Commissioner of Taxation v Bakarich

Federal Court of Australia|2024-12-16|Before: Commission J, Kennett J

Introduction 1 The applicant (the Commissioner) alleges contraventions of s 290-50(1) of Schedule 1 to the Taxation Administration Act 1953 (Cth) (the TAA) on the part of each respondent, by their conduct in promoting tax exploitation schemes that had the dominant purpose of obtaining research and development (R&D) tax offsets for taxpayers where it was not reasonably arguable that those claims were available at law. These contraventions are admitted by the first and fourth respondents. The Commissioner seeks civil penalty orders pursuant to s 290-50(3) of Schedule 1 to the TAA, and declarations of contraventions. 2 The factual background to the proceeding is summarised in two statements of facts agreed pursuant to s 191 of the Evidence Act 1995 (Cth) (the SOAFs). The Commissioner and the first respondent (Mr Bakarich) agreed to a statement of facts (the Bakarich SOAF), which was filed on 3 October 2023. The Commissioner and the fourth respondent (Ms Nguyen) agreed to a statement of facts (the Nguyen SOAF), which was filed on 16 June 2022. The SOAFs are lengthy and do not need to be canvassed in detail in order to articulate my reasons for the orders that will be made. However, where pecuniary penalties are imposed, there is virtue in members of the public being able to know in some detail what was the conduct that attracted the penalties. The Bakarich SOAF and the Nguyen SOAF are therefore reproduced in full as Annexures A and B to these reasons. 3 I set out below a brief summary of the events leading to the litigation. 4 Mr Bakarich was the sole director, secretary and shareholder of the second respondent, The Dream Consortium Pty Ltd (TDC), from the time of its incorporation on 16 March 2014 to 20 August 2019 when he was declared a bankrupt. Mr Bakarich had final responsibility for and control over the work of TDC during the relevant period in which the tax exploitation schemes occurred. In around December 2014, Mr Bakarich and Ms Nguyen resolved that they would carry on business together. That business was to be an accounting practice run by Ms Nguyen in association with TDC, providing accounting and finance functions to small businesses, and would trade as The Dream Accountants (the third respondent, TDA). Following an initial period during which the business obtained the necessary licences and registrations (including Ms Nguyen becoming registered as a tax agent), TDA was incorporated on 29 July 2015. Mr Bakarich and Ms Nguyen were the directors of TDA, and Ms Nguyen was also the secretary. TDA was subject to their control. The issued share capital in TDA was owned 50% by Ms Nguyen and 50% by TDC, with each holding 50 fully paid and beneficially owned shares. 5 In the course of their businesses, the respondents were involved in the provision of R&D services to clients, and a similar process was followed in the provision of these services in relation to each of the schemes: (a) A prospective client was referred to TDC by word of mouth or by a referral partner, or would contact TDC after seeing its published marketing material which advertised R&D tax incentive services. A prospective client would attend an initial meeting to discuss the R&D tax incentive scheme with Mr Bakarich and/or other TDC employees, who would promote TDC as R&D specialists with all the necessary approvals and accreditations and extensive experience in making R&D claims. They would discuss the possible benefits to the client of R&D tax incentives, ask general questions about the client's business operations, advise them that they were eligible, represent that TDC could assist and explain that TDC would charge a fee based on a percentage of any R&D tax offset obtained. (b) At the request of Mr Bakarich or another TDC employee, the client would provide information about their business via an online questionnaire, including their operations and finances and how their company was being innovative in its business methods. This would be used by TDC to prepare an application for registration of R&D activities and an R&D Tax Incentive Schedule (R&D Schedule) for the taxpayer (by apportioning line items in the taxpayer's profit and loss statement according to an estimate of how much those items were devoted to R&D activities). (c) When TDC lodged the application for registration of R&D activities with AusIndustry on the client's behalf, the application would list a TDC or TDA employee as the contact person and indicate that Ms Nguyen as a registered tax agent had provided advice in relation to the application. Such advice was not actually provided to the client. (d) Upon confirmation of registration with AusIndustry, an employee of TDC or TDA would inform the client of the outcome, provide an R&D Schedule (prepared by TDA) to the taxpayer, and either request the documentation be provided to the client's accountant to include in the income tax return for the relevant year, or seek instructions for TDA to file the tax return on the taxpayer's behalf. (e) Once the client informed TDC that the tax return had been lodged with the Commissioner, or TDA had lodged the tax return, TDC would issue an invoice to the client and follow up until it was paid. (f) TDC would then pay a fee to TDA (by way of cash deposit or recorded as a receivable in TDA's accounting ledger) for the work done on the taxpayer's claim for the R&D incentive. 