'Unlike the position in Sleight, the applicant did not have the option to farm alone. The Loan Agreement was optional. Nevertheless, it can be said of the present scheme (as it was said by the Full Court in Sleight of the scheme there in issue) that the form was one designed to increase the taxation deductions available to an investor. On the other hand, the substance was one in which the applicant as the investor was a passive investor. It can be said here as it was said in Sleight at [82] that the particular shape the investment took was fashioned in a way that would maximise the tax deductions. They were geared up by the Loan Agreement with up-front payments and the loan allowing the prepayment of the management fee and the deduction which emanated from that. The loan was to be repaid out of the investor's profit share on the limited recourse basis of 50 per cent so that the substance was that the investor was to receive only a lesser share of profit over the term of the Loan Agreement. 'But for' the tax deductions, the form the investment might be expected to take would relate more to the substance of what happened. This points to a tax benefit purpose.'
(iii) The Time and Length of the Scheme
70 His Honour found under this heading that Mr Calder had sold his interest in his yacht in March 1994. He had received money from the sale probably in April 1994. He had looked for investments in May and June 1994 and in June 1994 had purchased shares in six public companies. He invested in the Project because he wanted a higher risk venture. He received a receipt on 18 June 1994 evidencing the payment of money to enter the scheme. The round robins occurred on 30 June 1994. His Honour considered that the time of entry into the scheme in these circumstances marginally favoured a tax benefit purpose.
71 As to the length of the scheme it was not one which started and finished in the year of income once a deduction had been availed of. It contemplated activity over 15 years before the Management Agreements terminated and the farms reverted to the Land Owner. His Honour considered that this feature marginally supported a commercial purpose in entering into the scheme.
(iv) The result in relation to the Act that, apart from Part IVA would be achieved by the scheme
72 The parties were in agreement that, but for Pt IVA, the result of the scheme was that the applicant obtained a deduction of $13,512 in the 1994 year and a deduction of $2,513 in the 1995 year. These deductions related to the farm fees, management fees and interest paid in connection with the Project. His Honour found (at [104]):
'The applicant's claimed deductions of $16 025 exceeded the requirements of his personal cash, namely $7238. This points to taxation as a dominant purpose.'
(v) Change in the financial position of the taxpayer from the scheme
73 The submissions put to his Honour under this heading focussed upon the evidence of Mr Langridge and Mr McClymont no doubt having regard to the objective character of the imputed purpose to be ascertained under s 177D. His Honour held it was apparent that Mr Calder was subjectively influenced by the forecasts of return on investment in the prospectus. The Commissioner on the other hand, contended that he should have seen the lack of commerciality in the investment through analysis of the scheme. He should have seen that the commercial opportunities did not exist or were vastly overstated because of errors in calculation, the role of tax savings in the projections and wrong assumptions concerning future price and inflation. His Honour observed, however, that even if Mr Calder had appreciated the errors in calculation that did not have the result that he could be said only to have reasonably expected tax benefits from the scheme. Mr Langridge's evidence had supported the view that there would still have been a return of between 7.6 per cent and 8.91 per cent. His Honour also agreed with Mr Calder's submission that at the time he made his investment it could not reasonably have been expected that he would have discounted entirely the possibility of any price increase and that the rate of 5 per cent was a reasonable expectation in the circumstances. His Honour said (at [122]):
'Were it relevant, these factors would support a finding that the subjective purpose of the applicant lay in the pursuit of commercial gain in the course of carrying on a business.'
74 As to the other factor relied upon by the Commissioner which was the role of tax savings in the projections, his Honour said (at [123]):
'… Mr Langridge's evidence was that the Project relied upon the tax deductibility and effect of the initial payments and the gearing up provided by the loan to show any rate of return. In those circumstances it cannot be objectively found that the dominant purpose of the applicant's entry into the scheme was to enable the applicant to make a commercial investment: the tax benefit was the key to the commerciality of the investment.'
75 His Honour considered that at the time of Mr Calder's entry into the scheme the objective fact was that the dominant purpose of such entry was to obtain the tax benefit. Without that benefit the commerciality of the scheme would have been very substantially endangered.
