Commissioner of Taxation v Arnold

Overview 4 In 2009 and 2010, Mr Arnold brought to Australia a scheme involving the purchase and donation of goods ("pharmaceuticals", sometimes referred to in bundled form as "Treatment Kits") to charities with foreign operations, specifically on the African continent. 5 I use the word "scheme" in its ordinary meaning - The Shorter Oxford English Dictionary (rev ed., Onions CT, Clarendon Press, 1990 (1944)), 5b: "a plan of action devised in order to attain some end" - but without any unfavourable connotation of being "self-seeking or underhand". I shall hereinafter refer to the scheme the subject of this proceeding as the "DWB Scheme". 6 It was a critical element of the DWB Scheme that participating entities ("participants") incur a liability to pay for pharmaceuticals for use in foreign markets, but that liability for payment of 92.5% of the purchase price would be deferred for 50 years at very low interest. Participants would claim immediate deductions for the full amount of the purchase price. 7 For each participant, the DWB Scheme was intended to be or was implemented as follows: -The pharmaceuticals were manufactured by a generic manufacturer, Hetero, in India. They were transported to the UK and held in a bonded warehouse there. They never entered and were not sold in the UK market. (1) Solstar Ltd ("Solstar"), a company incorporated in Belize, acquired title to the pharmaceuticals. It sold them to a company called MedAid Pty Ltd ("MedAid") under an "umbrella" agreement, pursuant to which the price was $1,000 per unit, payable as to 5% on delivery with the balance deferred for 50 years at negligible interest. (2) MedAid sold the pharmaceuticals to the participant at $2,000 per unit, payable as to 7.5% on signing the agreement with the balance deferred for 50 years at negligible interest (payable in advance). (3) Title to the pharmaceuticals was allegedly transferred while the pharmaceuticals remained in bond in the UK, from Solstar to MedAid, from MedAid to the participant, from the participant to a charity which operated in Africa. (4) The pharmaceuticals were subsequently shipped from the bonded warehouse in the UK to Africa. (5) The charity would issue the participant with a receipt in respect of the gifted pharmaceuticals. (6) The participant would claim a deduction for the donated pharmaceuticals of $2,000 per unit, as shown on an invoice generated by MedAid for the sale from it to the participant.

Statutory Framework 8 Division 290 was inserted into Sch 1 to the TAA to, inter alia, deter the promotion of tax avoidance schemes and tax evasion schemes (s 290-5).

Section 290-50: Promoter of tax exploitation scheme 9 As noted in [3] above, the promoter provision alleged to be contravened in this proceeding is s 290-50(1): An entity must not engage in conduct that results in that or another entity being a *promoter of a *tax exploitation scheme. 10 The term "entity" is defined in s 960-100 of the Income Tax Assessment Act 1997 (Cth) ("1997 Act") as including, amongst other things, an individual, a body corporate and a partnership. Each of the respondents is an "entity" for the purposes of s 290-50(1). 11 As is made plain by the expression "results in", there must be a causal connection between the "conduct" engaged in by the entity and the status of that entity or another entity as a "*promoter of a *tax exploitation scheme". The proscription is not limited to conduct resulting in "that" entity being a promoter of a tax exploitation scheme, but extends to "that or another entity", thereby contemplating forms of principal and accessorial liability. 12 The work done by the provision depends substantially on the meaning of the expressions "promoter " and "tax exploitation scheme", which are addressed in turn below.

Section 290-60: Meaning of promoter 13 The term "promoter " has three requirements as set out in s 290-60(1): An entity is a promoter of a *tax exploitation scheme if: (a) the entity markets the scheme or otherwise encourages the growth of the scheme or interest in it; and (b) the entity or an *associate of the entity receives (directly or indirectly) consideration in respect of that marketing or encouragement; and (c) having regard to all relevant matters, it is reasonable to conclude that the entity has had a substantial role in respect of that marketing or encouragement. 14 The potential width of the words in para (a) has been remarked upon: [I]t is a mistake necessarily to exclude from them all conduct, which, looked at individually, answers the description of development or implementation. Such conduct may, in its proper context, form part of a body of conduct, which, examined as a whole, amounts to marketing, or encouraging the growth of or interest in, a scheme. [Ludekens at [257]] 15 Notwithstanding those requirements, an entity is not a promoter where the entity "merely ... provides advice" about the scheme (s 290-60(2)) or where an employee "merely ... distributes information or material prepared by another entity" (s 290-60(3)).

Section 290-65: Tax exploitation scheme 16 Section 290-65(1) provides: A *scheme is a tax exploitation scheme if, at the time of the conduct mentioned in subsection 290-50(1): (a) one of these conditions is satisfied: (i) if the scheme has been implemented--it is reasonable to conclude that an entity that (alone or with others) entered into or carried out the scheme did so with the sole or dominant purpose of that entity or another entity getting a *scheme benefit from the scheme; (ii) if the scheme has not been implemented--it is reasonable to conclude that if an entity (alone or with others) had entered into or carried out the scheme. it would have done so with the sole or dominant purpose of that entity or another entity getting a scheme benefit from the scheme; and (b) one of these conditions is satisfied: (i) if the scheme has been implemented--it is not *reasonably arguable that the scheme benefit is available at law; (ii) if the scheme has not been implemented--it is not *reasonably arguable that the scheme benefit would be available at law if the scheme were implemented 17 Relevant to all limbs of that provision is the expression "scheme benefit", which is defined in s 284-150 of Sch 1 to the TAA and must be read into s 290-65(1). The Full Court in Ludekens held (at [227]-[228]) that the "correct framework of analysis" for these provisions is to ask, with reference to the time of the conduct in s 290-50(1) (being any time at which there was marketing or encouragement): whether it is reasonable to conclude that the entity entered into or carried out the scheme (or would have) with the sole or dominant purpose of it, or another entity: (a) getting a lesser tax-related liability or a tax-related liability that could reasonably be expected to be less: or (b) getting a greater amount than the Commissioner must pay or credit to the entity under a taxation law, or an amount that the Commissioner must pay or credit to the entity under a taxation law that could be reasonably expected to be more, than would be apart from the scheme or a part of the scheme. (Emphasis in original.) 18 "Tax-related liability" is defined in s 255-1 of Sch 1 to the TAA to mean: [A] pecuniary liability to the Commonwealth arising directly under a *taxation law (including a liability the amount of which is not yet due and payable). 19 The words of s 290-65 (l)(a) are "it is reasonable to conclude", with the result that it is not necessary to plead or prove what the promoter or other entities would have done if they had not entered into or carried out the scheme and what their respective hypothesised tax positions would have been in such circumstances: Ludekens at [229]-[236]. Unlike the approach taken in cases involving Pt IVA of the Income Tax Assessment Act 1936 (Cth) ("1936 Act"), there is no need for an alternative postulate or hypothetical construct. 20 The second condition, in s 290-65(1)(b), is that it is not "reasonably arguable" that the scheme benefit was available at law. That expression has the meaning given by s 284-15 in Sch 1 to the TAA: (1) A matter is reasonably arguable if it would be concluded in the circumstances, having regard to relevant authorities, that what is argued for is about as likely to be correct as incorrect, or is more likely to be correct than incorrect. (2) To the extent that a matter involves an assumption about the way in which the Commissioner will exercise a discretion, the matter is only reasonably arguable if, had the Commissioner exercised the discretion in the way assumed, a court would be about as likely as not to decide that the exercise of the discretion was in accordance with law. 21 Section 290-65(2) provides that in deciding whether it is reasonably arguable that a scheme benefit would be available at law, one takes into account anything that the Commissioner can do under a taxation law including, of course, cancelling a tax benefit obtained by a taxpayer in connection with a scheme to which Pt IVA applies. 22 The "relevant authorities" include taxation laws, extrinsic materials and court decisions: s 284-15(3) of Sch 1 to the TAA.

No need to prove knowledge to establish contravention 23 There is no requirement in s 290-50(1) that the Commissioner prove that the entity knew that the scheme, the promotion of which resulted from his or her conduct, had the characteristics of a tax exploitation scheme. 24 In other words, there is a contravention of s 290-50(1) even where the entity did not know that his, her or its conduct would have that result. This is confirmed by the specific exception in s 290-55(7), which provides that, in those circumstances, the Court "must not order [the] entity to pay a civil penalty" in relation to that conduct. The premise for those exceptions is that there was a contravention in relation to which the entity might have otherwise been ordered to pay a penalty. It follows that the subjective knowledge of Mr Arnold and the other respondents is relevant only to penalty.

The Pleadings 25 The primary facts as pleaded are, to a large extent, not disputed although the amended defence puts in issue a number of the Commissioner's pleadings in his amended statement of claim in relation to the application of the provisions of Subdiv 290-B of Sch 1 to the TAA to those facts on a variety of grounds including, without limitation, that there was no relevant "scheme" or "tax exploitation scheme" for the purposes of ss 290-50 or 290-65; the lack of a nexus, connection or association, whether in a temporal or substantive sense, between various written instruments entered into by the parties to those instruments and participants gifting cash or property to charities that are conferred with Deductible Gift Recipient ("DGR") status or the entitlement of participants to claim tax deductions; the Commissioner's characterisation of documents; and the respondents' lack of knowledge of, lack of meeting with, lack of transacting with or lack of otherwise interacting with participants. This is, by no means, an exhaustive statement of the grounds upon which the respondents put in issue the Commissioner's pleadings in his amended statement of claim and it will be necessary to return to particular issues that are put in dispute to analyse and test the particular grounds raised by the respondents in respect of particular issues.

Prelude to Mr Arnold's activities in Australia 26 Mr Arnold is a Canadian citizen. In the period 2005 to 2009 he engaged with Robert Steen, Terrence Bey and others in schemes for the sale of pharmaceuticals to Canadian taxpayers. The schemes were apparently intended to enable participating taxpayers to donate the pharmaceuticals to charities which provided international aid and then to claim a deduction of the value of the pharmaceuticals, for Canadian income tax purposes. 27 These activities were the subject of investigation by the Canadian Revenue Authority in 2009, resulting in a decision of that agency issued 30 March 2010. The decision was to revoke the registration of an entity which had been involved in the schemes. The decision was based in part upon the Canada Revenue Agency's ("CRA's") view of the market value of the pharmaceuticals which had been purchased and donated as part of the activities. On the CRA's findings, the subject goods had been manufactured, sold and distributed outside Canada. They had been acquired in bulk and were never intended to be used for personal consumption in Canada. However, the taxpayers had been issued with receipts purporting to show the fair market value of the goods in amounts based upon the Canadian retail market. The CRA rejected the amounts shown on the receipts as not reflecting the fair market value of the goods, having regard to their origin and the circumstances of their sale and distribution outside Canada. 28 Mr Arnold read the CRA's decision of 30 March 2010 soon after it was issued. He was aware of the valuation issue referred to therein, at times relevant to his subsequent activities in Australia. 29 In early 2009 Mr Arnold travelled to Australia to investigate the possibility of establishing arrangements in this country pursuant to which Australian taxpayers would purchase pharmaceuticals and donate them, in kind, to charities which were providing medical services in Africa.

Mr Arnold's enquiries about buying AIDS medicines in Australia 30 Mr Arnold gave evidence that in mid to late 2009 he set about trying to identify a supplier in Australia of pharmaceuticals for the treatment of AIDS. He said that his purpose was to procure such medicines for the purpose of on-sale to Australian taxpayers, to enable them to donate the medicines in kind and to claim a deduction under s 30-15(2) of the 1997 Act. To the extent the documents tendered by Mr Arnold verified the making of these enquires, it appears that he contacted some wholesalers and some retail pharmacies in Australia. 31 In fact, Mr Arnold would never have been able to purchase these medicines in Australia, for on-sale to Australian taxpayers, because they are listed in Sch 4 of the Poisons Standard 2009 (Cth), made under s 52D(2)(b) of the Therapeutic Goods Act 1989 (Cth). They are therefore "restricted substances" within the meaning of the Poisons and Therapeutic Goods Act 1966 (NSW): see the definition of that term in s 4(1) and Sch 4(1) of the Poisons List. As such, a wholesaler would only be permitted to supply these drugs "to an authorised person": s 11(1). Mr Arnold did not qualify as an "authorised person" and nor did any of the companies he caused to be incorporated in Australia (as described below). The difficulties posed by the above regulatory regime were drawn to Mr Arnold's attention when he made enquiries of Australian suppliers. 32 Further Mr Arnold and his companies would have been unable to purchase these drugs from a retailer, by reason of s 10(3) of the Poisons and Therapeutic Goods Act 1966 (NSW). He would not have been able to on-sell the drugs to Australian taxpayers by operation of the same provisions. The real purpose of Mr Arnold enquiring about supply and pricing of AIDS medicines in Australia seems to be to gather information about price in the Australian market, with the view to establishing the value of such goods. As appears from the terms of the DWB Scheme subsequently established by Mr Arnold, he intended to have a company with which he was associated, MedAid Pty Ltd, sell pharmaceutical medicines, including AIDS medicines, to Australian entities at Australian retail prices. He needed to know what those prices were in order to fix the rate of sale under the DWB Scheme. He next sought to gather evidence that the Australian retail price (which he would use in sales to Australian entities) represented the value of the pharmaceuticals which he proposed the Australian participants would purchase and donate to the charities.

Mr Arnold's enquiries of the Australian Valuation Office 33 In November 2009 Mr Arnold contacted Mr Chris Proctor at IMS Health, a multinational business which collects sales data regarding pharmaceutical products. It provides reports on prices in the trade, to its clients. Mr Arnold obtained from Mr Proctor an email dated 9 November 2009 which summarised the business activities and capabilities of IMS Health. He then forwarded this to Chris Fratzia at the Australian Valuation Office ("AVO"). 34 The AVO at that time had as one of its functions the provision of valuations of goods and property which had been donated or were proposed to be donated to DGRs. Valuations were required for the purpose of enabling taxpayers to claim and to justify appropriate figures for deduction in relation to such donations in kind, pursuant to s 30-15 of the 1997 Act. 35 In about early November 2009, Mr Arnold spoke to Mr Fratzia by telephone. Mr Arnold recorded this conversation and made a transcript of the recording, which is in evidence. 36 It is apparent from the terms of the conversation that Mr Arnold's purpose in speaking to Mr Fratzia was to secure the latter's agreement that price data supplied by IMS Health would be accepted by the AVO as reliable information upon which the AVO could arrive at a valuation of pharmaceuticals. 37 The terms of the conversation did not make clear to Mr Fratzia that the IMS Health data to which Mr Arnold was referring would concern sales made within the Australian market of goods physically situated in this country, whereas the goods to be valued would never be delivered to Australia, would change hands in the United Kingdom in a bonded warehouse, and would be delivered from there to countries in East Africa. 38 Without full information concerning the circumstances relevant to the valuation of the pharmaceuticals to which Mr Arnold was referring, and operating under the assumption that the pharmaceuticals were in Australia at the time they were sold, Mr Fratzia agreed that IMS Health's price data would be valid for making a valuation of pharmaceuticals.

