Beazley v Steinhardt

Federal Court of Australia|1999-09-14|Before: Mansfield J, Dowsett J, Spender J, Drummond J, Mansfield JJ

3 This is an appeal from a decision of Dowsett J given on 30 April 1999 declaring that a number of documents seized by the respondent on 27 July 1998 in execution of a warrant could be inspected by the respondent, notwithstanding that those documents were the subject of client legal privilege. His Honour was satisfied that, on the material before him, there was evidence to establish a prima facie case that the documents the subject of his order had been brought into existence in the course of, or for, an ulterior purpose, namely to defraud the Commonwealth contrary to s 29D of the Crimes Act 1914 (Cth) in connection with the appellants liability for income tax. Background 4 The respondent is an officer of the Queensland Police Service. On 27 July 1998, he executed a search warrant at the home of Barry Albert Beazley ("Mr Beazley") and Doreen Beazley ("Ms Beazley"). On the same day, warrants were also executed by investigators attached to the Brisbane office of the National Crime Authority at another address. 5 In the course of execution of those warrants, certain documents were identified by the appellants, through their legal representative, as documents in respect of which client legal privilege existed. There is no issue that, if that were the case, those documents should be returned to the appellants, and not be available to the respondent. 6 The documents in issue are now in the possession of the Queensland District Registrar of the Court. They are described in a schedule exhibited to the affidavit of Craig William Smiley sworn on 2 November 1998. That schedule was prepared by solicitors for the parties. Initially it comprised 127 documents. With some exceptions, the respondent agreed that each of the documents appeared to be privileged from inspection on the ground of client legal privilege, but he asserted that each was also a document created or procured in furtherance of an illegal or fraudulent purpose, namely to defraud the Commonwealth of taxation receipts. He disputed that twelve of those documents were documents to which client legal privilege attached in any event. On 18 February 1999, Dowsett J ruled that nine of those documents were not protected from inspection by client legal privilege and that they be released to the respondent for inspection. There has been no challenge to that order. 7 Accordingly, there remained for his Honour's determination the remaining 118 documents which were the subject of a proper claim for client legal privilege. With one exception, which is not material for present purposes as there has been no complaint by the respondent about the ruling, his Honour concluded that the documents were not protected from inspection on the ground of client legal privilege and ordered that the respondent may have access to all of them. The principles 8 There is no dispute as to the relevant legal principles. 9 The general principle underlying client legal privilege is set out in Grant v Downs (1976) 135 CLR 674. Stephen, Mason and Murphy JJ at 685 said:

"The rationale of this head of privilege, according to traditional doctrine, is that it promotes the public interest because it assists and enhances the administration of justice by facilitating the representation of clients by legal advisers, the law being a complex and complicated discipline. This it does by keeping secret their communications, thereby inducing the client to retain the solicitor and seek his advice, and encouraging the client to make a full and frank disclosure of the relevant circumstances to the solicitor."

10 Communications with legal advisers which are criminal in themselves, or which are intended to further a criminal or fraudulent purpose, do not fall within that protection. The public policy considerations which result in the law recognising client legal privilege do not arise in such circumstances. There is no interest of justice, or of the administration of justice, in the protection from publication of such communications: Australian Federal Police v Propend Finance Pty Ltd (1997) 188 CLR 501 ("Propend") and Carter v Northmore Hail Davy & Leake (1995) 183 CLR 121 ("Carter"). In Carter, as the learned trial judge observed, Deane J said at 134:

"… the privilege does not extend to communications or documents made or brought into existence for the purpose of, or as part of the process of, crime, fraud, abuse of statutory powers or, in some circumstances, defeating or frustrating the administration of justice by the courts."

Client legal privilege does not attach to documents which are brought into existence or which are provided to a lawyer for the purpose of furthering some illegal object. 11 The onus is upon the respondent, being the party who disputes the claim for privilege, to establish the ulterior purpose, that is the illegal or improper purpose, for which the document was brought into existence: Attorney-General (NT) v Kearney (1985) 158 CLR 500; Propend. 12 In discharging that onus, Brennan CJ explained in Propend at 514, that it is necessary to show reasonable grounds for believing that the communication effected by the document for which client legal privilege is claimed was made for some illegal or improper purpose. His Honour explained:

"… the criterion as "reasonable grounds for believing" because (a) the test is objective and (b) it is not necessary to prove the ulterior purpose but there has to be something "to give colour to the change", a "prima facie case" that the communication is made for an ulterior purpose."