(vi) Change in the financial position of any person with any connection to the taxpayer from the scheme
76 His Honour considered this factor to be neutral.
(vii) and (viii) Any other consequence for the taxpayer or person referred to in subparagraph (vi) and the nature of any connection between the taxpayer and any person referred to in subparagraph (vi)
77 His Honour again found these factors to be neutral.
78 In the last paragraph of his Honour's judgment under the heading 'CONCLUSION ON THE APPLICATION OF PART IVA' he said (at [132])
'I have weighed each of the above factors individually and cumulatively. In my view the manner in which the scheme was entered into and structured, the presence of round robin arrangements, the nature of its form in contrast with its substance, the timing of the entry into the scheme, the result in relation to the Act apart from Pt IVA, the change in the financial position of the applicant and the character of what he may reasonably now have been expected to have in mind at the time of entry, are all consistent with the applicant objectively being seen to have a dominant purpose of obtaining a tax benefit. Accordingly I consider the application by way of 'appeal' should be dismissed.'
Grounds of Appeal
79 The grounds of appeal challenged his Honour's conclusions about dominant purpose largely by reference to his evaluative judgments. It is not necessary to set the grounds out here at length as they are particularised in some detail. It will suffice to deal with them seriatim in the reasons that follow. It is important, however, to bear in mind that the ultimate judgment as to purpose under s 177D is holistic, albeit it requires that regard be paid to each of the eight factors listed in s 177D(b). Indeed it can be expressed as a global or overall judgment provided that it is apparent that those factors have been considered.
80 Challenges to such global conclusions by reference to the failure to give adequate weight to one factor or another or by reference to allegedly excessive weight attributed to one factor or another are unlikely to succeed. A judgment will generally reflect an awareness of and immersion in the detail of the case that it is difficult to replicate in an appeal court. Without detracting from the function and responsibilities of the appeal court, that necessarily introduces a practical restraint into its judgment on such matters.
Statutory Framework
81 The relevant provisions of the Income Tax Assessment Act 1936 (Cth) applicable in this case are those comprised in Pt IVA. They are as follows:
'177A(1) In this Part, unless the contrary intention appears:
…
"scheme" means:
(a) any agreement, arrangement, understanding, promise or undertaking, whether express or implied and whether or not enforceable, or intended to be enforceable, by legal proceedings; and
(b) any scheme, plan, proposal, action, cause of action or course of conduct;
…'
The meaning of 'purpose', which appears in s 177D(b) below, is elaborated in s 177A(5) thus:
'A reference in this Part to a scheme or part of a scheme being entered into or carried out by a person for a particular purpose shall be read as including a reference to the scheme or part of the scheme being entered into or carried out by the person for 2 or more purposes of which that particular purpose is the dominant purpose.'
82 The idea of a 'tax benefit' is elaborated in s 177C:
177C(1) Subject to this section, a reference in this Part to the obtaining by a taxpayer of a tax benefit in connection with a scheme shall be read as a reference to:
…
(b) a deduction being allowable to the taxpayer in relation to a year of income where the whole or a part of that deduction would not have been allowable, or might reasonably be expected not to have been allowable, to the taxpayer in relation to that year of income if the scheme had not been entered into or carried out;
…
and for the purposes of this Part, the amount of the tax benefit shall be taken to be:
…
(d) in a case to which paragraph (b) applies - the amount of the whole of the deduction or of the part of the deduction, as the case may be, referred to in that paragraph;
…'
83 The purpose to be identified and the factors to be taken into account in that identification in order to attract the application of Pt IVA are set out in s 177D:
'This Part applies to any scheme that has been or is entered into after 27 May 1981, and to any scheme that has been or is carried out or commenced to be carried out after that date (other than a scheme that was entered into on or before that date), whether the scheme has been or is entered into or carried out in Australia or outside Australia or partly in Australia and partly outside Australia, where -
(a) a taxpayer (in this section referred to as the "relevant taxpayer") has obtained, or would but for section 177F obtain, a tax benefit in connection with the scheme; and
(b) having regard to:
(i) the manner in which the scheme was entered into or carried out;
(ii) the form and substance of the scheme;
(iii) the time at which the scheme was entered into and the length of the period during which the scheme was carried out;
(iv) the result in relation to the operation of this Act that, but for this Part, would be achieved by the scheme;
(v) any change in the financial position of the relevant taxpayer that has resulted, will result, or may reasonably be expected to result, from the scheme;
(vi) any change in the financial position of any person who has, or has had, any connection (whether of a business, family or other nature) with the relevant taxpayer, being a change that has resulted, will result or may reasonably be expected to result, from the scheme;
(vii) any other consequence for the relevant taxpayer, or for any person referred to in subparagraph (vi), of the scheme having been entered into or carried out; and
(viii) the nature of any connection (whether of a business, family or other nature) between the relevant taxpayer and any person referred to in subparagraph (vi),
it would be concluded that the person, or one of the persons, who entered into or carried out the scheme or any part of the scheme did so for the purpose of enabling the relevant taxpayer to obtain a tax benefit in connection with the scheme or of enabling the relevant taxpayer and another taxpayer or other taxpayers each to obtain a tax benefit in connection with the scheme (whether or not that person who entered into or carried out the scheme or any part of the scheme is the relevant taxpayer or is the other taxpayer or one of the other taxpayers).'