Establishment and promotion of Relevant Entities 39 In May 2009, Mr Arnold had arranged through solicitors for the incorporation of a company named Leaf Capital Pty Ltd. He was the sole director. The holder of all issued ordinary shares was Panaggregate Financial Corporation ("Panaggregate"), incorporated in Ontario, Canada. This was a company controlled by Mr Arnold. Mr Arnold's wife, Stephanie Arnold, held one D Class share in Leaf Capital. An organisational chart for Leaf Capital appearing in a "Product Research Form" promulgated by Mr Arnold shows that he was the managing director of Leaf Capital and his wife, Mrs Stephanie Arnold, was VP (Operations). 40 In September 2009, Mr Arnold arranged for Donors Without Borders to be incorporated. This was an unlisted public company limited by guarantee. Mr Arnold, his wife, Stephanie Arnold, and one Joshua Shy Kurtz were directors. 41 In March 2010, Mr Arnold arranged for the incorporation of MedAid Pty Ltd. Its sole director up until 17 January 2011 was John Day. From that date Mr Arnold became sole director and acquired 100% of the issued shares. 42 John Day was the partner of Ms Jo Steen, sister of Mr Arnold's associate in the Canadian pharmaceuticals donation scheme (Robert Steen). 43 Each of these three companies was established at the request of Mr Arnold for the purpose of playing a role in the DWB Scheme which he proceeded to implement from about March 2010.

Promotion and implementation of the DWB Scheme 44 During 2009 and early 2010 Mr Arnold contacted numerous financial advisors in Australia by email, attaching "PowerPoint Presentations" outlining his proposed scheme. The DWB Scheme envisaged that participants would: (1) Buy pharmaceuticals from a seller nominated by Mr Arnold, at a certain price; (2) pay only a small proportion of this price in cash and have credit from the seller for the balance; (3) donate the pharmaceuticals in kind to a charity; and (4) claim a tax deduction for the full purchase price of the goods, including the proportion in respect of which credit was granted by the seller. 45 During the early part of this promotion campaign, Mr Arnold had not finalised all of the entities which would be used in the DWB Scheme nor the contractual relationships which would be established between them. From about April 2010 he proceeded to finalise these particulars, outlined below. 46 First, he caused MedAid to enter into a Services Agreement with Leaf Capital on 3 May 2010. The essential elements of this contract are as follows: (1) It recited that "MedAid is in the business of marketing various products and assisting deductible gift recipients to raise donations for their charitable purposes". In fact, MedAid had only been incorporated seven weeks before this agreement was entered into, it had no established business of any nature, it was operated by close associates of Mr Arnold and acted, in essence, as a conduit for the sale of pharmaceuticals in the DWB Scheme. (2) It recited that "Leaf Capital is engaged in the business of providing marketing, advertising and related services". In fact Leaf Capital had no business prior to this agreement. It was simply a name that Mr Arnold used in connection with promotion of the DWB Scheme for deductible gifts in kind. (3) By cl 2 MedAid engaged Leaf Capital to solicit and introduce "prospective Donors" and to undertake marketing activities. (4) By cl 3, in consideration for Leaf Capital performing the marketing function, MedAid agreed to pay a service fee calculated at 5% of the monthly sales value of pharmaceuticals sold by MedAid. 47 Secondly, MedAid entered into a Supply Agreement with Solstar, dated 21 April 2010. By cl 1 MedAid agreed to purchase from Solstar AIDS pharmaceuticals as described in Schedule A to the agreement. 48 The key provisions are cll 6, 9 and Schedule A which relevantly provide: 6. Terms for Products Supplied (1) … The following terms and conditions of sale shall be deemed to be an integral part of every purchase order for Products submitted by the Purchaser to the Supplier (and of every transaction of purchase and sale of Products between the Purchaser and the Supplier): (a) Delivery to Warehouse. The Products supplied hereunder shall be delivered to such warehouse in England selected by and acceptable to the Purchaser or to such other location mutually acceptable to the parties hereto, each acting reasonably. All costs and expenses of delivery, freight, insurance, duties, handling, loading, storage and warehousing (for a maximum period of 12 months) shall be borne solely by the Supplier. The parties hereby acknowledge and agree that all delivery dates included in any purchase order shall be regarded by the parties as an estimate only based on conditions prevailing at the time when such purchase order is accepted. The Supplier shall use commercially reasonable efforts to have such Products delivered on the delivery date set out in any purchase order. Notwithstanding the foregoing and notwithstanding any term to the contrary herein, the Supplier shall deliver the Products to the Purchaser within ninety (90) days of the delivery date set out in any purchase order, but no later than June 30th of the financial year in which the order is placed; (b) Delivery to Other Destinations. After title transfer to the Purchaser and ultimately to the Recipient, the Products supplied hereunder shall be delivered to such destinations as selected by the Recipient which are mutually acceptable to the parties hereto, each acting reasonably. All costs and expenses of delivery, freight, insurance, duties, handling, loading, shall be borne solely by the Supplier. The parties hereby acknowledge and agree that all delivery dates included in any purchase order, shall be regarded by the parties as an estimate only based on conditions prevailing at the time when such purchase order is accepted. The Supplier shall use commercially reasonable efforts to have such Products delivered in a timely fashion; (c) Title to Products and Risk of Loss. The Supplier shall be liable for any loss, cost or damage, including without limitation, any spoilage, occurring during shipment. Subject to the obligation of the Supplier to pay insurance; storage and warehousing costs and expenses, acceptance of a shipment of Products by the Purchaser at the warehouse selected by the Purchaser shall constitute delivery by the Supplier to the Purchaser. Subject to the obligation of the Supplier to pay insurance, storage and warehousing costs and expenses, property in and all risk related to the Products passes from the Supplier to the Purchaser at the time of delivery. Title to the Products may pass from the Supplier to the Purchaser prior to the time of delivery if agreed to by the Supplier and the Purchaser in writing; (d) Taxes and Other Costs. … (e) Invoices. … … 9. Price. (1) Subject to the terms hereof, the price to be paid for each of the Products supplied hereunder shall be as set forth in Schedule "A", as the same may be amended or otherwise modified from time to time pursuant to the terms set forth herein. (a) All prices contained herein are inclusive of all applicable taxes. (b) The Purchaser shall pay to the Supplier the price for the Products supplied as follows: (c) 5% of the price in cash or by cheque on or prior to the delivery to the warehouse selected in accordance with Section 6(1)(a); and (d) the balance not later than the date which is 50 years after the date upon which the Products are supplied. The outstanding balance of the purchase price shall bear interest at the rate of 0.0526% per annum. … SCHEDULE A "Treatment Kit (7-1-7)." Contains 7 sets of 3-in-1 AIDS ARV Cocktail, 1 pill of Ciprofloxacin, and 7 pills of Fluconazole. 3-in-1 AIDS "ARV Cocktail" - $7.75 per set of 3 medicines in 2 pills Made up of three different anti-retroviral medications, this works to stop HIV from spreading through the body's white blood cells. Lamivudine (150 mg), Zidovudine (300 mg), and Nevirapine (200 mg) are used in combination to combat the adaptability of the HIV virus, or Lamivudine (150 mg), Stavudine (30 mg), and Nevirapine (200 mg) are used in combination to combat the adaptability of the HIV virus. The Supplier will be entitled to replace the components of the ARV Cocktail from time to time upon notice to the Purchaser, provided the components are approved pharmaceuticals as part of the recognized ARV Cocktail. 7 sets of ARV Cocktail: $54.25 AUD Ciprofloxacin (250 mg) - $0.60 per pill Marketed worldwide, Ciprofloxacin is used to treat severe and life-threatening infections caused by bacteria. Common infections this drug is used to treat include: - urinary tract infections - lower respiratory tract infections - typhoid fever (enteric fever) 1 Ciprofloxacin pill: $0.60 AUD Fluconazole (150 mg) - $6.45 per pill An antifungal drug, Fluconazole is used in the treatment and prevention of opportunistic infections caused by HIV such as fungal infections, cold sores, yeast infections, and athlete's foot. 7 Fluconazole pills: $45.15 AUD TOTAL PRICE OF TREATMENT KIT 7-1-7: $100.00 AUD 49 Mr Arnold gave evidence that the Supply Agreement was entered into on the initiative of John Day and Jo Steen as the persons who conducted the business of MedAid and that they acted independently of himself in identifying Solstar as a supplier and entering into a contract with it. This appears highly unlikely. 50 The principal of Solstar was a Mr Grosch who swore an affidavit in the proceedings. Mr Bey, who also swore an affidavit in the proceedings, claimed to have had prior dealings with Mr Grosch in relation to the supply of pharmaceuticals for the Canadian schemes - in which Mr Arnold was also involved. Mr Bey said that Mr Grosch was the representative of SunRX when that company supplied Panaggregate. Mr Day and Ms Steen had had no prior involvement in buying or selling pharmaceuticals in bulk or internationally. It would seem highly improbable that Mr Arnold would simply have left them to identify an international wholesale supplier of pharmaceuticals from whom to buy such goods for the purpose of implementing a scheme which Mr Arnold had been working towards establishing for over a year before MedAid was even incorporated. Under cross-examination Mr Arnold initially volunteered that in the earlier Canadian schemes his company Panaggregate had purchased pharmaceuticals from SunRX, and that in relation to SunRx - "I dealt originally, I think it was with Howard Grosch, although I didn't deal with him directly, but I believe he was the principal of that company at the time". Mr Arnold subsequently retreated from that position. 51 Further, the Supply Agreement between Solstar and MedAid is a highly artificial and uncommercial document. So much is exemplified by credit for 95% of the purchase price of goods, allowed at around a rate of 0.0526% for 50 years. MedAid was a company of negligible paid up capital. There is no evidence that it provided any security for the outstanding portion of the purchase price of goods to be supplied. The prospects of it still being in existence and having assets or funds from which to pay the outstanding portion, in 50 years' time, would have been negligible and this would have been evident to Solstar. 52 The only reasonable inference from these terms of the contract is that neither party really intended that the balance of 95% of the purchase price would ever be paid. That raises the question of why the contract was drawn in such artificial terms. The inescapable inference is that it was drawn in these terms in order to create the appearance that MedAid was paying AUD$100 per Treatment Kit (AUD$1,000 per Donation Unit) whereas in substance and reality it was only paying AUD$5 per Treatment Kit (AUD$50 per Donation Unit). Further, there is a strong inference that the Supply Agreement between Solstar and MedAid was orchestrated by Mr Arnold. 53 Thirdly, Mr Arnold caused memoranda of understanding to be entered into between Donors Without Borders and two charities, African Enterprise and Australian Relief and Mercy Services Ltd (ARMS). These provided as follows: (1) Donors Without Borders would facilitate the donation of, inter alia, pharmaceuticals to the charity (cl 1). (2) Donors Without Borders would arrange for payment of all shipping and handling costs for transport of the donated goods to the charities, respectively, at the locations where they conducted their activities (in East Africa) (cl 6). (3) Each charity would issue a gift in kind tax receipt to the donor (participant) for all goods received and would take other steps to ensure that donor participants were put in a position to be able to claim deductions for their donations (cll 2, 7 and 11). 54 A memorandum of understanding to this effect was made with African Enterprises on 20 May 2010 and another with ARMS on 25 November 2009. Each of these memoranda specifically referred to AIDS pharmaceuticals as the goods of which the charity would receive donations in kind. 55 Fourthly, Mr Arnold caused a Mr Laverick, solicitor, to prepare pro forma documentation for the transactions which each participant would enter into in order to participate in the DWB Scheme. First amongst these documents was the Purchase Agreement whereby each purchaser agreed to buy a certain number of Donation Units. Each Unit was to consist of 10 Treatment Kits. The Treatment Kit price was $200 and the Donation Unit price was therefore $2,000 each. The terms of the pro forma Purchase Agreement (into which a large number of participants in due course entered) included the following: (1) The purchaser agreed to purchase a certain number of Donation Units at $2,000 each from MedAid. (2) 7.5% of the purchase price ($150 per Donation Unit) was to be paid in cash upon signing the Purchase Agreement. (3) The balance ($1,850 per Donation Unit) would be on credit, payable no later than 50 years from the date the Purchase Agreement was entered into, with nominal interest of 0.108% per annum payable in advance on signing. This came to another $100 per Donation Unit. (4) The seller, MedAid, was directed to deliver the purchased goods to the charity nominated in a pledge signed by the participants and attached to the Purchase Agreement. 56 The minimum number of Donation Units that could be purchased and donated was 10. That is, a minimum purchase price of $20,000, of which only $1,500 would be in cash (excluding pre-paid interest). 57 One of the pro forma Purchase Agreements in evidence, excluding the name, address and contact details of the participant, relevantly provides: MEDAID PTY LTD (ABN 40 142 532 330) PURCHASE AGREEMENT The Purchaser listed below ("Purchaser") has agreed to buy certain goods from MedAid Pty Ltd ("Vendor") as listed in, and on the terms and conditions, this Purchase Agreement as of this 29th day of June, 2010. Purchaser Information (All fields marked with an asterisk () are MANDATORY and MUST be completed. Fields marked with (+) are for corporate donors only.) Full name: ______________________________________ Organisation*+: ____________________________ Position*+: _______________________________________ ABN*+: __________________________________ Street address*: _______________________________________________________________________________ Suburb*: _________________________________________ State*: ____________ Post code*: _____________ Phone*: __________________________________________ Mobile: ___________ Email*:______________________________________________________________ Date of birth: _________________________________________________________ PURCHASE DETAILS (A) Number of Donation Units purchased: 100 as per Schedule 1. Total purchase price: $200,000.00 (A) (B) Required down payment equal to 7.5% of the total purchase price (A), due upon signing: $15,000.00 (B) (C) Amount of credit with Vendor (A - B): $185,000.00 (C) (D) Prepaid interest equal to 0.108% p.a. of the amount of credit (C), due upon signing: $10,000.00 (D) (E) Total amount of first payment to Vendor (B + D): $25,000.00 (E) The balance of the purchase price (being the amount of credit) is payable no later than fifty years from the date the Vendor accepts this Purchase Agreement. DELIVER DIRECTIONS Delivery of Donation Units to be made to your selected Recipient as per the executed Pledge Agreement attached by you to this Purchase Agreement. The Vendor has agreed to effect the delivery of the goods to the recipient on behalf on the Purchaser. DISCLOSURE STATEMENT UNDER THE CONSUMER CREDIT CODE Amount of Credit The Amount of Credit provided under the Contract is $ 185,000.00 The amount of credit fees or charges payable under this Contract is $ 10,000.00 Payments The amount of your first payment (being the down payment plus the prepaid interest) is equal to $ 25,000.00, and is due upon the Purchaser signing this Agreement. The balance of the Purchase Price, namely $ 185,000.00, is payable in full no later than fifty years from the date of this agreement. Default If you default in payment of any amount due under the credit agreement, the balance of the Purchase Price then remaining unpaid shall, at the option of the Vendor, be immediately due and payable in full. Enforcement expenses may become payable under the credit contract in the event of a default. Commission There is an arrangement in place for the payment of commission to Leaf Capital Pty Ltd by the Vendor in relation to the introduction of business (including in relation to this Agreement). The amount of commission is based on the monthly amount of business introduced to the Vendor by Leaf Capital Pty Ltd.