Dawson J at 522 said that it was enough that circumstances are made to appear which sufficiently point to the bona fides and credibility of the allegation. 13 There was no issue as to the admissibility of the material placed before the learned trial judge by the respondent to establish that ulterior purpose. The real point of the appeal was that the evidence was insufficient to establish to the necessary degree the ulterior purpose alleged. Counsel for the appellant referred in particular to certain observations of Gummow J in Propend at 576, which he contended described the state of the evidence before Dowsett J. Those observations were:

"In the present case, quite apart from the failure accurately to frame the relevant issue, the inexactitude, indefiniteness and indirection referred to by Dixon J crippled the attempt of the appellants to take the documents in question out of the operation of the doctrine of legal professional privilege."

The reference is to the judgment of Dixon J in Briginshaw v Briginshaw (1938) 60 CLR 336 at 361-362 where his Honour said:

"Except upon criminal issues to be proved by the prosecution, it is enough that the affirmative of an allegation is made out to the reasonable satisfaction of the tribunal. But reasonable satisfaction is not a state of mind that is attained or established independently of the nature and consequence of the fact or facts to be proved. The seriousness of an allegation made, the inherent unlikelihood of an occurrence of a given description, or the gravity of the consequences flowing from a particular finding are considerations which must affect the answer to the question whether the issue has been proved to the reasonable satisfaction of the tribunal. In such matters "reasonable satisfaction" should not be produced by inexact proofs, indefinite testimony, or indirect references."

The evidence and findings 14 The respondent's claim was that, upon the basis of documents obtained upon execution of the warrants, there was a prima facie case that each of Mr Beazley and Ms Beazley between 1 July 1989 and 30 July 1996 had obtained income of $1,080,742.00 from overseas sources not declared to the Australian Taxation Office, and deliberately not declared because the derivation of that income had been concealed behind a tax evasion scheme. The learned trial judge described the alleged scheme as being:

"… to defraud the Commonwealth by concealing income. One feature of the structure is that the applicants incur expenses using credit cards. Companies in Vanuatu then repay the resulting debts. It is alleged that in so doing, the companies use funds which otherwise would have been available to the applicants as income. As the applicants are resident in Australia, such income would be "assessable income" pursuant to s 25 of the Income Tax Assessment Act 1936 (Cth). The respondent submits that a further available inference is that each of the four "entities" pays the individual expenses of one of the applicants or one of their children."