84 The power of the Commissioner to cancel a tax benefit obtained in connection with a scheme to which Pt IVA applies is set out in s 177F:
'(1) Where a tax benefit has been obtained, or would but for this section be obtained, by a taxpayer in connection with a scheme to which this Part applies, the Commissioner may:
…
(b) in the case of a tax benefit that is referable to a deduction or a part of a deduction being allowable to the taxpayer in relation to a year of income - determine that the whole or a part of the deduction or of the part of the deduction, as the case may be, shall not be allowable to the taxpayer in relation to that year of income;'
The Role of the Appellate Court
85 The appellate function of the Court has been considered in a number of cases and recently by the Full Court in Poulet Frais Pty Ltd v The Silver Fox Company Pty Ltd (2005) 220 ALR 211. The Full Court there reviewed a number of cases relating to its appellate function and referred to Branir Pty Ltd v Owston Nominees (No 2) Pty Ltd (2001) 117 FCR 424 in which there was also a substantial review of authorities. It is not necessary here to revisit those reviews. Poulet Frais and the cases it cited are clear authority for the proposition that where primary facts have been found and are not in dispute and where the judgment under challenge involves matters of evaluation or characterisation, a degree of appellate caution is required before reversing the trial judge's findings. This is so even though those findings are not dependent upon credibility - Poulet Frais at [37]. An appeal by way of rehearing is not simply a rehearing of or a second go at trial. It does not answer Ambrose Bierce's definition of an appeal in his Devil's Dictionary as 'a second throw of the dice'.
86 In Poulet Frais the Court was concerned with an appeal against a finding of misleading or deceptive conduct. In that context it said (at [46]):
'Where the determination of whether particular conduct was misleading or deceptive is not straight forward but rather involves elements of degree, opinion or judgment, a simple preference in the appellate court for a view different from that taken by the trial judge may not carry with it the conclusion of error. The appeal court might conclude either that there could not be said to be only one possible correct determination or that the trial judge had a particular advantage, not share by the appellate court, in assessing critical matters of nuance and judgment. In such a case, in determining whether or not the trial judge fell into appealable error, the appeal court should not proceed as though on a hearing de novo in which the views of the trial judge carry no weight. Rather the appeal court must give appropriate weight to the views of the trial judge and set aside his or her finding only if persuaded that the finding is wrong. However, if an appellate court is persuaded that particular conduct, found by the trial judge to be misleading or deceptive, was not in fact misleading or deceptive, it thereby identifies error in the decision of the primary judge. Similarly where an appellate court is persuaded that conduct which the trial judge did not consider misleading or deceptive is in fact misleading or deceptive.'
87 The preceding statement can be generalised to any judgment which involves elements of evaluation or characterisation on undisputed primary facts. In such a case the Court must give appropriate weight to the views of the trial judge and set aside his or her finding only if persuaded that the finding is wrong.
Principles Governing the Application of Part IVA
88 Part IVA of the ITA confers upon the Commissioner, by operation of s 177F, a discretion to cancel a tax benefit obtained by a taxpayer in connection with a scheme to which Pt IVA applies.
89 The exercise of that discretion does not depend upon whether the scheme, which the Commissioner identifies, is the correct scheme. It is possible for the Commissioner to rely, in appeal proceedings, upon one scheme and, in the alternative, another which is a subset of the transactions or arrangements covered by the first - Federal Commissioner of Taxation v Peabody (1994) 181 CLR 359 at 382. In the present case the Commissioner has identified a scheme and it is not in dispute that the scheme so identified is one capable of attracting the application of Pt IVA if the requirements of s 177D are satisfied with respect to it. As noted earlier, the Commissioner did formulate, before the learned primary judge, some alternative or fall back schemes which were propounded on the basis of the transactions and arrangements comprising the Project. Given his Honour's conclusions it was not necessary to address those alternative schemes and they did not figure in the arguments put to this Court.