PURCHASE AGREEMENT TERMS & CONDITIONS OPERATIVE PART 1. Definitions … 2. Purchase of Treatment Kits/Donation Units 2.1 The Vendor shall sell and the Purchaser shall purchase Treatment Kits for $200.00 per Treatment Kit for a total Purchase Price as indicated on the face of this Agreement. 10 Treatment Kits form 1 Donation Unit. A minimum of 10 Donation Units per purchase applies. 3. Payment and Deliveries 3.1 The Purchaser shall pay to the Vendor the Purchase Price for the Treatment Kits as follows: (a) the Down Payment of 7.5% of the Purchase Price in cash or by cheque on the date of signing by the Purchaser; (b) the Prepaid interest amount listed on the face of this Purchase Agreement in cash or by cheque on the date of signing by the Purchaser; and (c) the balance of the Purchase Price in cash or cheque no later than fifty years from the date the Vendor accepts this Purchase Agreement. The Purchaser shall be entitled to pay the balance of the Purchase Price at any time prior to the date upon which it is due and payable without notice, bonus or penalty, and any unapplied prepaid interest will be credited to the Purchaser by deducting it from the remaining balance. 4. Closing and Deliveries 4.1 Title of the Treatment Kits/Donation Units passes to the Purchaser within 150 days after receipt by the Vendor of the prepaid interest and the down payment, on a date determined by the Vendor ("Closing"). The Vendor further undertakes not to accept any purchase Agreement in terms of which it is unable to arrange for title of the Treatment Kits/Donation Units to pass from the Purchaser to the Recipient, by 30th June of the financial year in which the Agreement is executed. 4.2 With effect on the Closing, the Purchaser irrevocably grants the Vendor and its assignees a limited power of Attorney to act as the Purchaser's agent to: (a) unconditionally and irrevocably deliver to the Recipient, the Treatment Kits/Donation Units in satisfaction of the Purchaser's pledge to the Recipient in respect of the Treatment Kits/Donation Units; (b) to execute and deliver: (i) all deeds, documents of title, conveyances, bills of sale, transfers, assignments, indentures, instruments and consents and any other documents necessary or desirable to effect the assignment, transfer and sale of the Treatment Kits to the Purchaser; and (ii) such other documents as are required or contemplated to be delivered by the Vendor pursuant to this Agreement. 4.3 The Vendor confirms and acknowledges that there will be no additional cost to the Purchaser for packaging, storage, warehousing, freight and shipping costs, provided the purchaser selects an approved recipient listed on the Donor Pledge to receive the Treatment Kits/Donation Units. … 17. Governing Law 17.1 This Agreement is to be governed by the laws of the State of New South Wales, Australia. 17.2 The parties agree to the non-exclusive jurisdiction of the Courts of New South Wales, the Federal Court of Australia, and of Courts entitled to hear appeals from those courts. … 58 Additional pro forma documents for the DWB Scheme prepared by Mr Laverick, on Mr Arnold's instructions, provided that each participant would pay $20 to Donors Without Borders as a membership fee and would make a cash donation of $200 to the charity to which the goods were pledged. 59 The mode of operation of the DWB Scheme was that taxpayers who were introduced to it and agreed to participate would sign a Purchase Agreement for a given number of Donation Units. They would pay in cash the $20 membership of Donors Without Borders, the $200 cash donation to the nominated charity and 7.5% of the purchase price of their Donation Units at a price of $2,000 per Unit (plus the interest in advance). Jo Steen would then cause MedAid to issue an invoice to the purchaser, showing the sale of goods at $2,000 per Unit and on a statement showing the amount paid in cash and the remaining due on credit. 60 Solstar would issue an invoice and a statement to MedAid, showing the sale of the Units at $1,000 each with cash received of $50 per unit and the balance on credit. Pharmaceuticals of the description sold by Solstar to MedAid and by MedAid to the participants were held in a bonded warehouse of Southern Cross Logistics Ltd in the United Kingdom. When a number of Purchase Agreements had been entered into by participants, Mr Bey signed a direction to the principal of Southern Cross Ltd, Mr Patrick Knibbs, that the sale had taken place and that he should deliver a quantity of pharmaceuticals sufficient to satisfy the total of all the purchases by MedAid. Mr Bey signed a second direction to Mr Knibbs that he should deliver the same quantity of pharmaceuticals to the participants in satisfaction of the sales by MedAid to them. Lastly, a direction was issued to Mr Knibbs that he should deliver the same quantity of goods from the purchasers to the charity to which those purchasers had pledged them. 61 As noted in [55(4)] above, each participant signed a document styled "Donor Pledge" by which the participant pledged a gift to either African Enterprise or ARMS ("Charity"). 62 The form and terms of this document were as follows: DONOR PLEDGE Donor Information (All fields marked with an asterisk () are MANDATORY and MUST be completed. Fields marked with (+) are for corporate donors only.) Full name: ____________________ Organisation*+: ____________________ Position*+: ____________________ ABN*+: ________________________ Street address*: __________________________ ____________________________ Suburb*: ______________________ State*: ____________ Post code*: ____ Phone*: _______________________ Mobile: ___________ Email*: ____________________________________________________________ *Pledged items (select one or more) ____ Water Treatment (unit(s) Model type: ______________________ Purchase price: ___________________ ____ Donation units (pharmaceuticals) Description: ____treatment kits (7-1-7) Purchase price: ___________________ ____ Other Description: _____________________ Purchase price: ___________________ A. Under this Deed made on the ________ day of ___________, I, the undersigned (the "Donor"), hereby wish to pledge a gift to African Enterprise/ARMS (the "Recipient") ABN ___________, endorsed as a deductible gift recipient in Australia. B. Donor will effect the gift of the Pledged items as identified above. C. The Donor intends for this Pledge to be binding on the Donor if it has been delivered directly to the Charity by the Donor, or by a lawful authorised agent or representative thereof by limited power of attorney granted by the Donor. D. The Donor hereby unconditionally pledges to the Charity that the undersigned will deliver to the Charity within six months the Pledged items listed above. The Donor acknowledges and agrees that: (a) this Pledge is made voluntarily and without expectation of any benefit, consideration, privilege, recognition, or advantage of any nature from the Charity, other than claiming an income tax deduction in respect of the donation; (b) the undersigned has not imposed any limitation or other restriction of any nature on the use to which the Charity may make of the subject matter of the Donation, and that the Charity may apply or use the Donation in such manner as it may in its sole and unfettered discretion consider advisable. The Donor hereby covenants and agrees to be bound by the terms and conditions of this Pledge document and to perform its obligations under the Pledge document. Executed by me as a Deed: ____________________________ __________________________________ Signature of Donor Signature of Witness _________________________________ Name of Witness 63 Each participant gave an authority to Leaf Capital and MedAid in the following terms: AUTHORITY FROM DONOR TO LEAF CAPITAL PTY LTD & VENDOR Authority from _______________________________________ (the "Donor") of _____________________________________________________(street address), ___________(suburb) ____________ (state) ___________ (post code) to ____________________________ and MedAid Pty. Ltd (the "Vendor") Recitals A. The Donor has been introduced to the Donors Without Borders philanthropic Initiative ('the Initiative'). B. In order to participate in the Initiative, the Donor has entered into a Purchase Agreement with the Vendor to buy certain goods and donate them to a nominated Charity. Definitions Entity means an entity, trust, institution, association or body endorsed as a deductible gift recipient by the Australian Taxation Office pursuant to the Income Tax Assessment Act 1997 (Cth} and is a participant of the Donors Without Borders Initiative. Donors Without Borders Initiative means the concept developed by Donors Without Borders (ABN 82 139 263 871) whereby vendors, donors and deductible gift recipients are brought together so as to facilitate the donation to the deductible gift recipients by the donors of the products purchased from the vendors. Pledge means the pledge entered into on or around the date of this Authority made by the Donor to donate the goods purchase under the Purchase Agreement to the Charity. Purchase Agreement means the agreement between the Donor and the Vendor for the purchase of goods by the Donor for donation to a Charity, entered into on or around the date of this Authority. Authority I, the Donor, hereby authorise Leaf Capital Pty Ltd to provide the Vendor with the original(and/or copies) of the Purchase Agreement and Pledge entered into by me and to use such records and personal information as may be necessary to give effect to both the Pledge document and Purchase Agreement . I hereby authorize the Vendor to provide the nominated Charity with the original (and/or copies) of the Pledge entered into by me. I further authorize the Vendor to provide the nominated Charity with a receipt (or copy of same) of purchase (in AUD) for the goods donated to the nominated Charity with all the necessary requirements in order for me to obtain a tax deduction under Australian tax law. If the purchase of the goods by me pursuant to the Purchase Agreement does not proceed, then the Purchase Agreement and Pledge are to be returned to me. I acknowledge that no receipt will be issued where no donation is made. _____________________________ ___________________________________ Signature of Donor Signature of Witness _____________________________ ___________________________________ Name of Donor Name of Witness Date: ________________________

Valuation for Mr Sparrow 64 On 18 May 2010, Mr Arnold caused to be submitted to the AVO an application for a valuation in respect of a donation by a Mr Gordon Sparrow (an employee of Leaf Capital) of one Donation Unit to ARMS. The price of the Donation Unit was said to have been $2,000 and the receipt for it, issued by ARMS, was dated 21 January 2010. 65 Mr Arnold caused this application for valuation to be submitted together with a report by IMS Health dated 3 November 2009 containing several pages of data regarding prices paid in the Australian market for pharmaceuticals of the type donated. The result of this was that the AVO issued a certificate of valuation in respect of the Donation Unit at $2,000. 66 The Commissioner claims that the purpose of Mr Arnold obtaining this certificate of valuation was to enable him to represent to potential participants in the DWB Scheme that, upon their agreeing to purchase the pharmaceuticals at the rate of $2,000 per Donation Unit, they would be able to satisfy the Australian Taxation Office that the fair market value for each unit was no less than that sum and therefore they would be able to claim a deduction for an amount calculated by reference to that price. This claim was not disputed.

Market value of the pharmaceuticals 67 Mr Wayne Lonergan, a leading expert in the field of corporate and business valuations, gave evidence on behalf of the Commissioner and was cross-examined. Mr Lonergan prepared a report which addressed the following questions: In determining the market value of the Treatment Kits on the day on which a Participant in the Arrangement purported to make a gift of the Treatment Kits to the Charity, for the purposes of Item 1 of the Table in section 30-15(2) of the Act: what is the relevant market in which the market value is to be determined? When answering this question, please identify or comment on the relevant market by reference to: a) geographic markets (for example, Australia, Kenya or some other geographic area); and b) retail, wholesale or other relevant markets. 68 In summary, Mr Lonergan opined that the relevant market in which the market value of the Treatment Kits on the day on which the gift was made by a participant to the Charity should be determined is: (1) The Charity's local market (i.e. the country in which the pharmaceuticals are donated) or in Africa generally; and (2) based on the wholesale market price (including reasonable delivery costs). 69 Lest there be any ambiguity in respect of Mr Lonergan's answer in [68(1)] above, it is clear from the balance of his report that he is referring to the country in which the pharmaceuticals are ultimately physically delivered into the possession of the Charity for consumption. In cross-examination, Mr Lonergan's opinion in this regard was not seriously challenged. 70 The prices charged by Solstar to MedAid, and by MedAid to participants for the pharmaceuticals included in the Treatment Kits are set out in the table below. In this table the amounts are given for each Treatment Kit and also for 10 Donation Units (being 100 Treatment Kits). Ten Donation Units was the minimum purchase under the DWB Scheme, so it appears useful to provide comparative price and value figures for that quantity. Item in Treatment Kit Supply Agreement between MedAid and Solstar Tax Invoice from MedAid to Participant ($) AUD ($) AUD Treatment Kit Minimum Donation Treatment Kit Minimum Donation x 7 sets of AIDS "ARV Cocktail" $54.25 $5,425 $108.50 $10,850 x 1 Ciprofloxacin 250mg tablets $0.60 $60 $1.20 $120 x 1 Fluconazole 150mg tablets $45.15 $4,515 $90.30 $9,030 Total $100.00 $10,000 $200.00 $20,000 Cash paid under the Scheme $500 7.5% $1,500 (5%) Interest $1,000 Total $2,500

71 By comparison, the evidence of Dr Ryan Snaith and Mr Jonathan Kiliko in relation to the prices at which the pharmaceuticals could be purchased in Kenya is as follows: Item in Treatment Kit Dr Ryan Snaith Jonathan Kiliko, MEDS, Kenya (with AUD per Mr Lonergan) (Retail prices in Western Kenya) ($) AUD ($) AUD Treatment Kit Minimum Donation Treatment Kit Minimum Donation x 7 sets of AIDS "ARV Cocktail" $nil $Nil $0.380 x 7 = $266.00 (free) (free) $2.66 x 1 Ciprofloxacin 250mg tablets $0.136 $13.60 $0.036 $3.60 x 1 Fluconazole 150mg tablets $0.284 x 7 = $198.80 $0.090 x 7 = $63.00 $1.988 $0.63 Total $2.124 $212.40 $3.326 $332.60

72 Dr Snaith also exhibited to his affidavit (Ex 16) a publicly available report titled "International Drug Price Indicator Guide" published by the World Health Organisation ("WHO") in 2010, which he states "is highly regarded by charities and NGOs operating in the developing world". The WHO report shows a range of prices for ciprofloxacin and fluconazole. The following table summarises the median and high international prices presented in the 2010 WHO report (in US dollars), next to the values of the same pharmaceuticals in Australia as those values appear in the schedule to the MedAid Purchase Agreement: Pharmaceutical Supplier median Buyer median Highest price MedAid Australia 3-in-1 ARV cocktail US$0.2341 US$0.1952 US$0.2717 A$15.40 Ciprofloxacin (1 x 250mg) US$0.0166 US$0.0239 US$0.0527 A$1.20 Fluconazole (1 x 150mg) US$0.0679 US$0.0556 US$0.3054 A$12.90 MedAid Treatment Kit US$2.1306 US$1.7795 US$4.092 A$200.00 (7 x ARV cocktail, 1 x ciprofloxacin, 7 x fluconazole)

73 Even allowing for a generous exchange rate, the Australian value assigned by MedAid is orders of magnitude above the highest international prices. In the circumstances described above, and consistently with the expert evidence, it is difficult to identify any sensible basis for valuing the pharmaceuticals by reference to prices in the Australian market.

