but it should be compared with other evidence given by Harry Konstantinou in cross-examination including the following: Ms Needham: … So you walked out of Mr Allen's office happy, did you not, that the joint venture reflected, as far as you understood it, the intentions of all of the joint venturers?---Yes, otherwise, I wouldn't have signed it, I suppose. Yes, and it certainly reflected yours, your intentions at the time?---Yes. … MS NEEDHAM: And nobody at the meeting with Mr Allen indicated that this deed didn't fit in with their intentions, did they?---Not that I recall. And nobody said this is dreadful. We need to change it. But because we need a deed now, we have to sign it now?---No, not that I recall. … And indeed when you left the lawyer's office your understanding was that everybody was happy that they now had a joint venture deed which reflected their intentions and they were happy to go on and start work on the property. Is that right? ---Yes. Now was there any discussion about the cost at the meeting with Mr Allen on 6 August? ---His fees? His fees? ---No, there wouldn't have been because the invoice wouldn't have been issued. He didn't give any estimates of what doing this deed might have cost? ---I wish lawyers did that properly. HIS HONOUR: Well, were you the person responsible at that time for looking after his accounts? ---For the accounts? Yes. And for approving payment of his invoices? ---Yes. So you were the one who would be managing the fee side of the work you were doing with the lawyer? ---Yes.

The Addendum 107 Mr August gave evidence that in the days after 6 August 2001, he discussed with Mr Konstantinou and Mr Konstantinou's sons how the joint venture should operate in the future, including what role each of them should take. He said that on 11 August 2001 he travelled to Mr Konstantinou's olive farm, where he and Mr Konstantinou discussed matters about which Mr Konstantinou made some handwritten notes. Harry Konstantinou, who was also at the farm at this time, was later given the notes prepared by Mr Konstantinou and asked to produce another document which could then be signed by Mr August and Mr Konstantinou. 108 Mr Konstantinou gave an account in his affidavit of a conversation he said he had with Mr August in a caravan at the farm. The relevant paragraph in Mr Konstantinou's affidavit is in these terms: A few days after we signed the Syndicate Deed I met with Peter at my office in Canberra. He wanted to discuss the joint venture and I suggested that we drive to my farm to discuss it, which we did. We went to the farm together often, where we drank Cognac and enjoyed cigars. Harry was there at this particular time but does not like to smoke so left us alone. Peter and I had a discussion to the following effect: Peter: I am very excited by this joint venture with you. I want us to grow our investments for the benefit of our families. [Mr Konstantinou]: I agree. I have been building properties and selling them for many years. The money then disappears somehow and you are left with nothing. I want to build an asset base for my family too. Peter: The Deed does not expressly deal with any of our specific aims because it was all such a rush. Let's put our aims down in writing as part of the Deed. [Mr Konstantinou]: I agree. 109 According to the account of the events of 11 August 2001 given by Harry Konstantinou in his affidavit, his father and Mr August were at the farm at a time when he was also there. His affidavit did not include any account of any conversation between his father and Mr August, but merely reported that after his father and Mr August had spoken "my father called me over" and they then had a conversation to the following effect: Jeff: Peter and I have been talking about amending the objects clause of the Deed to make it more specific to what we're doing. We've written a few points down. Can you rewrite this for us? It will form an amendment to the Deed. [Harry Konstantinou]: Okay. His affidavit then goes on to explain how he was given a document - which he said he did not retain - consisting of a set of dot points written out by his father that he used to prepare what he described as "the amendment to the Syndicate Deed". 110 The original document said to have been prepared by Harry Konstantinou is in evidence. It consists of two handwritten pages and appears to have been signed by Mr Konstantinou and Mr August at the end of the second page. As is clear from what I have already said, it is a document which Mr August, Mr Konstantinou and Harry Konstantinou have sworn was written and signed five days after they went to Mr Allen's office to prepare and sign the Deed. The Commissioner contends that the document was created some years later after Mr August became the target of a tax audit. 111 The text of the handwritten document is as follows: DDA Syndicate Addendum 1 of 2 This document will form an addendum to the Syndicate Agreement for Dimensional Developments Australia (DDA) to outline the strategy for partnership. The Syndicate Manager should use this to understand its role. Strategy 1. Create a long term investment portfolio of predominately commercial and industrial properties. 2. Use the income and equity generated from the investment portfolio to reinvest and increase the portfolio with the aim of reaching targets set. 3. Restrict the sale of investment portfolio assets unless they are absolutely necessary or the sales provide other benefits to the portfolio. Achieved by 1. Purchasing and developing land in commercial and industrial areas. 2. Purchasing run down and redevelopment potential sites. [new page begins] -2- 2 of 2 3. Leveraging portfolio assets to fund purchases. 4. Land banking where permissible. Roles & Responsibilities Strategy Strategy will be the responsibility of all shareholders and renewed annually or as required. Other Roles Jeff - Construction and leasing Harry - Administration John - Construction Angelo & Peter - Passive role - provide assistance as and when required due to limited experience Agreed On 11 August 2001, Fedra Olive Grove, [Mr Konstantinou's signature appears] [Mr August's signature appears] SPIROS (JEFF) KONSTANTINOU PETER J AUGUST