90 It was not in issue on this appeal that the deductions claimed by Mr Calder constituted a tax benefit which he obtained in connection with the scheme propounded by the Commissioner. The necessary condition for the application of Pt IVA, which is set out in s 177D(a), was satisfied. The appeal therefore turned entirely upon the finding of the learned primary judge that, having regard to the eight factors listed in s 177D(b), it would be concluded that Mr Calder entered into the scheme for the purpose of obtaining a tax benefit. This requires consideration of the principles governing the application of s 177D(b) of the ITAA.
91 The question posed by s 177D(b) was formulated in Federal Commissioner of Taxation v Spotless Services Ltd (1996) 186 CLR 404 at 422 thus:
'…whether, having regard, as objective facts, to the matters answering the description in par (b), a reasonable person would conclude that the taxpayers entered into or carried out the scheme for the dominant purpose of enabling the taxpayers to obtain a tax benefit in connection with the scheme.'
Hill J said in Peabody v Federal Commissioner of Taxation (1993) 40 FCR 531 at 543 (Ryan and Cooper JJ agreeing) that it is necessary to have regard to each of the matters referred to in s 177D(b). This does not mean that each must point to the necessary purpose. Some may point one way, others another way:
'It is the evaluation of these matters alone, or in combination, some for, some against, that s 177D requires in order to reach the conclusion to which s 177D refers.'
All eight must be considered - Federal Commissioner of Taxation v Hart (2004) 217 CLR 216 per Gummow and Hayne JJ at 244 [70]. But as Callinan J said of the eight factors, in the same case (at 261 [92]):
'It is not necessary of course that every one of them be relevant to every scheme. Indeed the presence or overwhelming weight of one factor alone may of itself in an appropriate case be of such significance as to expose a relevant dominant purpose.'
The reference in s 177A(5) to a 'dominant purpose' in its ordinary meaning is a reference to that which was the ruling or most influential purpose - Spotless at 416. The list of factors in s 177D are exhaustive of the considerations relevant to the question of dominant purpose - Peabody at 542, applied by Sackville J in CC (NSW) Pty Ltd (In Liq) v Commissioner of Taxation (Cth) (1997) ATC 4123 at 4147 and adopted with apparent approval by Carr J in Eastern Nitrogen Ltd v Commissioner of Taxation (2001) 108 FCR 27 at 45 (Sundberg J agreeing).
92 There is no necessary opposition between a commercial purpose and the purpose of obtaining a tax benefit. As was said in Spotless (at 415):
'A person may enter into or carry out a scheme, within the meaning of Part IVA, for the dominant purpose of enabling the relevant taxpayer to obtain a tax benefit where that dominant purpose is consistent with the pursuit of commercial gain in the course of carrying on a business.'
Putting it another way, a particular course of action undertaken by a taxpayer may be tax driven and also reflect a rational commercial decision. The presence of the latter does not determine whether the person has the dominant purpose of obtaining a tax benefit - Spotless at 416.
93 In Hart Gleeson CJ and McHugh J said (at 227 [15]):
'… the fact that a particular commercial transaction is chosen from a number of possible alternative courses of action because of tax benefits associated with its adoption does not of itself mean that there must be an affirmative answer to the question posed by s 177D. Taxation is part of the cost of doing business and business transactions are normally influenced by cost considerations. Furthermore, even if a particular form of transaction carries a tax benefit, it does not follow that obtaining the tax benefit is the dominant purpose of the taxpayer in entering into the transaction.'
Their Honours also pointed out (at 227 [16]):
'… a transaction may take such a form that there is a particular scheme in respect of which a conclusion of the kind described in s 177D is required, even though the particular scheme also advances a wider commercial objective.'
The mere fact that a taxpayer pays less tax by entering into one form of transaction rather than another does not show that Pt IVA applies. Nor does the fact that a taxpayer has obtained a tax benefit (at 240 per Gummow and Hayne JJ).
94 Section 177C(1)(b) defines a tax benefit by reference, inter alia, to a deduction being allowable to the taxpayer where the whole or a part of it would not have been allowable if the scheme had not been carried out. In Hart, Gummow and Hayne JJ said, at 243, that when s 177C(1)(b) is read with s 177D(b):
'… it becomes apparent that the inquiry directed by Pt IVA requires comparison between the scheme in question and an alternative postulate. To draw a conclusion about purpose from the eight matters identified in s 177D(b) will require consideration of what other possibilities existed.'
95 Section 177D mandates consideration of an objective purpose. That is to say the purpose which could be inferred by 'a reasonable person'. One of the reasons for requiring consideration of objective criteria under s 177D in ascertaining purpose:
'… was to avoid the consequence that the operation of Pt IVA depends upon the fiscal awareness of a taxpayer.'