Mr Arnold's knowledge of value 74 Mr Arnold became aware of the general price of the relevant pharmaceuticals during the period of the Canadian scheme. In his view, it was "pretty common knowledge" that the pharmaceutical prices were "very little" in "various places of the world" and "for various wholesale manufacturers", and he knew that to be the case because "we had access to the international drug pricing guide". 75 His evidence was unequivocal: "[A]bsolutely, I know that the same medicine is available elsewhere in the world for pennies". He had "known that for some time". He was also aware of the gradations in price between manufacturers, wholesalers and retailers, and that "particularly with pharmaceuticals", "the profit margin is so big". He understood in the first half of 2010 that the cost base for the pharmaceuticals was "2, 3 or 4 per cent based on the purchase price" and "out of $100 the cost may be a couple of dollars". 76 The suggestion by Mr Arnold that he intended to source the pharmaceuticals physically in Australia, including at retail prices over the counter from a pharmacy in Potts Point, was unconvincing. When challenged, Mr Arnold ultimately said: "point taken". He ultimately did not dispute that it had been finally decided that the goods would be sourced offshore at the latest by 23 April 2010. Further, it is clear from Mr Arnold's instructions to Mr Laverick, as recorded in Mr Laverick's first legal opinion, that Mr Arnold's initial plan was that the pharmaceuticals to be sold in the DWB Scheme would be supplied by his company, which he had used in the Canadian schemes, Panaggregate. 77 Mr Arnold "intended and hoped" that the pharmaceuticals would go to Africa, even though he "didn't know that that's where absolutely it was going to go". Shipping some of the pharmaceuticals to Nairobi in Kenya "was the intention of the program, absolutely". In particular, "everyone thought it was going to go to those regions, absolutely, the answer is yes".

Promotion of the DWB Scheme in final form 78 Reference has been made at [44], above, to Mr Arnold's communications in 2009 and early 2010 with financial advisors, introducing in general terms the concept of a scheme for taxpayers to donate gifts in kind to DGRs and for deductions then to be claimed for the value of the goods donated. Once Mr Arnold had settled and established the final form of the DWB Scheme, with the above named entities in place, contracts executed between them and pro forma documents ready for execution by participants in connection with their purchase of pharmaceuticals, Mr Arnold, Leaf Capital and Donors Without Borders actively promoted the DWB Scheme.

Mr Arnold's activities in promoting or encouraging interest in the DWB Scheme 79 Mr Arnold agreed that he was "very active in promoting" the DWB Scheme. He undertook the following activities: (1) Mr Arnold presented a seminar promoting the DWB Scheme at the George Williams Hotel, 317-325 George Street, Brisbane, Queensland, on 24 February 2010. The seminar was advertised to the public in the mX afternoon newspaper on 18 February 2010. (2) Mr Arnold presented a seminar promoting the DWB Scheme at the offices of Leaf Capital at 397 New South Head Road, Double Bay, New South Wales, on 3 March 2010. The invitees at the seminar included two financial planners. (3) Mr Arnold presented a seminar to sections of the public promoting the DWB Scheme at the Kooyong Tennis Club at Kooyong in Victoria on 18 May 2010. The seminar appears to have been organised by Macpherson and Kelley Lawyers, who issued email invitations. Mr Steer recalls that a partner of that firm was present at the seminar. (4) Mr Arnold followed up those who had attended seminars with emails to encourage them to become involved in the DWB Scheme as authorised representatives of Leaf Capital or as participants. The evidence of Mr Andrew Steer is that Mr Arnold followed up the seminar at the Kooyong Tennis Club with emails enclosing documents which included: (i) "Statement of Advice" for sample participant. (ii) DWB PowerPoint presentation. (iii) MedAid blank donation PDF Form. (iv) "MedAid Blank Donation Smart Form (Rev 1.7)". This document was a spreadsheet "calculator" which could be used to calculate the amount by which a participant's "tax burden" would be reduced as a result of their participation in the DWB Scheme. (5) Mr Arnold distributed information brochures in relation to the DWB Scheme, including to those attending seminars promoting the scheme: see for example the brochures distributed to Mr Chow (an ATO officer) who attended the seminar presented by Mr Arnold at the offices of Leaf Capital on 3 March 2010. (6) Mr Arnold was an employee, authorised representative of, and the moving mind and will of Leaf Capital which was also itself active in promoting the DWB Scheme.

Leaf Capital's activities in promoting or encouraging interest in the DWB Scheme 80 Leaf Capital was the principal corporate entity responsible for marketing and encouraging interest in the DWB Scheme, pursuant to the Services Agreement it entered into with MedAid Pty Ltd (see [46] above). Under that agreement it agreed to provide the "Services", which were defined in clause 1.1 as: (a) Development and implementation of marketing strategies and marketing materials; (b) marketing, advertising, promotional and communications support; and (c) soliciting, procuring and introducing prospective Donors; 81 The activities of Leaf Capital directed to marketing or encouraging interest in the DWB Scheme included the following: (1) Leaf Capital distributed a range of marketing brochures which were provided to potential participants, including the brochures entitled as follows: (i) "Leaf Capital Pty Ltd and the New Philanthropy"; (ii) "Australians Understand The Importance Of Charity"; (iii) "Guidelines for Donations To Charity"; (iv) "About Financed "Gift-in-Kind" Donations"; (v) "Vendors Working With Donors Without Borders"; (vi) "How to Participate"; and (vii) "Frequently Asked Questions". (2) Leaf (and Mr Arnold) distributed a range of other documents to promote or encourage interest in the DWB Scheme, including: (i) A private ruling obtained by Mr Arnold in respect of an arrangement that bore some resemblance to (but was materially different from) the DWB Scheme; (ii) a letter from the Commissioner dated 23 October 2009 rejecting a request for a product ruling in respect of the DWB Scheme; (iii) a legal opinion from MacPherson and Kelley Lawyers, which was referred to in marketing materials but not necessarily provided to prospective participants; and (iv) Macpherson and Kelley Lawyers' Press Release dated 29 April 2010. (3) Leaf Capital maintained a website which included statements marketing or encouraging interest in the DWB Scheme. (4) Leaf Capital employed staff who were involved in promoting or encouraging interest in the DWB Scheme, including Mr Gordon Sparrow and Mr Arnold himself. (5) Leaf Capital appointed Authorised Representatives to promote or encourage interest in the DWB Scheme, in return for commission payments. A table of 26 Authorised Representatives (including Mr Arnold) is set out in the table to Ex 15 at para 107 of the affidavit of Brain Galbraith Healey affirmed 21 October 2013.

Donors Without Borders' activities in promoting or encouraging interest in the DWB Scheme 82 Mr Laverick's affidavit reproduced the instructions he received in relation to the role that would be played by Donors Without Borders in the DWB Scheme: 19. I recall that … in or about August or September 2009 I had a discussion with Mr Arnold and Mr Kurtz … where words to the following effect were spoken: … Mr Kurtz: "What we need is a core non-profit body that will co-ordinate the program and give its name to that program. We have decided on the name 'Donors Without Borders'. Me: "So this new body will be in the link between the other parties?" Mr Kurtz: "Yes, and all the others - the donors, the charities, the agents and the vendors will be members of Donors Without Borders. So Donors Without Borders won't be involved in the transactions but will be the body that co-ordinates the program and gives its name to it" 83 Consistent with these instructions, Donors Without Borders' role in co-ordinating the DWB Scheme involved it in the following: (1) Donors Without Borders entered into memoranda of understanding with each Charity to whom participants in the DWB Scheme donated the Treatment Kits: see [53] and [54] above. (2) Donors Without Borders held itself out as protecting or supporting the interests of the various parties involved in the DWB Scheme through its "community", including participants. The intention appears to have been to give the DWB Scheme the "look and feel" of a genuinely charitable enterprise, rather than that of a tax-driven scheme. An example is the brochure or slides titled "Donors Without Borders Philanthropic Initiative" which was provided to Mr Steer (a participant) and which bears the DWB logo in the header of each page. Statements similar to those in this brochure are also found in, and are more legible in, the PowerPoint slides emailed by Mr Arnold to Deloitte. This brochure included the following (with emphasis in bold in the original): Page 2: DWB'S MANDATE - To help Australian DGR charities through the promotion of donations of gifts-in- kind (goods) rather than money - To eliminate fundraising fees to charities - To help donors afford to buy life-saving goods to donate to charity to encourage more donations Page 8 entitled "The DWB Community - Everybody Wins" includes the following statements: Membership fee: - $20 for donors & accredited representatives - $100 for vendors - Free for charities and no-for-profit organisations Benefits of joining: - Participation in the initiative is exclusive to DWB members - Access to the best pricing and terms on vendor products - Free newsletters - Access to promotional offers Page 9 entitled "Charities in the DWB Community" includes the following statements (see also p 169 of the slides in Ex 15, which contains slightly different wording): DWB serves its charity affiliates by: - Eliminating fundraising fees - Sourcing quality items from vendors to be donated - Facilitating shipping of donated merchandise - Introducing new donors Page 11, entitled "Vendors in the DWB Community", includes the following statements (see also p 170 of the slides in Ex 15, which contains slightly different wording): DWB serves its registered vendors by: - Providing a new client base without … Page 12 entitled "Accredited Reps in the DWB Community" includes the following statements (see also p 171 of the slides in Ex 15, which contains slightly different wording): DWB serves its accredited reps by providing the opportunity to earn substantial service fees for referring donors to vendors It is noteworthy that services are paid by the vendors … Page 13 of the above brochure is titled "Donors in the DWB Community" and includes the following statements (see also p 172 of the slides in Ex 15, which contains slightly different wording): DWB serves its donors by: - Negotiating competitive pricing and credit terms for the products bought, and donated - Making donations more affordable through creative financing terms (3) Donors Without Borders distributed marketing brochures, or lent its name and corporate logo to marketing brochures issued by Leaf Capital, which promoted or encouraged interest in the DWB Scheme. For example: (i) the brochure issued by Leaf Capital, titled "Leaf Capital Pty Ltd & The New Philanthropy" which included the following statements: Leaf Capital Pty Ltd (Leaf) is a private, for-profit organisation working in the Donors Without Borders (DWB) community. … DWB achieves its mission of saving lives by aligning the goals of its members - charities, donors, accredited representatives, and vendors. By creating a win-win situation for its members, much higher levels of philanthropy can be effected. (ii) the brochure issued by Leaf Capital, titled "How to Participate", which bore the Donors Without Borders name and A.C.N. number and included the following statements:

1. Join Donors Without Borders $20 membership fee ($100 for vendors, $0 for charities)
2. Purchase Donor purchases $20,000 of life-saving goods from DWB vendor members on credit terms
3. Donate Donor donates $20,000 of goods purchased and a nominal $200 in cash to an Australian DGR charity in the DWB community. (4) Donors Without Borders maintained an internet website which included information in relation to the DWB Scheme. The website is still accessible on the internet (http://www.dwb.org.au/) and currently includes the following statement under the tab "About us": As far as we are aware, Donors Without Borders is the only Australian non-profit initiative that focuses on donations of gifts-in-kind (goods) to registered Deductible Gift Recipients (Australian Tax Office registered charities) and fully complies with the gift deduction provisions set out in Division 30 of the Income Tax Assessment Act 1997 (ITAA 1997) as interpreted and applied by the ATO in Public Ruling TR2005/13 and as outlined in ATO Non-Profit News Service No. 0296 - Donations of property & vendor finance. Please consult with your finance professional and/or obtain independent legal advice regarding of the tax deductibility of any donation to charity.

Aggregates of the participation in the DWB Scheme in 2010 year 84 The result of Mr Arnold's promotion was that 96 taxpayers participated in the DWB Scheme for 2010 year, entering into Purchase Agreements with MedAid for pharmaceuticals to a total invoice amount of $6,036,000.00 and total deductions claimed by these participants in that aggregate amount. See the schedule at pp 1-3 of Ex LPC-1 to Ex 13. These participants paid a total cash amount of $741,802.00, up to 30 June 2010. 85 Only the respondents would be able to provide a full record of the quantity of pharmaceuticals actually delivered to the charities in East Africa. They have not produced such a comprehensive record. The total number of Donation Units, calculated on Mr Healey's schedule, was 420. That is, 4,200 Treatment Kits, each kit containing the drug described (for example) on the receipts issued by the Charities. The Commissioner has not disputed that this quantity of pharmaceuticals was actually delivered to the Charities in East Africa.

Consideration derived by Mr Arnold, Leaf Capital and Donors Without Borders 86 As mentioned in [46] above, the terms of the Services Agreement require that MedAid should pay to Leaf Capital 5% of the monthly sales value of pharmaceuticals sold under Purchase Agreements to participants. That is, 5% of the invoiced amount of the sales, not merely of the cash component. 87 This clause of the Services Agreement was apparently implemented. The schedule to Ex 13 shows that as a result Leaf Capital received a total of $594,880.00. 88 It is has also been mentioned that each participant was required to pay a $20 membership fee to Donors Without Borders. Again, this was implemented and resulted in total receipts to Donors Without Borders of $2,680. 89 Mr Arnold received a salary of $100,000.00 from Leaf Capital in the 2010 year and his wife Stephanie received a salary of $80,028 from Leaf Capital in the 2010 year. 90 These amounts represent the consideration that each of the respondents, respectively received for their part in marketing the DWB Scheme and in encouraging participation in it.

Tax Exploitation Scheme: Consideration and ANALYsis 91 For the reasons which follow, I have concluded that: (1) The DWB Scheme is a "scheme" for the purposes of s 290-65(1) of Sch 1 to the TAA; (2) at the time of the conduct mentioned in s 290-50(1) of Sch 1 to the TAA, it is reasonable to conclude that each respondent (and each participant) entered into or carried out the DWB Scheme for the dominant purpose of getting a "scheme benefit" for each participant from the scheme; (3) at the same time, it is not reasonably arguable that the scheme benefit is available at law; and (4) by reason of (1), (2) and (3), the DWB Scheme is a "tax exploitation scheme" for the purposes of s 290-65(1) of Sch 1 to the TAA.

The DWB Scheme is a "scheme" 92 By reason of the operation of s 3AA(2) of the TAA and s 995-1 of the 1997 Act, the term "scheme" means "any *arrangement; or … any scheme, plan, proposal, action, course of action or course of conduct, whether unilateral or otherwise". The term "arrangement" is further defined to mean "any arrangement, agreement, understanding, promise or undertaking, whether express or implied, and whether or not enforceable (or intended to be enforceable) by legal proceedings". 93 The DWB Scheme clearly qualifies as a "scheme" so defined by these provisions.