6 It is common ground that Mr Bakarich, TDC and TDA contravened s 290-50(1) in relation to the promotion of 12 tax exploitation schemes involving 11 taxpayers across the 2015 and 2016 financial years and that Ms Nguyen did so in relation to 3 taxpayers across the 2015 financial year. Approximately $591,000 was charged to clients for the schemes in which Mr Bakarich was involved and approximately $16,000 for the schemes in which Ms Nguyen was involved. Had the schemes involving Mr Bakarich gone undetected, scheme participants would have been able to claim around $7 million in refundable tax offsets to which they were not entitled. 7 Following an investigation commenced by the Australian Taxation Office (the ATO) in 2016, separate proceedings were instigated in this Court against each of the respondents between 28 February 2020 and 8 May 2020. These proceedings were consolidated by order of Perram J on 17 June 2020. 8 Mr Bakarich actively resisted the allegations against him, initially with the assistance of solicitors and then, from 31 May 2023 as a litigant in person. At a pre-trial case management hearing on 25 August 2023 the Commissioner's counsel indicated that discussions were on foot between the Commissioner and Mr Bakarich that may obviate the need for the three week hearing which had been set down, but it was not until early on the morning of 18 September 2023 - the date the trial was set to commence - that the parties notified my chambers that an in-principle agreement on contravention and penalty had been reached between them. The Commissioner and Mr Bakarich now jointly ask the Court to make declarations by consent and impose an agreed penalty of $4,500,000 upon Mr Bakarich in relation to the promotion of 12 tax exploitation schemes involving 11 taxpayers across the financial years ended 30 June 2015 and 30 June 2016. 9 TDC and TDA both entered external administration on 27 January 2017. They are defunct corporate entities and have not taken any positive steps in relation to the proceedings. According to [16] of the Bakarich SOAF, the liquidations of TDC and TDA are on hold pending the outcome of this proceeding. At the time of the consolidation of the proceedings on 17 June 2020, leave was granted for the proceedings to continue as against TDC and TDA pursuant to s 500(2) of the Corporations Act 2001 (Cth). This was on the condition that the Commissioner not take any steps to enforce any order for payment of any monetary amount by TDC and TDA without further leave of the Court. The Commissioner submits that declarations should be made and a pecuniary penalty of $4,500,000 imposed on each of TDC and TDA in relation to the promotion of the same tax exploitation schemes that Mr Bakarich admits to. 10 On 15 June 2022 an agreement was reached between the Commissioner and Ms Nguyen, who together applied to the Court for declarations by consent identifying three contraventions by Ms Nguyen of s 290-50(1) of Schedule 1 of the TAA, and the imposition of an agreed penalty of $100,000. On 20 June 2022, Perram J noted that, subject to further order, the issue of penalty in respect of Ms Nguyen would be determined on the papers and made timetabling orders for the filing of the Nguyen SOAF, joint submissions and proposed orders. On the basis that the declarations and penalty orders sought would require conclusions on issues that are live in the proceedings as against Mr Bakarich, TDC and TDA, Perram J made an order on 5 September 2022 standing over the application until after the determination of the proceedings against the other respondents: Commissioner of Taxation v Bakarich (Penalty) [2022] FCA 1032. 11 On 18 September 2023, I made programming orders and listed the proceeding for hearing on 6 October 2023 in relation to the penalties sought against each of the respondents. The Commissioner consequently filed the Bakarich SOAF, joint submissions and proposed orders in relation to the contraventions and relief sought against Mr Bakarich, and the Commissioner's submissions on penalties sought against TDC and TDA. On 29 September 2023, I granted a request from Ms Nguyen to be excused from appearing at the hearing and for her application to be determined on the papers. At the hearing on 6 October 2023, the Commissioner made brief oral submissions relating to the alleged contraventions by TDC and TDA, and the penalties sought against Mr Bakarich, TDC and TDA.