This does not prevent attribution to the taxpayer of the purpose of a professional adviser - Federal Commissioner of Taxation v Consolidated Press Holdings Ltd (2001) 207 CLR 235at 264.
96 The subjective state of mind of a taxpayer or, in the case of a company, the company's directors is irrelevant - Eastern Nitrogen at 45. In Hart, Gummow and Hayne JJ said of s 177D(b) (at 243 [65]):
'That provision requires the drawing of a conclusion about purpose from the eight identified objective matters; it does not require, even permit, any inquiry into the subjective motives of the relevant taxpayers or others who entered into or carried out the scheme or any part of it.'
It does not follow from the irrelevance of the subjective state of mind of the taxpayer that objective factors, tending to indicate that a particular purpose was subjectively held by a person, may not also be relevant to the determination of the objective purpose which could be inferred by a reasonable person.
Ground 1.1 - Relevance of Joint Taxpayer and Spouse Investment in Assessing Dominant Purpose
97 It appeared from the evidence given by the Commissioner's expert, Mr Langridge, that had Mr and Mrs Calder wanted to maximise the tax benefit from their investment in the Project then all funds should have been invested in the name of Mrs Calder. Counsel for Mr Calder argued that the trial judge erred in failing to treat that matter as an objective factor strongly negating the dominant purpose of obtaining a tax benefit.
98 The joint character of the investment was examined by his Honour in connection with his consideration of the manner in which the scheme was entered into or carried out. He accepted the Commissioner's argument that just because Mr and Mrs Calder did not structure their investment to maximise their tax benefits did not mean that Mr Calder lacked a dominant purpose, viewed objectively of obtaining a tax benefit.
99 The real question was whether the joint character of the investment could be weighed in the balance as a matter tending against a dominant tax benefit purpose. It is no doubt possible in any given case to imagine schemes or structures or ways of doing things which might have given rise to greater tax benefits than those actually secured. Such imaginings have little bearing on the question whether in the case at hand it could have been concluded that the dominant purpose of entering into a scheme was to secure a tax benefit. His Honour's treatment of the question was correct as a matter of principle. His judgment on the facts of the particular case does not disclose error.
Ground 1.2 - Taxpayer's personal circumstances and attitudes to the investment
100 It was submitted for Mr Calder that the learned primary judge had failed to give proper weight to the undisputed fact that he and his wife and family had used Tea Tree oil medicinally since the 1970s, that they had displayed considerable interest in a knowledge of its medicinal qualities and had used it medicinally and had recommended it to others. These facts, viewed objectively, did not merely 'favour a commercial purpose'. It was said that these facts, viewed objectively, strongly supported the conclusion that the primary purpose of the investment was not to achieve a tax benefit but to have a stake in an industry and a product which had long been of particular personal interest to the Calders and in which Mr Calder believed on reasonable grounds had the potential to produce substantial returns.
101 His Honour, in dealing with Mr Calder's personal circumstances, did so as part of his consideration of the manner in which the scheme was entered into or carried out.
102 Counsel for Mr Calder submitted that his Honour should have held that these circumstances did not merely 'favour a commercial purpose' but strongly supported a conclusion that the dominant purpose of the appellant was not to achieve a tax benefit.
103 His Honour's finding on this matter was in favour of Mr Calder. The weight to be attributed to these circumstances was a matter for his Honour. No error adverse to Mr Calder was disclosed. If anything there is room for argument in relation to his Honour's consideration of these matters that they would seem primarily to bear upon Mr Calder's subjective purpose in entering into the transaction. However that matter was not debated.
Ground 1.3 - Factors relevant to subjective purpose not irrelevant to objective purpose
104 It was submitted for Mr Calder that the evidence showed that he had paid $1,887.50 to the Project in June 1994, lodged his tax return after 30 June 1994 and by a notice of assessment issued on 2 September 1994 received a refund of $3,873.17. He then paid a further $4,250 on 27 September 1994 as a principal repayment under the Loan Agreement and $1,125 on 8 June 1995 for prepaid interest. Mr Calder and his wife also paid a further $500 as a voluntary levy to fund harvests on the property although those payments were not required under the Project Agreements.