Dominant purpose of getting the "scheme benefit" 94 The scheme benefit sought to be obtained by each participant from the DWB Scheme was a lesser "tax-related liability" for the relevant accounting period, namely, income tax. The income tax liability of the participant would be "less than it would be apart from the scheme" (s 284-150(1)(a) in Sch 1 to the TAA), if the Commissioner allowed an income tax deduction claimed by each participant under s 30-15 of the 1997 Act for the full purchase price of the Donation Units said to have been purchased by the participant from MedAid under the Purchase Agreement and gifted to the relevant Charity. 95 The issue which arises under this head is whether it is reasonable to conclude that each respondent entered into or carried out the DWB Scheme for the dominant purpose of getting this scheme benefit for each participant from the scheme. In my view, it is not only reasonable to so conclude, but it would not be reasonable to come to any other conclusion. A number of aspects of the DWB Scheme lead me to this view: (1) The fact that the subject matter of the alleged gifts were pharmaceuticals and not money. In saying this, I acknowledge that each participant did donate a modest sum of money ($200) to his designated Charity, but this was insignificant relative to the purchase price of the pharmaceuticals. (2) The fact that the purchase price of the pharmaceuticals was many multiples of the market value of the pharmaceuticals in the country or countries where the Charity operated and where the pharmaceuticals were to be administered and consumed. (3) The fact that only 7.5% of the purchase price of the pharmaceuticals had to be paid by the participant at the time of entering into the Purchase Agreement with MedAid, with the balance of the purchase price being "payable in full no later than fifty years from the date of this agreement". In reality, due to the effluxion of time, the balance would never be paid to MedAid. (4) The fact that the balance of the purchase price only carried interest of 0.108% per annum, albeit payable in advance. (5) The memorandum of understanding with each Charity included repetitive, explicit obligations concerning issuing documents to ensure that participants could claim their deductions. Deductibility appears to have been uppermost in the mind of Mr Arnold in settling the terms of these memoranda with each Charity. (6) Mr Arnold's approach to Mr Fratzia of the AVO in November 2009, to seek assurance about obtaining a valuation of the pharmaceuticals on the basis of figures from IMS Health regarding Australian prices, indicates his preoccupation with and priority of facilitating the participants' deduction claims at a rate per Donation Unit equal to the high Australian prices for the pharmaceuticals. (7) The terms of Mr Arnold's marketing of the scheme to potential participants highlighted the purported tax benefits: see, for example, the marketing referred to at [79] and [81] above. 96 The fact that the respondents may have also had the purpose of making a commercial profit or facilitating donations to charity is not inconsistent with the conclusion that they had a dominant purpose of enabling the participants to obtain the scheme benefit: Commissioner of Taxation v Spotless Services Ltd (1996) 186 CLR 404 at 415-416 per Brennan CJ, Dawson, Toohey, Gaudron, Gummow and Kirby JJ; Ludekens at [243]-[245]. Without the scheme benefit claimed for the participants' participation in the DWB Scheme, there would be no commercial profit.

Not reasonably arguable that scheme benefit is available at law 97 There are at least five, there may be more, grounds upon which one can rely for the view that it is not reasonably arguable that the scheme benefit as identified is available at law. Any one ground would suffice.

Scheme benefit not available because deduction under s 30-15 of the 1997 Act is limited to the lesser of the market value of the pharmaceuticals on the day the gift is made and the amount paid for the pharmaceuticals (see item (b) of col 3 (How much you can deduct) of the Table in s 30-15(2)) 98 This effectively raises two of those grounds: first, that the scheme benefit is not available at law because, measured in Australian dollars, the market value of the pharmaceuticals on the day the gift was allegedly made was substantially less than the scheme benefit; secondly, that the scheme benefit is not available at law because, measured in Australian dollars, the price paid for the pharmaceuticals was also substantially less than the scheme benefit. Each ground renders the counter argument in each case "not reasonably arguable". 99 As to the first ground: I accept the evidence led by the Commissioner, in particular the evidence of Mr Lonergan, that where goods are to be used outside Australia, the market value of those goods is to be determined by reference to the market in which the goods are to be used; meaning in the case of goods being pharmaceuticals, the market where they are to be administered or consumed. The only circumstance I can envisage where the logicity of this may be doubted, is where the pharmaceuticals are not available in the market where they are to be administered or consumed, and have to be purchased outside that market; but that is not this case. 100 No evidence to the contrary was led by the respondents and as noted in [69] above, Mr Lonergan's evidence was not seriously challenged in cross-examination. 101 At no time did the pharmaceuticals come into Australia to warrant adoption of Australian market values. Even if the proposition could be maintained that the gifting of the pharmaceuticals occurred in Australia because this is the place where the participants executed their pledges, a proposition which is attended with some considerable doubt for the reasons given below, it would not alter my view that Australian market values of the pharmaceuticals are totally irrelevant. 102 It is unnecessary to come to a view as to the precise market value of the pharmaceuticals in the markets in which they were to be administered or consumed by the Charity; it suffices that they were but a minute fraction of the purchase price under the Purchase Agreement between MedAid and the participant constituting the scheme benefit against which they are to be measured; and for that reason the scheme benefit was not available at law. 103 As to the second ground: It is common ground and can be accepted that a participant "paid" 7.5% of the purchase price to MedAid. What is not common ground is the status of the remaining 92.5%. Was it "paid" or does it remain outstanding? 104 The concept of payment in the legal sense means a gift or loan of money or any act offered and accepted in performance of a money obligation. Money must therefore feature in some way, either because payment is in physical money or because the obligation to be discharged by the act of payment is a money obligation, in which case the mode of discharge is immaterial to the status of the act as an act of payment: see, Goode R, Commercial Law (3rd ed, Lexis Nexus UK, 2004) at p 461. 105 One way in which this can occur is by the replacement of the existing contract under which the indebtedness arises with a new contract, whether with the same or a new creditor, otherwise known as novation. A common example is where a vendor of property offers to finance the purchaser the balance of the purchase price payable on settlement of the contract for sale. The liability of the purchaser under the contract for sale to pay the balance of the purchase price on settlement is discharged and hence "paid" by the purchaser's assumption of the equivalent liability under the loan contract: see Olsson v Dyson (1969) 120 CLR 365 per Windeyer J at 388-390. But that is not this case. 106 The terms of the Purchase Agreement make it clear that the purchase price is payable in two instalments - "the Down Payment of 7.5% of the Purchase Price … on the date of signing by the Purchaser" (cl 3.1(a) and "the balance of the Purchase Price … no later than fifty years from the date the Vendor accepts this Purchase Agreement (cl 3.1(c)). Those terms also make it clear that title to "the Treatment Kits/Donation Units passes to the Purchaser within 150 days after receipt by [MedAid] of the prepaid interest and the Down Payment, on a date determined by [MedAid] ('Closing')". There is no requirement for the second instalment of the purchase price ("the balance" of 92.5%) to be paid in money before the expiration of fifty years, and "Closing" therefore is no occasion for that liability to be discharged by some other act of payment such as, for example, assumption by the participant of an equivalent liability under a new contract with MedAid. 107 The purchase agreement describes the difference between (A) "Total purchase price" and the amount (B) "due upon signing" as (C) "Amount of credit": see [57] above. The remarks of Gleeson CJ in Prime Wheat Association v Commissioner of Stamp Duties (1997) 42 NSWLR 505 are relevant in this regard. At 512 his Honour said: Not all forms of financial accommodation are loans: see, eg, Chow Yoong Hong v Choong Fah Rubber Manufactory [1962] AC 209. The fact that the transaction in question could (subject, perhaps, to constraints of which we are unaware) have been set up in a form involving a loan of money from the vendor to the purchasers is beside the point. The parties (including, be it noted, the Crown), chose to give their arrangements a certain form, and that form did not involve a loan of money. … Here there was no advance of money. There was, as required by the language of the definition of advance, financial accommodation, but that is not sufficient. An agreement for sale which allows credit to a purchaser does not, on that account alone, involve an advance of money: Rabone v Deane (1915) 20 CLR 636 at 640. Dunford J said that what was involved was an advance "because the transfer of title without waiting for the actual receipt of the full purchase price constituted a form of 'financial accommodation'". However, it did not constitute a form of financial accommodation that involved an advance of money; what was involved was a granting of time to pay. Ultimately, there was a debt, but no loan. As it is with the present case, the mere deferral of the balance of the purchase price, without more, is not an advance of money, and the amount representing that deferral is not any part of the price paid. 108 It follows, in my view, that the price "paid" by a participant for the pharmaceuticals gifted to the Charity was only 7.5% of the scheme benefit sought to be obtained from the DWB Scheme; and for that reason too, the scheme benefit was not available at law.

Scheme benefit not available because there was no gift to the Charity or, if there was a gift, it was not made in the year of income for which the scheme benefit was claimed. 109 It suffices to deal with this ground by reference only to the second limb because if there was no gift to the Charity in the year of income for which the scheme benefit is claimed, no scheme benefit is available. 110 A gift of goods may be made if the goods are delivered into the possession of the donee or by deed of gift. Actual delivery is not mere evidence of the gift, but is part of the gift itself. An agreement for gift, or a purported gift not perfected by delivery of possession or by deed, confers no interest on the donee, legal or equitable, for equity does not perfect an imperfect gift. 111 Evidence called by the respondents from Mr Patrick Knibbs, a director of Southern Cross Freight Logistics Ltd (Ex K, paras 16 and 17), confirms that as at 30 June 2010 the pharmaceuticals said to have been donated to ARMS on 8 June 2010 and to African Enterprise on 30 June 2010 were being warehoused by Southern Cross Freight Logistics Ltd at Feltham, Middlesex in the United Kingdom; and that they were not shipped to African Enterprise and ARMS until 21 December 2010 and 7 June 2011 respectively. There was thus no actual delivery of the pharmaceuticals into the possession of either Charity in the year of income for which the scheme benefit was claimed. 112 Mr Knibbs deposed (Ex K, paras 6 and 7) that he "transferred title" to the pharmaceuticals said to have been donated to ARMS on 8 June 2010 on that very day and that he "transferred title" to the pharmaceuticals said to have been donated to African Enterprise on 30 June 2010 on that very day. He also deposed (Ex K, para 16) that he "witnessed, saw and personally handled the goods which were in my care at my warehouse on behalf of each entity from 8 June 2010 and 30 June 2010", but there is no evidence upon which one could find that Mr Knibbs' possession of the pharmaceuticals on 30 June 2010 constituted delivery of them into the possession of either Charity. Indeed, there is no evidence to suggest that Mr Knibbs had any authority from either Charity. He took all his instructions from MedAid and there is no evidence that MedAid had any authority from either Charity. 113 There was evidence that delivery instructions were given by Mr Terrence Bey, on behalf of MedAid, to Mr Patrick Knibbs, on behalf of Southern Cross Logistics Ltd, in the form contained behind tab 4 of Ex TB-1 of Ex F. An example of that given on 30 June 2010 in respect of African Enterprise is reproduced below: MedAid Pty Ltd Level 18, Riverside Centre 123 Eagle St, Brisbane, QLD 4000 MedAid P: 07 3112 2670 F: 07 3112 2601 ABN 40 142 532 330 Delivery Direction to: Dated: June 30th, 2010 Patrick Knibbs Southern Cross Freight Logistics Ltd. Unit 9 Felthambrook Industrial Estate Felthambrook Way Feltham, Middlesex TW13 7DU Please be advised that the donation of the following pharmaceuticals, warehoused by Southern Cross Freight Logistics Ltd., has transpired: Donation from donors, as attached, to African Enterprise Number of Pills Rx Quantity of Bottles/Packs Quantity in Boxes/Cartons Batch # 2,150 ARV 35.83 0.6 3033 293,460 ARV 4,891 81.52 50001 19,850 Cipro 198.5 0.92 40023 22,380 Cipro 223.8 1.04 50003 7,750 Flu 77.5 0.775 30052 287,860 Flu 2,878.6 28.786 50002

Please deliver these units as described, to the possession of the charity, as attached. We require immediate verification of such delivery. Please sign below acknowledging such delivery. Thank you. Signed ______________________________ Authorised Agent for MedAid Signed ______________________________ Patrick Knibbs Southern Cross Freight Logistics Ltd. A similar example given on 8 June 2010 was also in evidence in respect of ARMS. 114 Attached to these instructions were computer spreadsheets of names, presumably of "donors", and details pertaining to them. Some of the names on the spreadsheet attached to the Delivery Direction reproduced in [113] above were underlined and their correct names appeared on an adjacent sheet bearing the following note: Please note that the list below details the correct name for the purchaser/donor. Names that required revision are underlined in the attached report. Some names were simply too long to fit in the report column. 115 Mr Knibbs' acknowledgment of delivery to the possession of African Enterprise on the Delivery Direction dated 30 June 2010 reproduced in [113] above, suggests, and I put it no higher than that, that delivery was intended to occur on that date, but there is no evidence to support a finding of fact that it did for the reasons given in [112] above. 116 In the absence of evidence to support a finding that there was actual delivery of the pharmaceuticals into the possession of each Charity in the 2010 year of income, the question arises as to whether the gift was nevertheless complete in that year of income by the participant's anterior execution of the Donor Pledge in the form and terms set out in [62] above. That is expressed to be a deed, not as an act of gift, but as a "wish to pledge a gift to African Enterprise/ARMS" (see A). B and C are in similar terms: B. Donor will effect the gift of the Pledged items as identified above. C. The Donor intends for this Pledge to be binding on the Donor if it has been delivered directly to the Charity by the Donor, or by a lawful authorised agent or representative thereof by limited power of attorney granted by the Donor. (Emphasis added.) 117 There was no evidence of delivery of the Pledge directly to the Charity by the participant or by a lawful authorised agent or representative thereof by limited power of attorney granted by the participant. On the other hand, that may not have been necessary if the Pledge was in fact a deed of gift: see the discussion in Meagher, Gummow and Lehane's Equity Doctrines & Remedies (5th ed, Butterworths, 2002) at [31-035]. 118 That the Donor Pledge was expressed in futuro, as a matter of wish or intention on the part of the participant and not as an act of gift, is exemplified by D, which relevantly provides: The Donor hereby unconditionally pledges to the Charity that the undersigned will deliver to the Charity within six months the Pledged items listed above. 119 In these circumstances, it is not surprising that para 8(c) of the respondents' amended defence denied that the Donor Pledge was in the nature of a Deed Poll but rather was a unilateral recording or expression of future intent by participants who completed that particular document. Importantly for present purposes, it was not a deed of gift such as to constitute completion of a gift before the end of the 2010 year of income. Its execution by participants did not complete the gift before the end of that year of income. In the absence of actual delivery of the pharmaceuticals into the possession of the Charity before the end of the 2010 year of income, of which there was no evidence (see [112] above), there was no gift of the pharmaceuticals in that year of income.