15 As was made clear in the course of submissions, both Mr Beazley and Ms Beazley have lived continuously in Australia for the past twenty years. Neither has lodged income tax returns at least since 1975. Each asserts that they have never generated or received any income in Australia, and have not lodged income tax returns for that reason. 16 It was also accepted that each of them has during each of the years 1989-1996 received quite substantial amounts of money from companies in Vanuatu. They have used those monies for their support. The real issue is whether there is a prima facie case (as that term was explained in Propend) that those receipts have the character of income. 17 The appellants contend that the receipts represent money received by them from a sophisticated but lawful taxation structure. In very broad terms, it is asserted that Mr Beazley, Ms Beazley, and their two children Linda and Mark have established in Vanuatu a corporate and trust structure which enables those entities (one for each of them) to pay those monies on behalf of the appellants by way of repayment of loans. 18 In the case of Mr Beazley, the relevant trust was identified as the Rover Trust. He is said not to be a beneficiary. The trustee is not expressly identified. The Rover Trust holds the shares in Magnetic Holdings Inc ("MHI"). Some evidence suggests that the Rover Trust holds those shares through an intermediary, Fidelity Pacific Life Insurance Co Ltd ("Fidelity Insurance"). 19 In the case of Ms Beazley, the relevant trust was identified as the Blue Water Trust. Some material indicates that she is not a beneficiary, and that the eligible beneficiaries are Mr Beazley, Linda and Mark. The trustee is not expressly identified. It holds the shares in Southern Seas Inc ("SEA"), again apparently through Fidelity Insurance. 20 The trusts of Mark and Linda are not identified in the material before the Court, but each apparently holds the shares in Marksland Inc ("MKI") and Worldwide Relations Inc ("WRI") respectively, either directly or indirectly. 21 It is claimed that a number of years ago Mr Beazley and Ms Beazley each lent very substantial sums to those structures. It is unclear how that was done. A document shows that MHI, SEA, MKI and WRI have received in total in the financial years 1989/90 to 1995/96 $4,322,968, which appears to be interest earned on the deposit of funds available to those entities. It is appropriate to infer that the monies upon which that interest has been earned, at least in large measure, are the monies then paid by Mr Beazley and Ms Beazley. 22 Mr Beazley and Ms Beazley also contend that the monies so advanced were interest free. The monies which they have received over the years for their living expenses have been the progressive repayment of the loans. They contend that the interest earned on the investment of the monies lent by them has not been passed back to them. Certain documents confirm that monies available in MHI and SEA have been routinely applied to meet expenses incurred by Mr Beazley and by Ms Beazley respectively on their credit cards and for other reasons. Those amounts, it is accepted, are of significant proportions. Certain other documents indicate that the Blue Water Trust through Fidelity Insurance held $5,000,000 in an investment account, which at 31 December 1990 was mainly represented by shares in SEA and that the Rover Trust through Fidelity Insurance held an investment account of $8,000,000 which, at that date, was mainly represented by shares in MHI. 23 Pacific International Trust Company Ltd ("Pitco") is a trustee company, somehow charged with managing the affairs of the trust. Its Executive Chairman is Thomas M Bayer ("Mr Bayer"). It may be the trustee of the Rover Trust and of the Blue Water Trust. The material before the Court indicates that it has played a significant role in relation to the affairs of those trusts, and of MHI and SEA. 24 The respondent disputes that the structure and circumstances enabling Mr Beazley and Ms Beazley to receive the payments they have received are as they assert. He submits that the evidence established a prima facie case that the payments received were in the nature of income upon which taxation was payable. Inevitably, at this point, the full picture has not emerged. The parties acknowledge that. It may well be that the real facts are as the appellants contend. It is necessary, however, to determine whether the evidence does lead to the degree of satisfaction to which the High Court referred in Propend. That evidence comprised a series of documents procured upon execution of the warrant. 25 On 25 August 1989, each of Mr Beazley, Ms Beazley, Linda and Mark gave notice to Pitco in Vanuatu in the following terms:

"Re: WORLDWIDE RELATIONS INC. MARKSLAND INC. MAGNETIC HOLDINGS INC. SEVEN SEAS HOLDINGS INC. We hereby consent that until further notice the interest earned on aggregate deposits of the above four entities with Swiss Bank Corp. be divided 25% to each of the above entities notwithstanding that the beneficial interest in those deposits is in a different proportion. This consent is voluntary and may be rescinded by any signatory hereto at any further date." 26 That arrangement apparently persisted until 28 October 1996 when they each signed a notice to Pitco in respect of the same four companies in the following terms:

"As of the 26th October 1996, interest earned on aggregate deposits of the above entities with Swiss Bank Corp. and now being divided 25% to each of the entities notwithstanding that the beneficial interest in those deposits is in a different proportion is to be discontinued. In future, the above four entities is to be credited with its own proportion of interest earned accordingly." [sic]

27 Pitco (Mr Bayer) acknowledged that notice by facsimile to Ms Beazley of 5 November 1996. It indicated that David Outhred ("Mr Outhred") was working on a recasting of what would have been the case "had the 25% split not been in effect". 28 That recasting appears to be reflected in a facsimile of 7 November 1996 from Pitco (Mr Outhred) to Ms Beazley. It relates to the interest received on certain Interest Bearing Deposits over the period 1989/90 to 1995/96 financial years. It shows the total interest over that period to have been $4,322,968 and that "each entity", namely MHI, SEA, MKC and WRI received $1,080,742. 29 It also contains a table, with columns for each of those four entities, described as "Pro Rata Calculation" showing (apparently) year by year the interest which would have been earned by those four separate entities had the interest received each year overall been appropriated to the four companies on some other basis, presumably on the basis of the respective capital sums standing to their credit in the Interest Bearing Deposits. 30 Over the seven year period, on that basis, the share of interest would have been