105 The learned primary judge is said to have erred in treating as irrelevant to a determination of Mr Calder's purpose his lack of reliance on a tax refund to invest in the Project. The tax refund of $3,873.17 from his 1994 deductions was less than his initial cash payments of $1,887.50 in June 1994 and $4,250 in September 1994 and voluntary harvest payments made. His Honour found that these considerations favoured a finding that Mr Calder had a subjective purpose of seeking commercial returns. He rightly treated that subjective purpose as irrelevant. However he went on to say of those underlying considerations (at [57]):
'They do not objectively support that the applicant did not enter the scheme for the purpose of obtaining a tax benefit in connection with it as his dominant purpose. These factors are therefore neutral.'
The mere fact that evidence might support a finding of a subjective purpose of seeking commercial returns does not mean that such evidence may not also be relied upon in ascertaining what a reasonable person might have concluded about Mr Calder's purpose in investing in the Project.
106 The timing and quantity of payments made by an Investor and the relationship between those payments and tax refunds may be matters of objective fact which could be taken into account in assessing dominant purpose. They are made relevant to that consideration by the broad terms of the criterion in s 177D(b)(i).
107 It should be noted however that his Honour did not find these matters incapable of supporting an objective inference. He found that they did not objectively support such an inference. The fact that they might support an inference that Mr Calder was seeking commercial returns does not, on the authorities previously discussed, exclude the possibility that they would be neutral in relation to the question whether there was a dominant purpose of seeking a tax benefit.
Ground 1.4 - the effect of the prospectus
108 In ground 1.4 it was alleged that his Honour erred in holding that the contents of the prospectus were a 'neutral factor' in ascertaining purpose under s 177D(b). It was submitted in support of the challenge to his Honour's finding that the prospectus placed significant emphasis on the commercial aspects of the Project. It gave substantial agricultural and commercial information which included income projections, an agricultural consultant's report and a marketing consultant's report. The promoters of the scheme were required by law to include information as to the tax benefits available by way of allowable deductions under the ITAA. A report detailing the tax implications of the Project and an Investigating Accountant's report meeting those reporting requirements were therefore included in the prospectus.
109 In coming to the conclusion that he did about the prospectus, it is said that the learned primary judge relied on the approach of Hill J in Sleight. It was pointed out that in Cooke where the prospectus had addressed and highlighted the taxation advantages of participation in the project the Court made a finding of a dominant commercial purpose and rejected the contention that references in the prospectus to the tax deductibility of the investment meant that the dominant purpose was a tax benefit.
110 In answer, the Commissioner submitted that the argument advanced on behalf of Mr Calder amounted to the following:
(a) the Project prospectus did not over emphasise tax;
(b) the Project prospectus in Cooke did over emphasise tax;
(c) Part IVA was held not to apply in Cooke;
(d) accordingly, the primary judge ought to have followed Cooke to find the contents of the prospectus to be a neutral factor.
It was submitted that had his Honour applied such reasoning he would have failed in the task of determining the question of purpose on the particular facts of the case before him.
111 There is no doubt that the emphasis in the prospectus on the commercial aspects of the Project would support an inference that, viewed objectively, a person investing in the Project in response to the prospectus would be doing so for a commercial purpose. But as has already been noted, a commercial purpose may be entirely consistent with the existence of a dominant purpose of securing a tax benefit. The latter not being indicated from the prospectus, it would seem that it was, in that sense, that his Honour regarded the prospectus as neutral. He cannot be said to have erred in that conclusion.
Ground 1.4A - significance of round robin transactions
112 The grounds of appeal were amended by leave at the hearing to allow the inclusion of a new ground 1.4A, reflected in the written submissions which had been filed before the hearing. Under this ground it was submitted that his Honour erred in holding that the round robin transaction, of which Mr Calder was unaware, supported a conclusion that it 'mildly supports a tax benefit purpose'. It was said his Honour should have held this to be a neutral factor simply because the taxpayer was unaware of and not a party to that part of the transaction. It was argued that in Cooke's case the taxpayer was also unaware of alleged round robin transactions and that it was rightly accepted by the learned primary judge that such transactions could not be part of any 'scheme' to which the taxpayer was a party.
113 It is important to bear in mind that in considering the round robin transaction his Honour was considering, having regard to the manner in which the scheme was entered into or carried out (alone or in combination with other factors mentioned in s 177D) it would be concluded that the taxpayer entered the scheme for the purpose of obtaining a tax benefit in connection with it. The subjective purpose of the taxpayer and, indeed, the taxpayer's awareness of the relevant provisions of the law, his fiscal awareness, are not material to determining the question of purpose. The issue that arises is whether the way in which the entities associated with the promoters of the scheme deal with their funds may be relevant to determining the taxpayer's purpose.