Section 78A of the 1936 Act operates to disallow any deduction 120 Section 78A of the 1936 Act relevantly provides: … (2) Subject to this section, a gift of money, or of property other than money, made by a person (in this section referred to as the donor) to a fund, authority, institution or person is not an allowable deduction under Division 30 of the Income Tax Assessment Act 1997 where: (a) by reason of any act, transaction or circumstance that has occurred, will occur, or may reasonably be expected to occur, being an act, transaction or circumstance occurring as part of, in connexion with or as a result of: (i) the making or receipt of the gift; or (ii) any agreement or scheme entered into in association with the making or receipt of the gift; the amount or value of the benefit derived by the fund, authority, institution or person as a consequence of the gift is, will be, or may reasonably be expected to be, less than the amount or value at the time when the gift was made of the property comprising the gift; (b) … (c) by reason of any act, transaction or circumstance of a kind referred to in paragraph (a), the donor or an associate of the donor has obtained, will obtain or may reasonably be expected to obtain any benefit, advantage, right or privilege other than the benefit of any deduction that, but for this section, would be allowable from the assessable income of the donor under Division 30 of the Income Tax Assessment Act 1997; or … 121 In my view, both paras (a) and (c) of s 78A(2) would have applied to deny participants a deduction for the alleged gift of pharmaceuticals even if a deduction was otherwise available which, for reasons canvassed above, I do not think is the case. 122 In the context of considering the application of para (a), the value of the benefit derived by the Charity as a consequence of the gift would be limited to the price the pharmaceuticals could have been acquired by the Charity in the location where they were to be used. Assuming that the value of the pharmaceuticals at the time that the gift was made was not less than the price agreed to be paid by the participants to MedAid, certainly no lesser value is contended for, the value of the benefit derived by the Charity as a consequence of the gift would be but a minute fraction of the value of the pharmaceuticals at the time the gift was made. That is sufficient to attract the application of para (a) of s 78A(2) so as to deny the deduction. 123 In the context of considering the application of para (c), there are relevantly two aspects of the DWB scheme which could trigger its application to deny a deduction for the alleged gift of pharmaceuticals, if a deduction was otherwise available. 124 First, by reason of the participants' entry into the purchase agreements with MedAid, the participants could reasonably be expected to obtain a "benefit, advantage, right or privilege" in the form of MedAid's forbearance from seeking to recover from the participants the remaining 92.5% of the purchase price, either for 50 years or at all. On the terms of the purchase agreements, any action by MedAid to recover the unpaid debt before the expiration of 50 years was forbidden. Thereafter, the debtor participant would be likely to be either deceased or not a person from whom the balance is readily recoverable; and by reason of the negligible and uncommercial interest rate, the present value of the debt obligation is substantially less than its face value. 125 Secondly, the circumstances of the participants' entry into the purchase agreements meant that, as a matter of law, no liability to pay any part of the purchase price was ever incurred or could ever be incurred by any participant in the DWB scheme. The sale and distribution of restricted substances pursuant to a contract governed by New South Wales law is an offence unless the parties to the contract are authorised to sell and distribute those substances under the legislation. 126 Clause 2.1 of the MedAid purchase agreement provided that MedAid "shall sell" and the participant "shall purchase" the "Treatment Kits", which were defined to be the pharmaceuticals in sch 1 to the agreement. It was essential to the transaction contemplated by the agreement that title to the pharmaceuticals would pass to the participant (cl 4.1) and the pharmaceuticals would then be delivered by MedAid, as agent for the participant pursuant to a limited power of attorney, to the charity nominated by the participant (cll 4.2, 10.1). The agreement was "to be governed by the laws of the State of New South Wales" (cl 17.1). 127 The law of New South Wales in this respect operates concurrently with related federal laws. The pharmaceuticals the subject of the purchase agreements are scheduled as poisons under the Therapeutic Goods Act 1989 (Cth). In particular, each pharmaceutical is listed in sch 4 to the Poisons Standard 2009 (being the standard in force under that Act between May and June 2010), which also forms the basis of equivalent State instruments. In this State, sch 4 of the Poisons Standard 2009 is adopted by sch 4 of the New South Wales Poisons List 2013. 128 Section 4(1) of the Poisons and Therapeutic Goods Act 1966 (NSW) defines a "restricted substance" as meaning any substance specified in sch 4 to the Poisons List, which as mentioned includes the pharmaceuticals described in the purchase agreements. Under the State Act, a person who "supplies by wholesale" a restricted substance for therapeutic use (the term "therapeutic use" is defined in s 4(1) by reference to the Commonwealth Act, s 3(1) of which defines that term as meaning "use in or in connection with … preventing, diagnosing, curing or alleviating a disease, ailment, defect or injury in persons; or … influencing, inhibiting or modifying a physiological process in persons", amongst other things) other than in accordance with the conditions of a wholesaler's licence or authority is guilty of an offence (s 9(1)). The supply of a restricted substance "other than by wholesale" is similarly an offence (s 10(3)). There are also offences for possession of a restricted substance or attempt to possess a restricted substance unless the person falls within a recognised exception (s 16(1)). 129 The term "supply" is expressly defined by s 4(1) to include "agree or offer to sell or distribute", "send, forward, deliver or receive for sale, dispensing or distribution", and "authorise, direct, cause, suffer, permit or attempt" either of the former acts. It is plain that the MedAid purchase agreements involved the "supply" of restricted substances within the meaning of the Act. It is equally plain that neither MedAid nor any of the participants targeted by the scheme held a wholesale's licence or any other relevant authority under the Act. Whether the supply was "by wholesale" or "other than by wholesale" does not matter because for the participants in the scheme both forms of supply were proscribed by the statute. 130 The principles governing the circumstances in which an agreement will be void and unenforceable for statutory illegality are settled: Equuscorp Pty Ltd v Haxton (2012) 246 CLR 498 at [23] (French CJ, Crennan and Kiefel JJ), citing Miller v Miller (2011) 242 CLR 446 at [26] (French CJ, Gummow, Hayne, Crennan, Kiefel and Bell JJ). The case law distinguishes between an express statutory provision against the making of a contract and an express statutory prohibition, not of the formation of a contract, but of the doing of a particular act. In the latter case, an agreement that the act be done is treated as impliedly prohibited by the statute and illegal: Miller at [26] (French CJ, Gummow, Hayne, Crennan, Kiefel and Bell JJ), citing Nelson v Nelson (1995) 184 CLR 538 at 551-552 (Deane and Gummow JJ). In both cases, however, the agreement is void and unenforceable. Insofar as the State law makes it an offence to "agree ... to sell or distribute" restricted substances "by wholesale" or "other than by wholesale", or to "authorise, direct, cause" a person to "deliver" those substances, it must be understood as an express statutory provision against the making of a contract such as the MedAid purchase agreement. Alternatively, the wide terms of the legislation impliedly prohibited any contractual agreement for the doing of acts forbidden by that law. 131 The purchase agreements were thus void and unenforceable for statutory illegality. It follows that no liability for the purchase price of the pharmaceuticals was or could be incurred by the participants in the DWB scheme, with the consequence that any amount in fact paid to MedAid was paid under a mistake of law and is prima facie a debt recoverable by the participant from MedAid. Those circumstances occurred in connection with the making of the gift, with the result that s 78A(2)(c) operated to disallow any deduction that might have otherwise been claimed.

Any deduction otherwise allowable, is liable to be cancelled by the Commissioner in reliance on s 177F of the 1936 Act 132 As noted in [21] above, s 290-65(2) provides that in deciding whether it is reasonably arguable that a scheme benefit would be available at law, one takes into account anything that the Commissioner can do under a taxation law including, of course, cancelling a tax benefit obtained by a taxpayer in connection with a scheme to which Pt IVA applies. 133 If, contrary to the earlier views I have expressed under this head, it was reasonably arguable that a scheme benefit in the amount claimed or sought to be claimed was available at law then, if the Commissioner determined to cancel that scheme benefit in reliance on a determination made under s 177F of the 1936 Act to the effect that the scheme benefit was a tax benefit obtained by a participant in connection with a scheme to which Pt IVA applied, and issued an assessment to give effect to that determination then, in my view, it is beyond argument that any objection decision disallowing an objection against that assessment would be upheld by this Court. 134 In summary, my reasons for this view are as follows: (1) The DWB scheme is a "scheme" for the purposes of Pt IVA. (2) The participant is a party to the DWB Scheme, along with the respondents. (3) The participant has, but for the application of Pt IVA, obtained a tax benefit in connection with the DWB Scheme. (4) Having regard to the matters in s 177D(1)(b), the dominant purpose of the participant (and of the other parties) in entering into or carrying out the DWB Scheme was to obtain a tax benefit for the participant. (5) The DWB Scheme is therefore a scheme to which Pt IVA applies and the Commissioner is entitled to make a determination under s 177F cancelling the tax benefit and issue an assessment to give effect to that determination.

Conclusion 135 Upon each of these five grounds, it is not reasonably arguable that the scheme benefit as identified is available at law; together, they render any such argument untenable. For the foregoing reasons, I am firmly of the view that the DWB Scheme is a "tax exploitation scheme" for the purposes of s 290-65(1) of Sch 1 to the TAA.

Promoter: Consideration and Analysis 136 The conduct that is proscribed by s 290-50(1) of Sch 1 to the TAA is conduct engaged in by an entity that results in that or another entity being a promoter of a tax exploitation scheme. 137 As noted in [13] above, an entity is only a promoter of a tax exploitation scheme if three requirements are met: (1) The entity markets the scheme or otherwise encourages the growth of the scheme or interests in it; and (2) the entity or an associate of the entity receives (directly or indirectly) consideration in respect of that marketing or encouragement; and (3) having regard to all relevant matters, it is reasonable to conclude that the entity has had a substantial role in respect of that marketing or encouragement. 138 For the reasons which follow, I have concluded that: (1) Mr Arnold's conduct satisfied these three requirements with the result that each of he, Leaf Capital and Donors Without Borders is a promoter of the DWB Scheme, which I have found to be a tax exploitation scheme; (2) the conduct of each of Leaf Capital and Donors Without Borders also satisfied these three requirements with the result that each is a promoter of the DWB Scheme, which I have found to be a tax exploitation scheme.

First Requirement: Marketing or otherwise encouraging growth of the DWB Scheme or interests in it 139 Mr Arnold clearly marketed and encouraged participation in the DWB Scheme: see [79] above. 140 Leaf Capital undoubtedly marketed and encouraged interest in the DWB Scheme - the marketing and promotion of sales of pharmaceuticals is precisely what it agreed with MedAid it would do in the Services Agreement. The website for promoting the scheme was put up in the name of Leaf Capital. Mr Arnold sent most email correspondence and other communications in the name of Leaf Capital. As Mr Arnold's alter ego, the company promoted the scheme and encouraged others to participate in it, as much as Mr Arnold did himself: see [80] and [81] above. 141 Donors Without Borders encouraged interest in and the growth of the DWB Scheme by providing one element of the structure of the scheme, contributing towards giving it the appearance of a genuine undertaking supporting charitable organisations and providing marketing material used by Mr Arnold and Leaf Capital to market the scheme: see [82] and [83] above.

Second Requirement: Received consideration in respect of marketing and encouragement of the scheme 142 Mr Arnold received consideration in respect of his marketing and encouragement of the DWB Scheme - namely, the $100,000.00 salary from Leaf Capital referred to at [89] above. 143 This requirement is also satisfied by evidence that an associate of Mr Arnold received consideration directly or indirectly in respect of his marketing: see s 290-60(1)(b). By operation of s 3AA of the TAA, the term "associate" in s 290-60 has the meaning given by s 318 of the 1936 Act. Under the definitions to be found there, both Leaf Capital and Donors Without Borders were associates of Mr Arnold. Leaf Capital received consideration in respect of its marketing of the scheme in the form of the marketing fee which was paid to it by MedAid under the Services Agreement - 5% of the face value of invoices for the sales of pharmaceuticals by MedAid to taxpayer participants. Donors Without Borders also received consideration for its part in marketing and encouragement of the scheme; namely, the $20 membership fee from each participant. 144 Both of Mr Arnold's associate companies, Leaf Capital and Donors Without Borders, necessarily were paid for the promotion activities. Clearly Mr Arnold considered that he needed an entity in the position of Donors Without Borders, as a purported facilitator of charitable donations, to make the scheme work by that company lending its name to the scheme and in particular entering into the memoranda of understanding with the charities.

Third Requirement: A substantial role in respect of marketing and encouragement 145 The third requirement that must be satisfied to hold that any person or entity is a promoter is that "the entity has had a substantial role in respect of that marketing or encouragement". This appears to be clearly satisfied in relation to each of the respondents: (1) Mr Arnold was the principal individual promoter and the driving force behind the introduction of the DWB Scheme in Australia; (2) Leaf Capital was his principal corporate promotional vehicle; and (3) Donors Without Borders played a significant part in the marketing and encouragement of the DWB Scheme in entering into the memoranda of understanding with the Charities and providing the "brand name" and appearance of propriety to the DWB Scheme.

Conclusion 146 For the reasons more particularly set forth in [139]-[145] above, I am firmly of the view that Mr Arnold engaged in conduct that resulted in each of the respondents being a promoter of a tax exploitation scheme, namely, the DWB Scheme; and that each of Leaf Capital and Donors Without Borders engaged in conduct that resulted in each of them being a promoter of a tax exploitation scheme, namely, the DWB Scheme. 147 I am therefore of the view that each of the respondents has contravened s 290-50(1) of Sch 1 to the TAA and that the Commissioner should have the declarations he seeks.

Introduction 148 Having found that: (1) Mr Arnold engaged in conduct which resulted in: (a) Mr Arnold being a promoter of a tax exploitation scheme; (b) Leave Capital being a promoter of a tax exploitation scheme; and (c) Donors Without Borders being a promoter of a tax exploitation scheme, each in contravention of s 290-50(1) of Sch 1 to the TAA; (2) Leaf Capital engaged in conduct which resulted in it being a promoter of a tax exploitation scheme in contravention of s 290-50(1); (3) Donors Without Borders engaged in conduct which resulted in it being a promoter of a tax exploitation scheme in contravention of s 290-50(1), it is necessary to turn to the issue of whether the Court should exercise the discretion vested in it by s 290-50(3) of Sch 1 to the TAA and order the contravening entity or entities to pay a penalty or penalties to the Commonwealth; and if so, how much.

The statutory maximum amount of penalties: s 290-50(4)

Statutory framework 149 Section 290-50(4) of Sch 1 to the TAA provides that: (4) The maximum amount of the penalty is the greater of: a) 5,000 penalty units (for an individual) or 25,000 penalty units (for a body corporate); and b) twice the consideration received or receivable (directly or indirectly) by the entity and *associates of the entity in respect of the *scheme. Note: See section 4AA of the Crimes Act 1914 for the current value of a penalty unit. 150 Section 4AA of the Crimes Act 1914 (Cth) provided that, during the whole of the period in which the contraventions took place, the value of a penalty unit was as follows, with multiples of 5,000 and 25,000 penalty units also as shown: Period Amount of Penalty Unit, per s 4AA 5,000 Penalty Units (Individual) 25,000 Penalty Units (body corporate) Between July 2009 and 2012 $110 $550,000 $2,750,000

151 The appropriate penalty unit is that which was applicable at the time of the contraventions. 152 In order to calculate the statutory maximum amount of penalties it is necessary to identify the associates (if any) of each respondent and the "consideration received or receivable (directly or indirectly)" by each respondent and associates of the respondent.