112 The clauses appearing under the heading "Strategy" are of particular significance. Not only do they define the strategy in terms of the creation of a long term investment portfolio, they also provide for the reinvestment of the "income and equity" generated by the portfolio. The strategy described does not contemplate that income generated by the sale of joint venture property - even assuming any such sale was to occur - will be paid to syndicate members. Rather, it contemplates that all such income will be re-invested to increase the portfolio. 113 Mr August gave evidence that all together there were seven properties acquired by the joint venture. According to his affidavit, the following acquisitions were made: Block 55 Section 6 Mitchell (Block 55 Mitchell) - purchased June 2001 Block 47 Section 5 Hume (Hume) - purchased November 2001 Block 44 Section 95 Charnwood (Charnwood) - purchased June 2003 Block 76 Section 6 Mitchell (Block 76 Mitchell) - purchased November 2003 Block 72 Section 6 Mitchell (Block 72 Mitchell) - purchased November 2004 Block 7 Section 57 Mitchell (Block 7 Mitchell) - purchased July 2006 Block 25 Section 38 Mitchell (Block 25 Mitchell) - purchased July 2007 114 Mr August's evidence was that of the seven properties acquired, only Hume and Block 7 Mitchell had been sold. This is a matter upon which Senior Counsel for Mr and Mrs August placed considerable reliance. The retention of Block 55 Mitchell, in particular, was said to be consistent with an intention to hold the properties as long term, income producing assets. The evidence was also said to demonstrate that Block 7 Mitchell was only sold as a result of pressure from the bank. 115 However, Harry Konstantinou's evidence shows that the ground floor of Charnwood is to be sold, and that the whole of Block 72 Mitchell is also to be sold. He explained both of these sales as being necessary to enable Dimensional Developments to reduce borrowings.

The purchase of Hume 116 In November 2001 Dimensional Developments was the successful bidder for Hume. The relevant Crown lease was issued in favour of Dimensional Developments in January 2002. Dimensional Developments paid $800,000 for its lease of Hume. 117 Hume was a large and vacant block. The terms of the Crown lease required that the lessee commence construction on the block within 12 months (by January 2003) of the commencement of the lease and that such construction be completed within 24 months (by January 2004). These time limits could be extended with the approval in writing of the relevant government authority. 118 By September 2003, construction work had not yet commenced at Hume, nor had any extension of time been sought. On 10 September 2003 the Compliance Unit of the ACT Planning & Land Authority wrote to Dimensional Developments and drew attention to the requirements of the Crown lease with respect to commencement and completion of construction work. Dimensional Developments did not respond to this letter, and the Compliance Unit sent a further letter dated 3 February 2004 indicating that if no response was obtained by 4 March 2004 action would be taken to terminate the Crown lease. 119 In 2004 and 2005, Dimensional Developments submitted a number of development applications in respect of Hume seeking permission to subdivide the large block into six smaller blocks. These development applications were submitted by Sellick Consultants Pty Ltd (Sellick) on behalf of Dimensional Developments. The second application was approved, subject to conditions, in May 2005. 120 The development applications lodged on behalf of Dimensional Developments were accompanied by a report prepared by Sellick. In the report Sellick is described as structural and civil engineers, and in his affidavit, Mr August described it as the project manager for the subdivision work. The report (the Sellick report) includes an introduction which states: Block 47 Section 5 Hume is to be subdivided into six smaller lots, each of minimum 5,000m2 area in accordance with the Territory Plan. Each of the blocks is to be sold individually, and as such will require individual servicing and access. This report outlines the design for the construction of civil works associated with the subdivision of the block. In preparing this report, reference has been made to several previous meetings held at Actpla, and involving representatives from Actpla and City Management, and comments provided by each of these authorities have been incorporated into the design. (emphasis added) 121 There was evidence from Mr August and Mr Konstantinou that they decided to subdivide Hume because it was proving difficult to find a tenant for one large (vacant) block. I infer that they were not prepared to commence construction until they had secured a tenant. Sub-division would, Mr Konstantinou said, make the block easier to lease. 122 At some stage a sign was erected at the front of the block that stated "For Sale or Lease". Mr Konstantinou gave evidence that he instructed an agent to put a sign up, but that he intended that the agent would put up a "For Lease" sign rather than a "For Sale or Lease" sign. According to Mr Konstantinou, the agent made a mistake. He said in his evidence that he later told the agent to "leave it" and, according to Mr Konstantinou, "[w]e just left it". 123 Mr August gave evidence that he was aware of the sign. He said that he was "a little bit cranky because it did not reflect the intention of our joint venture partnership" and that he "immediately went to Jeff and told him to change it to 'For Lease.'" In relation to the Sellick report, Mr August gave evidence that Sellick handled all of Mr Konstantinou's developments and that they "simply made an assumption" in stating that the sub-divisional blocks would be sold. Mr August said that it was his intention and, as he understood it, the joint venture's intention, not to sell any of the individual blocks.