114 The broad formulation of the factors in s 177D(b) particularly (i) and (ii) clearly encompasses matters of which a taxpayer may be quite unaware. So a taxpayer may execute the relevant application form and agreements without reading them. That does not mean that the taxpayer is taken to be unaware of them and that the contents of the agreements are to be disregarded in assessing purpose under s 177D. It would be open to a taxpayer to make inquiry as to how the funds which the taxpayer is contributing will be dealt with as between, for example, lender and manager. That is an inquiry which the taxpayer would be entitled to make having regard to the liability that he or she has assumed to pay the manager's fees. The absence of such inquiry and lack of awareness of the way in which the funds were actually processed does not mean that those factors are to be disregarded in the objective assessment of purpose under s 177D any more than the unread details of the contracts which constitute the framework of the scheme.
115 The ground of appeal in this case turned entirely upon Mr Calder's ignorance of the round robin arrangement that was said to exist between Lender and Manager. That lack of awareness being irrelevant to his Honour's proper consideration of this aspect of the execution of the scheme, this ground must fail.
Ground 1.4B - the form of the investment as indicative of a tax benefit purpose
116 It was submitted in support of this ground that Mr Calder had appointed a Manager to manage his Project Farm by signing a Management Agreement. He understood that such appointment would offer benefits such as economies of scale, modernised farming activities and continuous market research and development. The Project was actually established, operated and managed in a professional, commercial and businesslike manner and in accordance with the Agreements. So much was indicated by the evidence of Mr McClymont and Mr Hayer. There was no contention by the Commissioner that the arrangements were a sham or that the fees incurred under the Project Agreements were excessive or inflated or that the required work was not fully carried out. In the submissions on behalf of Mr Calder comparisons were drawn with Cooke's case where, like Mr Calder, the taxpayer's only involvement in the project was to contribute the required funds. The Court in Cooke concluded that the taxpayer's dominant purpose was to obtain a commercial return and not to obtain a tax benefit. The learned primary judge found the form of the investment was designed to increase the taxation deductions available to an Investor, that Mr Calder was a passive Investor and that this pointed to a tax benefit purpose. Counsel for Mr Calder made the point that the learned primary judge had earlier found in [86] that the passivity aspect was a neutral factor. He submitted that the learned primary judge should have found (as the Court had done in Cooke) that the fact that Mr Calder prepaid his fees using predominantly borrowed funds, sought to maximise his commercial return through the appointment of a manager and was a passive investor who did not physically take part in the project, did not point to him as having a dominant tax purpose.
117 The finding of the learned primary judge which is impugned under this ground was related to a consideration of the form and substance of the scheme, the factor mentioned in s 177D(b)(ii). His Honour found that the form of the scheme was one designed to increase taxation deductions available to an investor. It could be said, as was said in Sleight, that the particular shape the investment took was fashioned in a way that would maximise tax deductions. His Honour referred to the gearing up by the Loan Agreement with upfront payments and prepayment of the management fee giving rise to a deduction. He referred to the limited recourse basis upon which the loan was to be repaid. It is true that his Honour described a substance of the scheme as '… one in which the applicant as the Investor was a passive investor'. But the factors to which he referred as pointing to a tax benefit purpose were directed to the form of the scheme and the features of it recited by his Honour in [96]. It was plainly open to his Honour to come to the conclusion that those features pointed to a tax benefit purpose. There is no error in coming to the conclusion with which this Court would interfere.
118 It is true that in [86] his Honour said that the fact that the scheme only required limited activity from the applicant over the first 13 months was a neutral factor. This was in the context of his Honour's consideration of the manner in which the scheme was entered into or carried out. In [96] his Honour was looking to the form and substance of the scheme. The passivity of the investment does not appear to have played any significant role in the logic, related to the 'particular shape the investment took' which led him to the conclusion of an indication of a tax benefit purpose. Ground 1.4B fails.
Ground 1.5 - the timing of the investment
119 His Honour had regard to the time and length of the scheme as required by s 177B(b)(iii). In that process he said at [101]:
'The applicant sold his interest in his yacht in March 1994. His evidence was at trial was that he received the money from the sale probably in April 1994. (sic) In May and June 1994 he looked for investments. In June 1994 he purchased shares in six public companies. He invested in Main Camp because he wanted a high risk venture. On 18 June 1994 he received a receipt evidencing that he had paid money to enter the scheme. The round robins occurred on 30 June 1994. I consider that the time of entry into the scheme in these circumstances marginally favours a tax benefit purpose.'