The associates of the respondents, for the purposes of s 290-50(4) 153 By reason of the operation of s 3AA(2) of the TAA and s 995-1 of the 1997 Act, the term "associate" in s 290-50(4) of Sch 1 to the TAA "has the meaning given by s 318 of the [1936 Act]". 154 Relevantly for this proceeding, I find by reference to this legislative framework, the "associates" of each of the respondents are as set out below. It is not necessary that I set out my reasons for these findings because they are self-evident and not in dispute. 155 Mr Arnold's associates are Leaf Capital, Donors Without Borders and Mrs Stephanie Arnold, his wife. 156 Leaf Capital's associate is Mr Arnold. 157 Donors Without Borders' associate is Mr Arnold.

The consideration received by the respondents and their associates 158 At paragraph 15 of his written submissions on penalty, the Commissioner set out a table of "the consideration received or receivable (directly or indirectly)" by each of the respondents and their associates in respect of the DWB Scheme: Respondent Associate of Respondent Nature of Consideration Consideration Reference Mr Arnold - Salaries or wages paid by Leaf Capital $100,000 Affidavit of Brian Healey, affirmed 20 December 2012, at [17] Leaf Capital See below $594,880 See below Donors Without Borders: See below $2,680 See below Mrs Stephanie Arnold: Salaries or wages paid by Leaf Capital $80,028 Affidavit of Brian Healey, affirmed 20 December 2012, at [18] Total $777,588

Leaf Capital - Service fees received from MedAid $594,880 Affidavit of Leo Pasquale Cappellone, sworn 18 December 2012, at item 5.1 of the table at [18] Mr Arnold See above $100,000 See above Mrs Arnold See above $80,028 See above Total $774,908

Donors Without Borders - Membership fees received from Participants $2,680 Affidavit of Leo Pasquale Cappellone, sworn 18 December 2012, at item 4.4 of the table at [18] Mr Arnold See above $100,000 See above Total $102,680

159 At para 18 of his written submissions on penalty, the Commissioner set out a table of his calculations of the maximum penalties provided for in s 290-50(4) available against each respondent as follows: Respondent Contravention Penalty Units Twice the Consideration Maximum Penalty: Greater of [1] [2] [1] and [2] Mr Arnold Conduct which resulted in himself being a promoter $550,000 $777,588 x 2 = $1,555,176 $1,555,176 Conduct which resulted in Leaf Capital being a promoter $1,555,176 Conduct which resulted in Donors Without Borders being a promoter $1,555,176 Total maximum penalty for Mr Arnold $4,665,528 Leaf Capital Conduct which resulted in itself being a promoter $2,750,000 $774,908 x 2 = $1,549,816 $2,750,000 Donors Without Borders Conduct which resulted in itself being a promoter $2,750,000 $102,680 x 2 = $205,360 $2,750,000

The statutory factors relevant to determining appropriate penalties: s 290-50(5)

Statutory framework 160 Section 290-50(5) of Sch 1 to the TAA states in a non-exhaustive way the principles relevant to the determination of the appropriate penalty: (5) In deciding what penalty is appropriate for a contravention of subsection (1) or (2) by an entity, the Federal Court of Australia may have regard to all matters it considers relevant, including: (a) the amount of the consideration received or receivable (directly or indirectly) by the entity and *associates of the entity in respect of the *scheme; and (b) the deterrent effect that any penalty may have; and (c) the amount of loss or damage incurred by scheme participants; and (d) the nature and extent of the contravention; and (e) the circumstances in which the contravention took place, including the deliberateness of the entity's conduct and whether there was an honest and reasonable mistake of law; and (f) the period over which the conduct extended; and (g) whether the entity took any steps to avoid the contravention; and (h) whether the entity has previously been found by the Court to have engaged in the same or similar conduct; and (i) the degree of the entity's cooperation with the Commissioner. 161 Some of these matters have already been considered at length; others are dealt with below.

The consideration received or receivable: s 290-50(5)(a) 162 Distilling the figures in the table at [158] above, the consideration received or receivable by the respondents was as follows: (1) Leaf Capital received $594,800 in service fees from MedAid from which salaries were paid to Mr Arnold ($100,000), his wife, Mrs Stephanie Arnold ($80,000) and commissions were paid to other authorised representatives of Leaf Capital. (2) Mr Arnold received $100,000 in salary or wages from Leaf Capital. (3) Donors Without Borders received a relatively modest amount ($2,680) for membership fees paid by participants and their authorised representatives. 163 In the context of mass-marketed tax avoidance schemes of previous years, these amounts are not large although, having regard to the shortness of the period over which the DWB Scheme was actively marketed, nor are they insignificant in amount.

The deterrent effect that any penalty may have: s 290-50(5)(b)

General deterrence 164 There are a number of reasons why contraventions such as those committed by the respondents should attract penalties which will act as a strong deterrent to others. 165 First, the facility in s 290-50(4) for the maximum penalties to be increased commensurate with consideration received or receivable is intended to enable the Court to fix penalties at levels that create a genuine commercial disincentive to engaging in conduct which results in either the contravenor or another entity being a promoter of a tax exploitation scheme. 166 Secondly, putting promoters of ineffective tax schemes substantially at risk financially overcomes what would otherwise be an asymmetry in the risks faced by the promoters of the schemes and by the participants in the schemes. The Explanatory Memorandum to the Tax Laws Amendment (2006 Measures No. 1) Bill 2006 (Cth) ("the EM"), which when enacted inserted Div 290, explained this (at para 3.3) as follows: [P]romoters can obtain substantial profits while investors may be subject to penalties under the TAA 1953. This represents a significant asymmetry in risk exposure. 167 Thirdly, ineffective tax schemes, particularly those which are mass marketed and which purport to provide participants with deductions which are "inflated" by the provision of finance or credit on uncommercial terms, pose potentially significant risks to the revenue. The EM included estimates of the financial impact of the introduction of Div 290, which was expected to take the form of gains to the revenue, and stated (at para 3.135) that "[t]hese estimates are based solely on the anticipated deterrent effect of the regime". The potentially adverse impact on the revenue underscores the need for a robust message to those promoting tax-exploitation schemes. In the present matter the total deductions which would be expected to have been claimed by participants was $6,036,000 in the 2010 year and $840,000 in the 2011 year, making a total of $6,876,000. 168 Fourthly, it can be difficult for the Commissioner to detect ineffective tax schemes. It is well recognised that difficulties in detecting contraventions are a significant factor in the need for general deterrence: Clean Energy Regulator v MT Solar Pty Ltd [2013] FCA 205 per Foster J at [102]. The difficulties in detecting ineffective tax schemes are inherent in the self-assessment regime, under which "taxpayers are now effectively required to determine their own taxable income": Explanatory Memorandum to the Bill enacted as the Taxation Law Amendment (Self Assessment) Act 1992 (Cth). For example, participants in the present scheme simply returned deductions for donations to charities, which on their face would not indicate involvement in a scheme. The Commissioner first became aware of the scheme by chance as a result of an ATO officer reading an advertisement in the mX afternoon newspaper for a seminar to be presented by Leaf Capital. 169 Fifthly, ineffective tax schemes impose compliance costs on the ATO and therefore on the whole community. Compliance costs arise in relation to action required to be taken by the Commissioner in relation to investigating ineffective tax schemes, communicating with the promoters and participants in the schemes, disallowing deductions or cancelling tax benefits associated with the schemes, amending the participants' assessments, determining the participants' objections to their amended assessments, and conducting review and appeal proceedings under Part IVC of the TAA. The compliance activities in relation to the scheme are apparent from the following: (1) There were a total of 96 participants who purchased Treatment Kits; and (2) investigation in relation to the scheme included ATO officers issuing information and evidence gathering notices under s 264 of the 1936 Act and s 353-10 of Sch 1 to the TAA to banks, and to persons and entities involved in the scheme, together with obtaining access to a number of premises occupied by the respondents, pursuant to s 263 of the 1936 Act. 170 Sixthly, participation in ineffective tax schemes imposes costs on the community by reason of the misallocation of scarce financial resources. The EM observed (at para 3.136) that: By putting promoters at risk financially for the promotion of ineffective tax schemes, rather than allowing all risks to be passed on to investors, the market for investment schemes is likely to operate more efficiently, with the potential for investment capital to be redirected to legitimate and productive investments. (Emphasis in original)

Specific deterrence 171 Specific deterrence is a significant factor where, as here, the contraventions involved deliberate wrongdoing, sustained denials of contraventions and lack of remorse: Australian Ophthalmic Supplies Pty Ltd v McAlary-Smith (2008) 165 FCR 560, per Gray J at [16]-[17]; Construction, Forestry, Mining and Energy Union v Pilbara Iron Company (Services) Pty Ltd (No 4) [2012] FCA 894 per Katzmann J at [32] and [37]; and Australian Securities & Investment Commission v Soust (No 2) [2010] FCA 388 at [34]-[39], [65]-[66], [71] and [93]. 172 There has been no indication of contrition from Mr Arnold. He has made no statement either to the Commissioner or to the Court indicating a full appreciation of, and contrition for, his promotion of what was an obviously blatant, artificial and contrived scheme. Nor has he expressed any regret for the damage his actions have caused to the participants and to others. 173 In his opening submissions for the respondents' cases on liability, counsel for the respondents stated (at T 136.28-35) that: This case is not about getting a tax deduction where one is not deserved but, rather, that Mr Arnold has found a way to give every Australian access to earn a duly deserved tax deduction for a donation which saves lives. The DWB initiative is good for charities, good for the companies offering to sell their goods via long term low interest vendor financing and good for the donor as it enables them to actually afford to make donations. 174 Leaf Capital has similarly issued no apologies or statements of regret in relation to its involvement in the scheme. Its website is still accessible on the internet (http://www.leafcapital.com.au), with the following statement displayed prominently: CLICK HERE TO SEE OUR NEW VIDEO ABOUT HOW THE AUSTRALIAN TAXATION OFFICE IS TRYING TO STOP LIFE-SAVING GOODS FROM GOING TO THOSE SUFFERING IN AFRICA! 175 Donors Without Border has also issued no apologies or statements of regret in relation to its involvement in the scheme. Its website is also still accessible on the internet (http://www.dwb.org.au/) and includes the following statement under the tab "About us": As far as we are aware, Donors Without Borders is the only Australian non-profit initiative that focuses on donations of gifts-in-kind (goods) to registered Deductible Gift Recipients (Australian Tax Office registered charities) and fully complies with the gift deduction provisions set out in Division 30 of the Income Tax Assessment Act 1997 (ITAA 1997) as interpreted and applied by the ATO in Public Ruling TR2005/13 and as outlined in ATO Non-Profit News Service No. 0296 - Donations of property & vendor finance. Please consult with your finance professional and/or obtain independent legal advice regarding of the tax deductibility of any donation to charity. 176 Mr Arnold has returned to Canada. The Commissioner says that he may in future return to Australia and there remains a clear need for a strong message to be sent to Mr Arnold and the company respondents. I have serious reservations about such a need. I think it is highly unlikely, having regard to his experiences in this country while the DWB Scheme was under investigation by regulatory authorities, including the ATO and the Australian Federal Police, that Mr Arnold will ever return to this country, at least to promote or market "philanthropic tax schemes". In my view, having heard from Mr Arnold as to those experiences, they are far more likely to be a greater deterrent to his repeating his assailed conduct in this country than any penalty that might be imposed by this Court.

The amount of loss or damage incurred by scheme participants: s 290-50(5)(c) 177 It seems to me that this matter seeks to ascertain how much in economic terms participants lose by entering into the scheme. It is true, as the Commissioner says, that participants do not get a deduction for the whole or any part of the purchase price of the Treatment Kits, but they would not have got a deduction for the whole or any part of that purchase price had they not entered into the scheme. 178 Participants have actually outlaid 7.5% of that purchase price, for which they get no tax relief, so that that amount is an actual net loss. They have also outlaid a small amount in membership fees to Donors Without Borders, for which they receive no tax relief. 179 Participants incur a liability to MedAid for 92.5% of the purchase price of the Treatment Kits, but having regard to the terms and conditions of that obligation, its present value is negligible and, on the Commissioner's own case, will never have to be paid. It is, on any view, an insignificant liability. 180 Participants may have incurred shortfall penalties under Div 284 of Sch 1 to the TAA. Participants also donated small cash donations which, arguably, they would not have donated had they not entered into the scheme.

The nature and extent of the contravention: s 290-50(5)(d) 181 This matter, and a number of the following matters to which the Court is entitled to have regard under s 290-50(5), have already been canvassed at length. 182 There can be no argument that the nature and extent of Mr Arnold's contravention was both substantial and extensive. His conduct, constituting the contravention, not only by him, but by Leaf Capital and Donors Without Borders as well, touched every aspect of the DWB Scheme and its marketing to prospective participants. 183 Equally, there can be no argument that the nature and extent of the contraventions of both Leaf Capital and Donors Without Borders were both substantial and extensive.

The circumstances in which the contraventions took place, including the deliberateness of the entity's conduct and whether there was an honest and reasonable mistake of law: s 290-50(5)(e) 184 The circumstances in which the contraventions took place have already been canvassed at some length. There can be no issue that the conduct of Mr Arnold, Leaf Capital and Donors Without Borders was anything but deliberate and no "honest and reasonable mistake of law" has been relied upon to excuse the contraventions; if there is such a mistake, it has not been identified.

The period over which the conduct extended: s 290-50 (5)(f) 185 Mr Arnold's evidence was that it was in February 2009 that he first travelled to Australia for the purposes of investigating whether the scheme could be established here. 186 However, the participants joined the scheme in the relatively short period of three months between May 2010 and July 2010.

Whether the entity took any steps to avoid the contravention: s 290-50(5)(g) 187 Not only is there no evidence that any of the respondents took any steps to avoid the contraventions, the respondents' cases were predicated solely on the basis that there were no contraventions.

Whether the entity has previously been found by the Court to have engaged in the same or similar conduct: s 290-50(5)(h) 188 It is not in dispute that none of the respondents has previously been found by this Court to have engaged in the same or similar conduct.