Sale to Optus Networks Pty Limited 124 According to Mr August, in late July or early August 2005, Mr Konstantinou told him that a real estate agent had indicated that Optus was interested in purchasing Hume. According to Mr August, "[t]his was an unsolicited communication" because "we had never sought purchasers for the site." 125 Mr August gave evidence of his communications with Mr Konstantinou in relation to the approach from Optus. In his evidence in chief he said: MR RUSSELL: Do you recall being told of an approach from Optus to acquire the property shortly before it was finally sold? ---Yes, I do. Do you recall a discussion with Mr Constantinou [sic] about how that approach should be dealt with? ---Yes. Yes, I do. What was your response to that proposed purchased? ---Well, it was - it was - the initial - there was an initial approach by Optus which again was inconsistent with what we wanted to do with the properties, which was just build and lease. HIS HONOUR: No. I think the question is what was your response to this approach from Optus? MR RUSSELL: Yes. THE WITNESS: Okay, but - okay - but - see, there was an initial approach and then there was subsequent approaches. HIS HONOUR: All right. Well, which one are we talking about? MR RUSSELL: The first one? ---Yes. HIS HONOUR: The first one. THE WITNESS: The first one was simply to reject it. And the way Jeff sought to reject it was just--- MS NEEDHAM: Your Honour, that's gone beyond the question. HIS HONOUR: Anyway--- THE WITNESS: Sorry. HIS HONOUR: ---the response was to reject Optus' initial offer … or approach? ---Yes, that's correct. … MR RUSSELL: …And you were then - there was then a further offer from Optus? ---Yes. When we rejected - okay - it went like this, your Honour: when Optus came to us, or came to Jeff, Jeff's way of rejecting the offer was to just quote him a silly price, just to, you know, like - you know, that's - "That will get rid of them," so to speak. Right. So we paid a particular price for the entire block. We were going to subdivide it into six lots and so he quoted them the price we paid for the entire lot for one sixth of the lot. They went away. And we thought, "Okay, that gets rid of them. Goodbye." And then they came back and they said, "Well, how much for two?"… (emphasis added) 126 On 4 August 2005 Mr Konstantinou received from Optus a facsimile which referred to previous discussions and indicated that it was Optus' preference to purchase the entire site, and that Optus was prepared to pay $5.0 million for the entire site subject to a number of conditions. On 27 October 2005, contracts of sale were exchanged pursuant to which Hume was sold by Dimensional Developments to Optus for the price of $5,472,500 inclusive of GST. There is no doubt that Hume had special value to Optus as a site for a proposed communications facility. I am satisfied that the price which it initially offered and the price which it ultimately paid were well above market value.