The contraventions 12 Section 290-50(1) of Schedule 1 to the TAA prohibits an entity from engaging in conduct that results in that entity (or another entity) being the "promoter" of a "tax exploitation scheme". Section 290-60 defines what an entity being a "promoter" entails: in short, marketing the scheme or encouraging its growth or interest in it; receiving (or an associate receiving) a benefit in respect of that marketing or encouragement; and, having regard to all relevant matters, it being reasonable to conclude that the entity has had a substantial role in respect of that marketing or encouragement. Section 290-65(1) defines a "tax exploitation scheme" as follows. 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. Note: The condition in paragraph (b) would not be satisfied if the implementation of the scheme for all participants were in accordance with binding advice given by or on behalf of the Commissioner of Taxation (for example, if that implementation were in accordance with a public ruling under this Act, or all participants had private rulings under this Act and that implementation were in accordance with those rulings). 13 As noted earlier, the Commissioner alleges that Mr Bakarich, TDC and TDA contravened s 290-50(1) in relation to the promotion of 12 tax exploitation schemes involving 11 taxpayers across the 2015 and 2016 financial years and that Ms Nguyen did so in relation to 3 taxpayers across the 2015 financial year. Mr Bakarich and Ms Nguyen admit these allegations. The schemes were substantially similar, and I have outlined their shared features above at [5]. It is not necessary to set out the details of each scheme (see [18]-[19] for discussion of the applicability of the SOAFs to TDC and TDA).

Mr Bakarich 14 Mr Bakarich admitted contraventions of s 290-50(1) in relation to the promotion of 12 tax exploitation schemes (at [3], [5]-[6] of the Bakarich SOAF). Mr Bakarich admits that he contravened s 290-50(1) of Schedule 1 to the TAA by engaging in conduct which resulted in him being a promoter of 12 tax exploitation schemes to Basebuild Pty Ltd (Basebuild), BAS Services Australia Pty Ltd (BASSA), Compass Global Markets Pty Ltd (Compass), Create Construction Australia Pty Ltd (Create), Creative Ideas Constructions Pty Ltd (CIC), Harbour Business Solutions Pty Ltd (HBS), Implemented Portfolios Pty Ltd (Implemented Portfolios), Learoy Poindexter Pty Ltd (Learoy), Precision Air Electrical Pty Ltd (PAE), Precision Air Pty Ltd (Precision Air) and Signature Cellars Pty Ltd (Signature Cellars). The schemes involved claims under Division 355 of the Income Tax Assessment Act 1997 (Cth) relating to R&D activities (R&D claims), where it was not reasonably arguable that those claims were available at law. Mr Bakarich marketed and encouraged interest in those schemes (or caused other entities to engage in such conduct), and received, or was entitled to receive, directly or indirectly, consideration in respect of that marketing and encouragement. 15 Mr Bakarich also admitted that his conduct in respect of each of the schemes involved tax evasion. In general terms, "tax evasion" (as distinct from tax avoidance) is present when a scheme depends for its success on the Commissioner never discovering the true position. Applying that characterisation to the schemes emphasises the need to send a strong message that engaging in promotion of schemes of this kind will not be tolerated. It also has a statutory consequence, in that, by operation of s 290-55(6) of Sch 1, the time limit for the commencement of proceedings by the Commissioner in s 290-55(4) does not apply and does not need to be considered here.

Ms Nguyen 16 Ms Nguyen admitted that she contravened s 290-50(1) by engaging in conduct that resulted in her being a promoter of three tax exploitation schemes (to Compass, HBS and Implemented Portfolios) (at [3]-[4] of the Nguyen SOAF). The schemes involved R&D claims where it was not reasonably arguable that those claims were available at law. Ms Nguyen marketed and encouraged interest in the schemes (or caused other entities to engage in such conduct), and received, or was entitled to receive, directly or indirectly, consideration in respect of that marketing and encouragement. The Commissioner does not allege that the schemes as they relate to Ms Nguyen involved tax evasion or that she knew of false representations.