The degree of the entity's co-operation with the Commissioner: s 290-50(5)(i) 189 Co-operation with authorities in the course of investigations and subsequent proceedings will be a mitigating factor that will almost certainly reduce the penalty that would otherwise be imposed: Clean Energy Regulator at [118] and the cases there cited. The reduction reflects the fact that such co-operation: (1) Is evidence of contrition and an acceptance of responsibility; (2) furthers the object of the legislation; (3) reflects a willingness to facilitate the course of justice. See generally NW Frozen Foods Pty Ltd v Australian Competition and Consumer Commission (1996) 71 FCR 285 at 293-294; Minister for Industry, Tourism & Resources v Mobil Oil Australia Pty Ltd [2004] FCAFC 72 at [55] and Mornington Inn Pty Ltd v Jordan (2008) 168 FCR 383 per Stone and Buchanan JJ at [73]-[74]. 190 As to the last of the above four matters, it is sometimes observed that one of the advantages of early admissions is the savings in relation to the cost of a contested hearing: Mobil Oil at [55]; Australian Competition & Consumer Commission v Qantas Airways Limited [2008] FCA 1976 at [67]. However, in Mornington Inn, Stone and Buchanan JJ noted (at [74]) that it is not the mere savings in cost which attract the discount, but rather the fact that the plea may be seen as a willingness to facilitate the course of justice. 191 The respondents did not co-operate with the Commissioner either in relation to his investigations into the scheme or in relation to the conduct of these proceedings. 192 As to these proceedings: (1) The respondents by their pleadings denied essential elements of the Commissioner's case and maintained those denials after the Commissioner had filed his evidence. The elements denied included: (a) That there was a "scheme": paras 3(a), 3(b), 14(b), 15(b), 16(a) of the Amended Defence; (b) that there was a "tax exploitation scheme": para 3(c) of the Amended Defence; (c) that the respondents were persons who entered into or carried out the scheme: para 16 of the Amended Defence; (d) that one or more of the persons who entered into or carried out the scheme did so with the sole or dominant purpose of the participants obtaining a tax benefit from the scheme: para 17 of the Amended Defence; (e) that the deductions that the participants claimed or would have been expected to have claimed were not allowable: para 18 of the Amended Defence; and (f) that each of the respondents was a "promoter of a tax exploitation scheme": para 21 of the Amended Defence; (2) the respondents did not formally agree on any of the key facts; and (3) the respondents did not take the approach, as they could have, of admitting liability and putting only the quantum of penalties in issue. 193 Had the respondents co-operated by admitting some of the elements of the cases against them (for example, the existence of a scheme), or by admitting liability, the public cost of these proceedings (both in terms of the Commissioner's legal costs and the Court's resources) would have been reduced, and as a result the respondents would have been entitled to a discount on the penalties to be imposed. Having regard to the way in which the respondents chose to defend the cases against them, no such discounts are available to them.

Lack of remorse or contrition 194 As noted above, there is no indication of any remorse or contrition by any of the respondents. 195 In Soust, Goldberg J indicated that lack of remorse: (1) Means that the character of the offender can become a more significant issue than would ordinarily be the case: [28]-[37]; (2) increases the need for specific deterrence: [38]-[39]; [60], [65]; (3) can be an aggravating feature (not just the absence of a mitigating feature): [38]-[39]; (4) will not be explicable by reference to fear of a criminal prosecution, particularly where legislation prevents evidence in civil penalty proceedings from being used in criminal proceedings: [42]-[46] and [70(a)]; (5) may not be explicable by reference to a loss of indemnity under any insurance policy: [70(b)]; and (6) renders any character evidence of "limited assistance": [57]-[58]. 196 In ACE Insurance Limited v Trifunovski (No 2) [2012] FCA 793, Perram J said of contrition by corporations: [113] It is not clear to me how an artificial construct such as a corporation can experience the complex human emotion of contrition made up, as it is, of an amalgam of distinctly human emotions such as regret, shame and sympathy. I do not doubt that a corporation may exhibit signs of regret but it is too much to expect that such an artificial construct can be meaningfully contrite. [114] For civil penalty cases involving corporations it would be more coherent to ask only whether the corporation has changed its behaviour. Nothing more can be expected; a person who does not literally or physically exist may not wear sackcloth. [115] In this case there is a difficulty generated by the bifurcated hearing which has occurred. In the first judgment I concluded that the agents were employees. That issue will certainly be tested on appeal. In the meantime Combined has done nothing to change its arrangements. Given the certainty of an appeal I do not regard this as showing an unwillingness to bend to the judgment. I will treat this matter as neutral. 197 Almost immediately afterwards a different view was taken by Katzmann J in CFME Union v Pilbara (No 4) where her Honour stated: [34] While I naturally accept the force of Perram J's remarks, I do not agree that nothing more can be expected of a corporation than that it has changed its behaviour. A corporation may admit its wrongdoing and spare the other parties the costs of prosecuting the case. In a jurisdiction, such as this, where costs can only be awarded in exceptional cases that is a meaningful expression of contrition. The corporation may also offer recompense. It may apologise. The decision-makers themselves could offer apologies. It may introduce precautions to guard against the risk of reoffending. In the present case, evidence was led (and not contradicted) that the General Manager, Ben Van Roon, acknowledged that Mr Hamilton should not have rejected Mr Lamberth's nomination for the safety and health committee. In the circumstances, the respondent could (and should) have stopped the ballot. [35] Yet, the respondent did nothing. Moreover, it sought to shift all responsibility away from itself to the employee it wronged. 198 In contrast to Soust, other authority is to the effect that absence of contrition cannot aggravate, but its presence can mitigate: Automotive, Food, Metals, Engineering, Printing and Kindred Industries Union v Visy Packaging Pty Ltd (No 4) Union [2013] FCA 930 at [51] citing BHP Steel (AIS) Pty Ltd v Construction, Forestry, Mining and Energy [2001] FCA 336 per Kiefel J. 199 In the present matter, none of the respondents have expressed remorse or contrition.

Financial circumstances of the respondents 200 The overarching requirement for a penalty which achieves strong deterrence will frequently limit the weight that can properly be given to a contravener's financial circumstances. This is particularly so in the present case, where the respondents' contraventions call for penalties which will operate as a powerful deterrent to others who may likewise be tempted to deliberately and wilfully disregard their legal obligations. 201 The proper balance between achieving general deterrence and a consideration of financial circumstances was explained in Australian Competition and Consumer Commission v High Adventure Pty Ltd [2006] ATPR 42-091 where the Full Court relevantly stated (at [11]): [A]s deterrence (especially general deterrence) is the primary purpose lying behind the penalty regime, there inevitably will be cases where the penalty that must be imposed … may be so high that the offender will become insolvent. That possibility must not prevent the Court from doing its duty for otherwise the important object of general deterrence will be undermined. 202 The underpinning rationale for this requirement was explained by Merkel J in Australian Competition and Consumer Commission v Leahy Petroleum Pty Ltd (No 2)& Ors (2005) 215 ALR 281 relevantly at [9] as follows: [A] contravening company's capacity to pay a penalty is of less relevance to the objective of general deterrence because that objective is not concerned with whether the penalties imposed have been paid. Rather, it involves a penalty being fixed that will deter others from engaging in similar contravening conduct in the future. Thus, general deterrence will depend more on the expected quantum of the penalty for the offending conduct, rather than on a past offender's capacity to pay a previous penalty. … 203 There are many other cases in which the Court has emphasised that the financial circumstances of the contraveners will be a factor of little weight against the need for general deterrence: see, for example, Mornington Inn at [69] per Stone and Buchanan JJ and Australian Competition and Consumer Commission v SIP Australia Pty Limited [2003] FCA 336 at [59]. Thus penalties are frequently imposed on contraveners who have no capacity to pay them. For example: (1) In Secretary, Department of Health and Ageing v Prime Nature Prize Pty Ltd (in liquidation) [2010] FCA 597, penalties of $7,250,500 and $575,250 were imposed upon a company and its director respectively. The fact that the company was in liquidation and the director was expected to go into bankruptcy was held to be "of little relevance" (at [58]-[59]); (2) in Australian Securities & Investments Commission v Loiterton (2004) 50 ACSR 693, penalties of $400,000 and $285,000 were imposed upon two individual respondents despite the fact that they had been made bankrupt; (3) in Leahy Petroleum Pty Ltd (No 2), the individual respondents received penalties of $100,000 to $200,000, despite none of them having a capacity to pay those amounts; (4) penalties are regularly imposed upon corporations which are in liquidation and have no capacity to pay the amounts in question: for example, Australian Competition & Consumer Commission v The Vales Wine Co Pty Ltd [1996] ATPR 41-528; Australian Competition & Consumer Commission v Fila Sport Oceania Pty Ltd (Administrators Appointed) [2004] FCA 376; Australian Competition and Consumer Commission v GIA Pty Ltd (in liq) [2002] FCA 1298; Australian Competition & Consumer Commission v Chaste Corporation Pty Ltd (in liquidation) [2005] FCA 1212. 204 The need for general deterrence must, of course, be balanced by an insistence that the penalty not be "so high as to be oppressive": see Trade Practices Commission v Stohl Chain Saws (Aust) Pty Ltd [1978] ATPR 17,882 at 17,896; NW Frozen Foods per Burchett and Kiefel JJ at 293. However, this principle requires only that the penalty be no higher than what is required to achieve general deterrence. It does not require that the proper amount necessary to achieve general deterrence be mitigated by reference to notions of financial hardship. The result is that "a penalty that is no greater than is necessary to achieve the object of general deterrence, will not be oppressive": see Leahy Petroleum at [9].

Commissioner's submissions on penalty 205 The Commissioner submitted that having regard to the factors referred to, and making due allowance for the relevant features of the contraventions, penalties of appropriate deterrent value should be assessed against the following guiding principles.

Deterrence 206 First, the requirements of deterrence are such that the total penalties imposed on all respondents should be substantially more than the total consideration "received or receivable (directly or indirectly)" by the respondents and their associates. In Clean Energy Regulator, Foster J recorded at [156] his acceptance of the submission by the Regulator that: … The penalties to be imposed must leave no doubt in the minds of other would-be contravenors that such conduct will not pay. 207 Potential promoters must be left in no doubt that acting on the commercial temptation to engage in the proscribed conduct in relation to tax exploitation schemes, so as to realise the significant potential rewards that can be available, will result in substantial penalties. The penalties need to be substantial enough to persuade potential promoters that it is not worth the risk of whether a tax exploitation scheme will escape detection by the Commissioner.

Allowance should be made for double counting of consideration 208 Secondly, while the calculation of the statutory maximum amount of penalties for Mr Arnold necessarily includes some double counting of the consideration (see [158]-[159] above), it is appropriate, when determining the appropriate penalty for each respondent, to make allowance for the fact that the consideration in respect of the scheme moved between a number of associated entities.

Penalties for Mr Arnold should reflect his multiple contraventions 209 Thirdly, the penalties imposed on Mr Arnold should reflect his three contraventions; that is, that his conduct both in relation to himself and as the controller of Leaf Capital and Donors Without Borders, resulted in three entities being promoters of tax exploitation schemes: (1) Himself; (2) Leaf Capital; and (3) Donors Without Borders.

Non-Application of the course of conduct principle 210 Fourthly, for a number of reasons it will not be appropriate to apply the course of conduct principle - to treat the three contraventions by Mr Arnold as being closely related and forming part of a "course of conduct", rather than as separate contraventions arising from separate acts. First, a course of conduct principle is only applicable where there is a need to avoid double punishment. In Clean Energy Regulator, Foster J described the course of conduct principle as follows: [75] [W]here multiple offences truly represent only one multifaceted course of conduct, the course of conduct principle is a "tool of analysis" which can be used to avoid any double punishment for those parts of the legally distinct offences which involve overlap in wrongdoing … [76] [T]he same principles are now accepted as applying in the civil penalty context … the question in each case is whether the contravention should be treated as being truly a single course of conduct or whether the contravention's separate character should be maintained when penalties are imposed. … this is a factual enquiry to be made having regard to all of the circumstances of the case. 211 In the present matter, the contraventions by Mr Arnold identified were a result of separate and distinct conduct by Mr Arnold. This is reflected in Mr Arnold's decision to use corporate vehicles to carry out elements of the scheme, for the advantages he thought they conferred. The roles of Leaf Capital and Donors Without Borders were distinct, although both entities were involved in marketing the scheme: (1) Leaf Capital's principal function was to market the scheme; and (2) Donors Without Borders' functions included marketing the scheme, but its marketing materials suggested that its role included protecting the interests of participants. 212 The acts which resulted in the contraventions referred to, while related, were nonetheless independent and distinct acts. 213 Secondly, even if the course of conduct principle is applicable in the circumstances here, the proposed penalties would not need further adjustment because they take into account the movement of money from entity to entity. This avoids double punishment.

It is appropriate to penalise all the individuals and entities involved 214 Fifthly and further to the fourth point, while Mr Arnold was the controller of Leaf Capital and Donors Without Borders, it is nevertheless appropriate that penalties should also be imposed on those corporations, for the following reasons: (1) Parliament has provided under Div 290 for the separate liability of, and higher penalties for, corporations; (2) individuals usually choose to use corporate vehicles for the commercial and practical benefits they confer. Given these substantial commercial and practical benefits, a corporation should also bear the regulatory risk which accompanies its use; and (3) the financial rewards from the contravening behaviour will often, at least in the first instance, accrue to the corporation.

Consideration and analysis 215 I agree with the Commissioner's submission in relation to the applicability of these guiding principles, other than the fourth, namely, that the course of conduct principle is not applicable in assessing penalties against Mr Arnold for his conduct that resulted in not only him, but also Leaf Capital and Donors Without Borders, being a promoter of a tax exploitation scheme in contravention of s 290-50(1) of Sch 1 to the TAA. 216 In my view, the conduct of Mr Arnold, whether it was conduct on his part, conduct as the guiding mind and will of Leaf Capital or conduct as the guiding mind and will of Donors Without Borders was so integrated in its nature, planning, sequence, timing and supervision that it is not possible, and the Commissioner did not submit to the contrary, to identify sets or sequence of acts and characterise those as being totally referrable to Mr Arnold, or Leaf Capital, or Donors Without Borders. In my view, the acts constituting the conduct of Mr Arnold cannot be allocated as being exclusive to himself or either of the two corporate respondents; their respective roles in the DWB Scheme were so overlapping in the conduct called for from Mr Arnold that each and every act on his part was related to the other acts on his part; they were all part of the same course of conduct.

Assessment of penalties 217 The Commissioner made submissions on the range of penalties that the Court should order each of Mr Arnold, Leaf Capital and Donors Without Borders to pay. 218 In the case of Mr Arnold, the Commissioner submitted that the total penalties for the three contraventions should be in the range of $1,210,000 to $1,500,000. In my considered assessment, it should be at least $1,000,000, but I am not persuaded that it should be any more. 219 In the case of Leaf Capital, the Commissioner submitted that it should be in the range of $595,000 to $1,190,000. In my considered assessment, it should be at least $400,000, but I am not persuaded it should be any more. 220 In the case of Donors Without Borders, the Commissioner submitted that it should be in the range of $302,000 to $509,000. In my considered assessment, it should be in at least $100,000, but I am not persuaded it should be any more.

Costs 221 As well as making orders in those terms, the respondents must pay the Commissioner's costs, as agreed or taxed. I certify that the preceding two hundred and twenty-one (221) numbered paragraphs are a true copy of the Reasons for Judgment herein of the Honourable Justice Edmonds.