The Audit 127 The evidence indicates that in September 2006 the Commissioner selected Mr August and related entities for a tax review because Mr August had not lodged an income tax return since 2002. During the course of the tax review the Commissioner became aware of many of the real estate transactions in which entities associated with Mr August had been involved. These included various transactions in residential real estate in Canberra and the acquisition and sale of Hume by Dimensional Developments. 128 In his dealings with the Australian Taxation Office (ATO), Mr August was represented by his accountant, Mr Alexander Papazoglou of the firm G A Gregory. Mr Papazoglou was, and still is, Mr August's tax accountant. 129 On 31 March 2008 Mr August and Mr Papazoglou attended a meeting with ATO officers, Mr Blanco and Mr Shelley, who were involved in carrying out the tax review. The meeting took place over two hours. None of Mr Blanco, Mr Shelley or Mr Papazoglou gave evidence. However, what appear to me to be reasonably detailed file notes were made by both Mr Shelley and Mr Blanco and these file notes were received into evidence as business records. They show that Mr Papazoglou made a presentation to Mr Shelley and Mr Blanco in relation to Mr August's property dealings and those of at least some of his associated entities. The file notes show that the associated entities referred to during the meeting included Toorak, Dimensional Developments, August Holdings, Universal Coin and the related unit trusts. There are two matters of particular significance referred to in the file notes. 130 The first is an entry in Mr Shelley's file note: Toorak Management Unit Trust Joint Venture with another party - buying, developing , selling property in Canberra - Dimensional Developments. The Commissioner relied upon this entry as evidence of an admission by Mr August that Dimensional Developments was in the business of purchasing, developing and selling property in Canberra. 131 Mr Blanco's file note does not make reference to "selling" in the context of describing the joint venture activities, but refers only to the activities of Dimensional Developments as "purchasing + developing land". In the circumstances, I am not willing to find that the admission attributed by the Commissioner to Mr August was made. 132 The second matter of significance is the record of discussion concerning the sale of Hume and the distribution of the proceeds of sale. The file notes show that the ATO officers were interested in a reference to "Hume" and a transfer of $865,536.17 in (I infer) banking or accountings records in their possession. It is apparent from the file notes that at that stage of their investigations the ATO officers may not have known what Hume was. Mr Blanco's file note contains an entry in these terms: What is 'Hume' $865,536.19 → loan funds that went out + came back as loan 'trf'. Mr August was asked very few questions concerning these entries, but his answers are important because they show that distributions were made to the syndicate members after the sale of Hume. 133 Also in evidence is a memorandum sent by Mr Papazoglou to Mr Dominic Gilbert of the ATO dated 19 January 2009. As is apparent from that memorandum, Dimensional Developments eventually submitted a tax return for the year ended 30 June 2006 declaring a revenue loss and a substantial capital gain. According to this memorandum, in the financial year ended 30 June 2006 the net capital gain was distributed equally between the two joint venture partners. Toorak then made distributions to the Toorak Unit Trust and the Wiz Unit Trust. 134 Having referred to these distributions, Mr Papazoglou's memorandum dated 19 January 2009 goes on to express the following views: When reviewing the above listed chain of transactions, it is our view that the Tax Returns reflect distributions made by Dimensional Developments Australia who stands at the top of the chain. Any argument as to the treatment of amounts received will have to be argued at the level of the Partnership and not at the level of the individual beneficiary at the lower end of the chain. It is also our view that the partnership treated matters properly and in accordance with the initial memorandum of understanding between the partners at the inception of the operations back in year 2001. 135 Mr Papazoglou had previously written a letter to Mr Gilbert dated 21 September 2008 in direct response to a detailed position paper dated 29 August 2008 issued by the Commissioner in relation to the sale of Hume. He followed this up with a memorandum to Mr Gilbert dated 5 December 2008. 136 The position paper was supplied under a covering letter addressed to the Public Officer of Toorak. The covering letter, signed by Mr Gilbert, referred to the position paper, and invited a response by 21 September 2008. It contained the following specific request: Please review the position paper and: • if you do not agree with our understanding of the facts or our interpretation of the law, provide details, including any additional facts we should be taking into account; • advise us of any other relevant matters Please reply in writing by 21 September 2008 to: Attention: Dominic Gilbert Australian Taxation Office PO Box 9977 Civic Square ACT 2608 137 Under the heading "Development application to subdivide and sell the property", the position paper referred to the Sellick report which was said to have proposed "… that the property be subdivided … into 6 separate industrial blocks to be sold individually with individual servicing and access." 138 The position paper also included Appendix A which consisted of a chronology of relevant events related to the development and sale of Hume. The first entry in the chronology, dated 6 August 2001, refers to the "Syndicate deed of arrangement" which is, obviously enough, a reference to the Deed that was signed at Mr Allen's office on that date. The next entry in the chronology refers to the grant of the Crown lease of Hume to Dimensional Developments. Importantly, there is no reference made to the Addendum in the chronology or in any other part of the position paper. 