MHI $ 378,155 SEA $3,019,524 MKC $ 240,717 WRI $ 684,572 $4,322,968

31 On the typed document, there has been handwritten against names of the four entities "Dad", "Mum", "Mark" and "Linda" respectively. 32 It is largely on the basis of that document that the respondent asserts that each of Mr Beazley and Ms Beazley have failed to disclose income of $1,080,742, that sum being the interest earned over the period 1989/90 to 1995/96 apportioned equally. 33 In early 1995, Ms Beazley was apparently contemplating the purchase of a property owned by another company Force 10 Pty Ltd ("Force 10") through another corporate entity. Pitco, by letter dated 27 April 1995, made certain comments to her about that proposal, including the financing of that proposal. 34 Those comments indicated that the proposed price was of the order of $1,500,000 and that, to Mr Bayer's understanding, Force 10 was owned by Nepuka Nominees Pty Ltd as trustee for a Beazley family trust "which is for Mark and Linda", so that when and if the outstanding debt over the property were repaid the property would beneficially belong to Mark and Linda. The outstanding debt of Force 10 in respect of the property was said to be in excess of $1,500,000 and to be owned to "FCB Trust". Mr Bayer also indicated that, as "a beneficiary" of the Blue Water Trust, Ms Beazley held a debenture over SEA with an outstanding balance of about $350,000 which could be repaid, and the remaining sum of $1,150,000 could be paid as a dividend by SEA to the Blue Water Trust, which could in turn distribute that sum to Ms Beazley. That distribution would oblige Ms Beazley to lodge an Australian income tax return. Mr Bayer also observed that if the $350,000 debenture was discharged, that

"… will mean Seven Seas will no longer have the facility in the future to legally provide you with funds and/or pay your credit card expenses."

A later facsimile from Pitco (Mr Bayer) to a solicitor in New Zealand dated 15 January 1998 also referred to Mr Beazley and Ms Beazley having each loaned substantial amounts, but they "have slowly recalled their loans" Mr Bayer commented in that facsimile:

"What is not clear to me is whether the ongoing loan at no interest is a settlement of the foregone interest each year." (My underlining)

"P.S. Please ensure this letter is not left lying around and after the matter is finalized, it is destroyed." 36 There are handwritten notations on that letter. The addressee, and their content, leads to the inference that they are Ms Beazley's comments. Those comments indicate that, contrary to Mr Bayer's views, Ms Beazley regards Force 10 as owing her $1,300,000 either directly or through FCB Trust, and she notes

"Force 10 owes me $1.3 million + interest". 37 It appears, at least in the mind of Ms Beazley, that the transaction is not as it is apparently documented. Her assertion that, despite the structure of the loan to Force 10 being from the FCT Trust, it is a debt owed to her and her assertion that it is a debt upon which she is also entitled to interest tends to suggest some different arrangement. The detailed advice contained in that letter of 27 April 1995 also tend to suggest, given the concluding observation that it be destroyed, that the structure is not one which the appellants would be comfortable to see exposed and tested by taxation authorities. 38 There is also other evidence which tends to the conclusion that the formal corporate and trust structure does not entirely represent the real arrangements, notwithstanding some indications as noted that monies received by Mr Beazley and Ms Beazley were in reduction of loans made by them. In respect of the structure of each, and despite them being said not to be beneficiaries of the Rover Trust and the Blue Water Trust, the facsimile of Pitco of 15 January 1998 says that MHI "represents the interests of" Mr Beazley and that SEA "represents the interests of" Ms Beazley. The letter of 27 April 1995 also suggests that, contrary to other material, Ms Beazley is a beneficiary of the Blue Water Trust and could, at her wish, be paid a distribution of $1,150,000 by that Trust. 39 It is not clear what proper considerations led to the interest sharing arrangement. It may be a contrivance to spread income. It is not clear why the pro rata calculation was necessary or desirable. It is not clear how the income received by way of interest has been accounted for, or applied. Those matters may be but straws in the wind. By themselves, they do not take the respondent's case any real distance. They may however add a little colour to the other material referred to. 40 It may not be appropriate to place much weight upon the annotations in the facsimile from Mr Outhred of Pitco of 7 November 1996 identifying each of the entities with members of the Beazley family. That is a relatively insignificant matter. However, the pro rata calculation discloses that the interest receivable by MHI, but for the arrangement that the total interest be apportioned equally across the four entities, was slight and considerably less than that receivable by SEA. In the years from 1991/92, that interest has diminished and in only one year has it been in excess of $10,000. The capital sum to earn that interest could not be very great. That has not inhibited Mr Beazley from being able to receive significant funds from MHI over those years. It is open to infer that, somehow, the interest received by MHI has been capitalised so as to be available to meet his drawings. 41 One further document relied upon by the respondent is an unsigned letter addressed to Mr Beazley dated 25 September 1997, included the following:

"Even assuming that there has been no dealing with any accrued interest due on loans from overseas, I [don't] think a court case in regard to this matter would be in the interests of F10 or of family members. It would have a very high probability of highlighting the financial situation of the family members and call into question as to how they are being supported, having been resident in the country for more than a decade. I believe that will be a no win situation for the family members. … Questions about how your livelihood is paid for maybe [sic] difficult to answer and how your travelling expenses are met. Even relatively small infringements could result in a major disruption to one's life and financial situation if challenged. If you wish to respond I suggest you do so by mail … I [don't] think a telephone conversation would be appropriate." 42 The learned trial judge concluded that the evidence disclosed the following available inferences:

"(a) That the [appellants], while resident in Australia, are, or have been, owed large amounts by companies resident outside of Australia; (b) That they have dealt with those funds in a way which suggests that they retain some interest in them; (c) That in the usual course, such substantial loans would yield some return to the lenders; (d) That such return, in the hands of Australian residents, would be assessable income; (e) That expenses incurred by both applicants have been met by overseas companies to which such loans were made; (f) That the [appellants] have not filed tax returns while resident in Australia over a period of about twenty years. (g) That the [appellants] and those advising them have demonstrated an unusually high level of concern about concealing details of their financial affairs;"

43 His Honour regarded those inferences as sufficient to ground a conclusion that the appellants may have concealed income for the purposes of avoiding the payment of taxation. He accepted, as is clearly the case, that other explanations are possible, including that they have been living off their capital. The availability of those explanations did not in his Honour's mind exclude the suggested conclusion. His Honour said that it was also possible to infer that the appellants established a structure outside of Australia designed to assist them to conceal the true character of funds available to them, in order to avoid tax. It may be that the structure achieves that purpose in an entirely lawful way, but the concern for secrecy disclosed in some documents arguably suggests a guilty mind, or at least an awareness that the structure may be a mere facade. His Honour was therefore satisfied that there is a prima facie case of ulterior purpose. 44 The appellants disputed the inference which the learned trial judge said was available that substantial loans normally yield some returns to lenders. It is true that interest on substantial loans may be forgone. That may occur as part of legitimate tax planning. That may have been the circumstance here. However, as noted in these reasons, there is some evidence that Ms Beazley does not necessarily agree that to be the case. In addition there is some evidence which raises doubts whether the loan of Mr Beazley was sufficient to have met his drawings since 1989/90 without some interest capitalisation. There is also evidence which may suggest an artificial and uncommercial appropriation of interest across the four entities mentioned. 45 The evidence to which I have referred earlier in these reasons, taken overall, is sufficient to raise a prima facie case that Mr Beazley and Mrs Beazley have participated in an arrangement which has the purpose of evading the liability to pay income tax, in contravention of s 29D of the Crimes Act. That evidence is also, as the learned trial judge found, of sufficient character to support the conclusion that the documents in issue were brought into existence in the course of, or for, that ulterior purpose. In the circumstances, the learned trial judge has not been shown to have been in error in his conclusions. 46 It should be noted that the appellants did not submit that it was necessary separately to address each of the 118 documents, or that those of or concerning the trustees of the F C Beazley Trust or concerning Force 10 should be treated differently from other documents. 47 The appeal should be dismissed with costs.

I certify that the preceding forty-five (45) numbered paragraphs are a true copy of the Reasons for Judgment herein of the Honourable Justice Mansfield.

Associate: Dated: 14 September 1999 Counsel for the Appellants: Mr J A Logan

Solicitors for the Appellants: Primrose Couper Cronin Rudkin

Solicitors for the Respondent: National Crime Authority

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