120 It was submitted for Mr Calder that the learned primary judge should have found, based on the facts which were undisputed, that there was clearly no flurry of activity on the last day of June 1994, that the appellant had entered into the project well before the end of June 1994 at the same time as he made other (non tax effective) investments. These facts, it was said, would support a finding that the time of the investment in the Project was a neutral factor and did not support a conclusion that the purpose was to achieve a tax benefit even 'marginally'. There is no doubt that the investment was proximate to the end of the financial year. The fact that the appellant may have purchased shares in other companies in the same month does not exclude the possibility that the timing of investment in this scheme was related to a tax benefit purpose. It was open to his Honour to draw the conclusion that he did. No error is shown under ground 1.5.
Ground 1.6 - the relationship between the claimed deductions and 'the requirements of his personal cash'.
121 As was said in Hart, simply borrowing to invest does not of itself point to a tax purpose and simply to show that a taxpayer has obtained a tax benefit does not show that Pt IVA applies. It was submitted that the learned primary judge should have found that the fact that Mr Calder's claimed deductions exceeded the requirement of his personal cash, due to the use of borrowings, was not a factor pointing to a dominant tax purpose as in Cooke, where the taxpayers borrowed a far higher percentage of their total invested funds. The Commissioner submitted in answer however, that this is not a case in which Mr Calder simply borrowed to invest and that so much appeared from his Honour's reasoning. In considering the relationship between the deduction claimed and the cash outlaid his Honour had regard to s 177D(b)(iv) namely the result in relation to the operation of the ITAA that, but for Pt IVA would be achieved by the scheme. He noted under that heading that both Mr Calder and the Commissioner were in agreement that but for Pt IVA, the result of the scheme was that he obtained deductions totalling $16,025 in the 1994 and 1995 years. His finding that that exceeded the requirements of the cash outlaid over that period was indisputable. His Honour was entitled to draw the conclusion that the multiplier effect of the scheme as between cash outlay and claimed deduction was indicative of a tax benefit purpose. His reasoning simply states his conclusion, but his conclusion was plainly open and no error is shown.
Grounds 1.7, 2 and 3
122 These three grounds collapse into the one complaint about his Honour's treatment of the evidence of the Commissioner's expert witness Mr Langridge. In the relevant part of his reasons for judgment the learned primary judge discussed the change in the financial position of the taxpayer from the scheme, the factor set out in s 177D(b)(v). His Honour had noted the contentions advanced against Mr Calder that he should have seen the commercial opportunities of the scheme did not exist or were vastly over-stated because of errors in calculation, the role of tax savings in the projections and wrong assumptions concerning future prices and inflation. As to the role of tax savings in the projections, his Honour said (at [123]):
'However … Mr Langridge's evidence was that the Project relied upon the tax deductibility and effect of the initial payments and the gearing up provided by the loan to show any rate of return. In those circumstances it cannot be objectively found that the dominant purpose of the applicant's entry into the scheme was to enable the applicant to make a commercial investment: the tax benefit was the key to the commerciality of the investment.'
On the strength of that finding his Honour went on to say, at [124], that it was an objective fact that the dominant purpose of entry into the scheme was to obtain a tax benefit for without that benefit the commerciality would have been 'very substantially endangered'.
123 In his expert report, Mr Langridge had in fact said:
'The Project only shows a return significantly in excess of this risk free rate where the loan options are taken and the investment is measured on an after tax basis. This highlights that the Project relies upon the tax deductibility and effect of the initial payments and the gearing provided by the loan, to show any acceptable rate of return.'
124 In [123] the words used by his Honour indicated that he was picking up the actual words used by Mr Langridge in his report. The omission of the word 'acceptable' is most likely to have been simply a slip. But even if it were not, the difference between a finding that, absent tax deductibility and other features, the project would not show any acceptable rate of return and a finding that absent those matters the project would fail to show any rate of return is not a difference that would have been material to his Honour's conclusion. The short answer to this cluster of grounds of appeal is that his Honour has made a finding which he was plainly entitled to make on the strength of Mr Langridge's evidence and that to the extent there was a misquotation, it was not a material misquotation. The grounds of appeal 1.7, 2 and 3 must therefore fail.
Conclusion
125 For the preceding reasons, the appeal will be dismissed with costs.
I certify that the preceding one hundred and twenty five (125) numbered paragraphs are a true copy of the Reasons for Judgment herein of the Court.