139 The only other point to make about the chronology is that it refers to a sign promoting expressions of interest on display at the entrance to the site. In the absence of any evidence to the contrary, I infer that this refers to the "For Sale or Lease" sign referred to in Mr August's and Mr Konstantinou's evidence, that this sign was erected on or before 20 January 2004, and that it remained in place at all relevant times thereafter. According to the chronology, the sign "was a sign promoting expressions of interest concerning new modern warehouses, showrooms or offices available at the site" although, as the chronology and other evidence makes clear, no development work had commenced. 140 Mr Papazoglou's letter of 21 September 2008 states that "[a]fter careful review of your position paper … we would like to advise you that we do not agree with your understanding of the facts …". It asserts that Hume was acquired "with the intention of building and leasing in order to derive a constant income stream for the Joint Venturers." The letter refers, amongst other things, to the difficulties experienced in finding a tenant for Hume and the syndicate members' decision to subdivide in order to make it easier to find tenants. 141 In spite of the contention advanced by Mr Papazoglou in his letter of 21 September 2008, the letter makes no mention of the Addendum. Significantly, however, it includes a statement that Optus initially expressed interest in one and then three blocks in the sub-divided property rather than the whole of it. Whether it was due to the sign on the block or the activities of a real estate agent, Optus was aware that the block was being subdivided into six separate blocks and that the owner was open to offers for the individual blocks. 142 Mr Papazoglou's memorandum of 5 December 2008 addressed the observations made in the position paper in relation to the Sellick report and the development applications lodged in relation to Hume. In his memorandum Mr Papazoglou stated: In the part of your letter dealing with the "Development application to subdivide and sell the property" you are enumerating a number of steps taken by Sellick Consultants, as Engineers for the Syndicate, for the sub-division of the property (paragraphs 17, 18, 19, 20, 21 and 22 of your letter). However, these steps are not indicative of the intent of the syndicate and if treated in isolation will result in misleading conclusions. Our investigations of the documentation related to the subject property reveal the following: The property was acquired at Auction around November 2001, and the Crown lease was registered in January 2002 (copy of the Lease attached). The syndicate used its contacts, and several real estate agents to market the property to try and secure one or more tenants, however the size of the property meant that they where [sic] unable to secure a tenant (at the time there where [sic] not many potential tenants looking for large size of warehouse space to rent) According to the terms of the lease, the syndicate was supposed to commence land development and building works within 12 months from the date of the commencement of the lease. Whilst in search for a tenant the Syndicate missed the commencement and completion covenants as per the lease, thus incurring the additional costs and penalties imposed by ACTPLA. At the time, the Syndicate had no other properties generating rental income, and it was being funded by the owners who where [sic] not able to continue injecting funds to pay Government penalties, holding charges and interest to the bank. On the 10th of September 2003 the ACT Planning & Land Authority wrote a letter to the Syndicate (copy attached) pointing out that the commencement of the works had delayed for considerable time and continued failure to comply with the relevant terms of the lease could result in the termination of the lease. At the same time the bank funding the acquisition was expressing concerns for the delay in the development and the failure to secure a tenant. Under mounting pressures the Syndicate decided to review its original plan to secure a single tenant for the property and proceed with a subdivision that would give them more options and ways out of the impasse. A subdivision into 6 individual smaller lots could attract tenants that are interested in small lots or allow the syndicate to sell one or two lots to reduce their borrowing and remove the pressure from the bank. This was the intent of the syndicate when the application for the subdivision was lodged in late August 2004 by Sellick. The intent remained unchanged until the "too good to refuse" offer came from Optus. (emphasis added) 143 There are two important points to make about Mr Papazoglou's memorandum of 5 December 2008. 144 First, like the letter of 21 September 2008, the memorandum makes no mention of the Addendum. This is significant because, assuming Mr Papazoglou knew of its existence at the time, he could not have failed to appreciate that it was important evidence of the syndicate's intentions at the time Hume was acquired. The question that arises is whether the Addendum was not referred to because it did not exist or because Mr Papazoglou had not been made aware of it at the time he wrote to Mr Gilbert. 145 Second, unlike the letter of 21 September 2008, the memorandum asserts that the syndicate decided to sub-divide Hume into six smaller blocks "to attract tenants interested in smaller lots or to allow the syndicate to sell one or two lots to reduce their borrowing and remove the pressure from the bank." This is at odds with Mr August's evidence that the syndicate never intended to sell Hume, that the "For Sale or Lease" sign was erected by mistake, and that it was Mr Konstantinou's intention to "get rid of [Optus]" by quoting a "silly price".

Why did Mr Papazoglou not refer to the Addendum? 146 The reference to the "memorandum of understanding between the partners at the inception of the operations" in the last paragraph of Mr Papazoglou's memorandum of 19 January 2009 is a reference to the Deed. I think this is clear from a reading of the relevant correspondence as a whole, and it is also confirmed by evidence from Mr August who ultimately accepted that the Addendum was not supplied by Mr Papazoglou to the ATO. 147 Mr August accepted in cross-examination that the first time the ATO was supplied with a copy of the Addendum was when it was served as an exhibit to his affidavit sworn 14 July 2010. I am satisfied that Mr Papazoglou would have relied upon the Addendum in his submissions to the ATO had he known of its existence at the time. I am also satisfied that he was never provided with a copy of the Addendum, or told of its existence during the period of time in which he was corresponding with the ATO. 148 There is no evidence to which Mr and Mrs August can point to show that the Addendum was signed in 2001 apart from the evidence given by Mr August, Mr Konstantinou and Harry Konstantinou. In particular, there is no documentary evidence (whether of a contemporaneous or non-contemporaneous nature) to suggest that the Addendum was created when the three of them say it was. However, because all three have given evidence that the Addendum was created on 11 August 2001, I am not being asked by Mr and Mrs August to make findings on the basis of Mr August's uncorroborated evidence. His evidence is corroborated by Mr Konstantinou and Harry Konstantinou. To find that the Addendum was not created on 11 August 2001 necessarily involves rejecting the evidence of all three, and is tantamount to finding not only that the evidence of all three is unreliable, but that there has been collusion between witnesses of a highly improper kind.

Mr August 149 I have already made some observations concerning Mr August's reliability as a witness in the context of the Melba shops. Mr August's evidence in relation to Hume reinforced my view that he is not a reliable witness. 150 I do not accept Mr August's evidence that he was cranky that the "For Sale or Lease" sign had been erected at Hume or that he told Mr Konstantinou that he wanted it taken down. In my view this evidence was not truthful. It is most unlikely that Mr August told Mr Konstantinou to take the sign down. Even if I was to accept Mr Konstantinou's evidence in relation to the sign - a question I will come to - it was to the effect that having been contacted by Mr August, Mr Konstantinou then told the real estate agent to leave the sign where it was. Accepting, as I do, that the sign was put up by the real estate agent by no later than January 2004, and that it was not taken down until after Optus bought the block, it follows that it remained in place for more than 18 months. If Mr August was cranky about the sign and he requested that it be taken down, why was his request ignored, and why did he not take steps to ensure it was complied with? 151 Mr Papazoglou's memorandum of 5 December 2008 acknowledged that at the time the development applications were submitted, it was the joint venture's intention to subdivide Hume into smaller lots that it could then lease or sell. This is inconsistent with Mr August's evidence that it was never the intention to sell Hume and that the only reason why it was sold was that Optus made an offer that was too good to refuse. 152 Mr August's evidence is also inconsistent with the statement that appears in the Sellick report that each of the sub-divided blocks was to be sold individually. I do not accept that statement was the result of a mistake by Sellick. I am satisfied that it reflected the true intention of Mr August and Mr Konstantinou at the time. 153 Mr August's evidence that the reason for offering Hume to Optus at what he called a "silly price" was to get rid of Optus is not credible. On the version of events Mr August provided to Mr Papazoglou and to the ATO, Dimensional Developments was in breach of its Crown lease and under considerable pressure. The idea that Mr August and Mr Konstantinou were not interested in selling Hume (developed or undeveloped) is not credible. 154 I do not accept Mr August's account of what occurred at Mr Allen's office on 6 August 2001. In particular, I do not accept Mr August's evidence that Mr Allen said anything about the extra cost involved in making amendments to the draft Deed, or that he suggested to Mr August that it would be much simpler to write a note. Changes were made to the draft Deed at the request of Mr August and his solicitor. It would have been simple enough for them to have sought to include a recital in the Deed which outlined the investment strategy to be adopted by the joint venture if that is what Mr August wanted to do. Such a recital need only have recorded that it was the joint venture partners' intention that the joint venture purchase commercial or industrial property to develop, lease and hold for long term investment.

Mr Konstantinou 155 Mr Konstantinou was also an unreliable witness. He instructed the real estate agent to put the "For Sale or Lease" sign up, and it was he who provided instructions to Sellick in relation to the proposed subdivision of Hume. In his affidavit Mr Konstantinou said that he would not have told Sellick that the subdivided lots would be sold "because that would have been untrue". I do not accept this evidence. It is inconsistent with the presence of the sign on the site, and also with Mr Papazoglou's statements to the ATO as to the reason for the sub-division of Hume. Whatever the position was in earlier years, it is clear that by 2004 Dimensional Developments was taking steps to ensure that it would be able to lease or sell Hume as six individual units as soon as the necessary development approval was obtained. 156 In his evidence in chief Mr Konstantinou was asked whether he thought the sale to Optus would ever go through. He said he did not think that it would because a sale to Optus of undeveloped land would be contrary to ACT Government policy. He then said, referring to Ms Peng of Optus, "[t]hat is why I put a silly price so she can go away and she stuck with us." Here, Mr Konstantinou was echoing what Mr August had said in evidence, that is to say, "the silly price" (the same expression was used by both of them) put by Mr Konstantinou to Ms Peng was an attempt to "get rid" of Optus or make it "go away". I do not believe that was the true intention. 157 I think it much more likely that Mr Konstantinou put a high price on Hume because he knew, or at least suspected, that it was of special value to Optus. According to Mr Konstantinou, before there was any discussion of money, and at a time when Optus was talking about purchasing only one of the subdivided blocks, Ms Peng told him that "the Government will be assisting Optus with its land purchases". This was likely to have suggested to Mr Konstantinou that the ACT Government would not want to block a sale to Optus even if the land being sold was not yet developed. If Mr Konstantinou truly believed that a sale to Optus would never have been allowed, then I do not see why he would have been talking to Optus. 158 As with Mr August's evidence on this point, Mr Konstantinou's evidence is not credible. Moreover, there are similarities in their evidence that lend credence to the possibility that there has been collusion between Mr August and Mr Konstantinou as to how they would go about explaining why they were offering to sell to Optus if, as they now maintain, they were never interested in selling Hume to Optus or any other prospective purchaser.

Mr Harry Konstantinou 159 I did not regard Harry Konstantinou as a reliable witness. I have already referred to his evidence in relation to the meeting with Mr Allen. This included evidence that Mr Allen was in too much of a rush to change the Deed, and that he told those present that they could change it later by an addendum. When the topic was explored in cross-examination, he made no further reference to any such statement. I am satisfied that he had no genuine recollection of what was said at the meeting. I am also satisfied that the evidence he gave to the effect that Mr Allen did not have time to make any changes to the Deed and that Mr Allen suggested that the Deed be changed by way of an addendum was not truthful. 160 As to the sign, Harry Konstantinou said in his affidavit: To find a tenant for Hume signs were erected on the site saying "for sale/for lease". I understand the ATO suggest that this meant we intended to acquire Hume in order to sell or to lease it. That is wrong. These were standard signs used by Konstantinou Developments. 161 In cross-examination Harry Konstantinou said that he knew there was a sign on display at Hume but that he did not know what it said. I do not accept that he did not know what the sign said. Nor do I accept that the sign at Hume was a "standard sign". The description of the sign in the chronology included in the ATO position paper suggests that the sign was not a standard form. 162 Harry Konstantinou also said that if he had considered the issue of what was on the standard sign to be of any importance at all, he would have changed them. In this regard, he would have me accept that he had no qualm advertising a property for sale in circumstances where he knew it was not for sale. It is possible that his companies do advertise properties as being for sale when they are not, but, in the case of Hume, I think it is much more likely that the sign was accurate insofar as it conveyed that the owner was seeking expressions of interest from potential purchasers of the block or subdivided portions of it.

When was the Addendum created? 163 I am not satisfied that the Addendum was created on 11 August 2001. In my view, the evidence given by Mr August, Mr Konstantinou and Harry Konstantinou in relation to the creation of the Addendum was not truthful. There are a number of reasons why I have come to this view. 164 First, for reasons I have sought to explain, I do not consider Mr August, Mr Konstantinou or Harry Konstantinou to be reliable witnesses. Their evidence in relation to their intention not to sell Hume is contradicted by objective evidence, in particular, the sign erected at Hume and the statement of intention in the Sellick report. Their various attempts at explaining away such evidence were unconvincing. And the evidence given by Mr August and Mr Konstantinou in particular to the effect that they did not want to sell to Optus and that it was their true intention to send Optus away by asking for a "silly price" for Hume was to my mind plainly false. 165 Secondly, if Mr August had signed the Addendum on 11 August 2001 as he claims, why did he not give a copy to Mr Papazoglou or at least tell him about it? Mr August did not provide any clear explanation for not doing either of these things. 166 Harry Konstantinou gave evidence that he never made a copy of the Addendum, that it was put in a safe by either his assistant or his brother, and not removed from the safe until "we pulled it out of the safe and gave it to the lawyers … three, four, five, months ago." He also gave evidence that Mr August had an office he used from time to time at the Konstantinou Group's Canberra offices. I am satisfied that it would have been very easy for Mr August to obtain a copy of the Addendum whenever he was at that office. 167 In my view, if the Addendum was created in 2001 as Mr August, Mr Konstantinou and Harry Konstantinou claim, the only possible explanation for Mr August not providing a copy of it to Mr Papazoglou, or at least telling him about it, is that Mr August had forgotten all about it. In that regard, I am mindful that the Addendum was, if Harry Konstantinou's evidence is accepted, put in the safe in 2001 and not removed until 2009 or 2010. 168 On the other hand, the Addendum was, according to Mr August, an important document. Having regard to what he said about it in evidence (including his detailed account of the circumstances in which it came into existence) I do not accept that he could have forgotten that it existed or not appreciated its significance during the period of time that Mr Papazoglou was engaged in correspondence with the ATO. 169 In the result, I am not satisfied that the Addendum was created when Mr August, Mr Konstantinou and Harry Konstantinou say it was. I think it is more likely that the Addendum was created in 2009 or 2010 before a copy of it was first supplied to the ATO in about July 2010 as an exhibit to Mr August's affidavit. 170 Another matter I consider quite telling is the way in which the proceeds of sale for Hume were dealt with. It is apparent that in the same financial year as the sale to Optus was completed, there was a substantial distribution made by Dimensional Developments to Toorak. In his affidavit, Harry Konstantinou referred to the sale of Hume in October 2005 for $5,472,500 (inclusive of GST) and said "[t]he sale proceeds were shared between the joint venture members as per the Syndicate Deed". None of the witnesses explained why such distributions were made. 171 The Addendum expressly contemplated that income and equity generated from the investment portfolio would be re-invested and used to increase the portfolio with the aim of reaching set targets. There was no evidence of any such targets ever being set. More importantly, the decision to distribute the sale proceeds to Toorak and its joint venture partner was contrary to the strategy outlined in the Addendum which, if it had been followed, would have seen the proceeds from the sale of Hume reinvested by Dimensional Developments.

Absence of expert evidence 172 Some months before the trial was originally fixed to commence, the Commissioner informed the Court that he had engaged a handwriting expert to provide an opinion as to the authenticity of the Addendum. The trial was adjourned to allow this to occur, and for Mr and Mrs August to engage their own handwriting expert. Ultimately, no affidavit or report by the handwriting expert was relied upon by the Commissioner or Mr and Mrs August. Against that background it was submitted on behalf of Mr and Mrs August that a Jones v Dunkel submission should be drawn against the Commissioner based upon a failure to call the handwriting expert he had engaged. 173 The inference I would draw if Jones v Dunkel was applicable in such a situation is that the evidence of the expert could not have assisted the Commissioner's case. But if I was to draw that inference, it would not affect my view of the facts. There may be a number of reasons why the expert evidence was not called by the Commissioner. For example, the expert may have been unable to form a view one way or the other as to the authenticity of the document in question. I certainly would not infer that the expert was not called because it was his or her opinion that the document in question was authentic.

Conclusion in relation to Hume 174 I am not satisfied that Hume was acquired by Dimensional Developments as a long term investment. On the contrary, I am satisfied that Hume was acquired by it for profit-making purposes. In particular, I am satisfied that it acquired Hume so that the land could be developed and sold for a profit, or developed, leased and sold for a profit. Either way, the purpose to make a profit from the sale of Hume, which I am satisfied existed at the time of acquisition, was a substantial one.

Disposition 175 The appeals must be dismissed with costs. I certify that the preceding one hundred and seventy-five (175) numbered paragraphs are a true copy of the Reasons for Judgment herein of the Honourable Justice Nicholas.

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