TDC and TDA 17 The Commissioner alleges that TDC and TDA contravened s 290-50(1) of Schedule 1 to the TAA by promoting the 12 tax exploitation schemes listed in [14]. As stated above at [9], TDC and TDA are defunct corporate entities and the Commissioner's counsel mentioned at the hearing that they have taken no positive steps in relation to the proceeding and would not be. 18 TDC and TDA are not parties to the SOAFs. However, counsel for the Commissioner indicated at the hearing that he wished to rely on the Bakarich SOAF in relation to the alleged contraventions and penalties sought vis-Ă -vis TDC and TDA. Counsel put the propositions as submissions founded on the evidence that is comprehensively referenced in the footnotes of the Bakarich SOAF. 19 I am satisfied that the SOAF as agreed between Mr Bakarich and the Commissioner reflects the factual findings that should be made in respect of TDC and TDA because there is significant overlap with Mr Bakarich's conduct. Conduct of Mr Bakarich was also, in relevant respects, conduct of TDC and/or TDA. Although they are parties to the proceeding, they have chosen not to appear or to contradict the conclusions drawn from the evidence by the Bakarich SOAF. I make findings in the terms set out in the Bakarich SOAF in relation to TDC and TDA. 20 Based on these findings, I am satisfied that TDC and TDA have engaged in conduct which resulted in promoting the 12 tax exploitation schemes, therefore contravening s 290-50(1).

Principles relating to pecuniary penalties 21 A civil penalty may be ordered in relation to a contravention of s 290-50(1)-(2) pursuant to s 290-50(3)-(5). Civil penalty (3) If the Federal Court of Australia is satisfied, on application by the Commissioner, that an entity has contravened subsection (1) or (2), the Court may order the entity to pay a civil penalty to the Commonwealth. Amount of penalty (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. Principles relating to penalties (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. 22 Section 290-50(5) of Schedule 1 to the TAA requires the Court to have regard to "all matters it considers relevant" in determining the appropriate penalty, and provides a non-exhaustive list of factors the Court may have regard to. 23 Of these factors, (b) is to be given the greatest weight. It is well established that the purpose of a civil penalty is "primarily, if not solely, the promotion of the public interest in compliance with the provisions of the Act by the deterrence of further contraventions of the Act" (Australian Building and Construction Commissioner v Pattinson [2022] HCA 13; 274 CLR 450 (Pattinson) at [9] (Kiefel CJ, Gageler, Keane, Gordon, Steward and Gleeson JJ)). The objects of Division 290, which s 290-5(a) of Schedule 1 to the TAA relevantly sets out as, are: (a) to deter the promotion of tax avoidance *schemes and tax evasion schemes; and (b) to deter the implementation of schemes that have been promoted on the basis of conformity with a *product ruling in a way that is materially different from that described in the product ruling. 24 The penalty should "put a price on contravention that is sufficiently high to deter repetition by the [contravener] and by others who might be tempted to contravene" (Trade Practices Commission v CSR Ltd [1991] ATPR 41-076 at 52, 152 (French J)) and must not be seen as an "acceptable cost of doing business" (Singtel Optus Pty Ltd v Australian Competition and Consumer Commission [2012] FCAFC 20; 287 ALR 249 at [62] (Keane CJ, Finn and Gilmour JJ)). It should be no greater than necessary to achieve deterrence and should not be so high as to be oppressive (NW Frozen Foods Pty Ltd v Australian Competition and Consumer Commission (1996) 71 FCR 285 (NW Frozen Foods) at 293 (Burchett and Kiefel JJ, Carr J agreeing). General deterrence is important in the context of tax exploitation schemes (see Commissioner of Taxation v Arnold (No 2) [2015] FCA 34; 324 ALR 59 at [165]-[170] (Edmonds J)) and particularly for those that exploit R&D tax incentives (see Federal Commissioner of Taxation v International Indigenous Football Foundation Australia Pty Ltd [2018] FCA 528; 107 ATR 769 at [51]-[62] (Logan J)) because: (a) it puts promoters at risk financially to counterbalance the asymmetry of promoters profiting while investors may be subject to penalties; (b) it is difficult to detect ineffective tax schemes; (c) the schemes impose significant compliance costs on the ATO and the community; and (d) the schemes have significant consequences for consolidated revenue. 25 Where contraventions arise from a "course of conduct", the penalty imposed "should reflect that fact, otherwise there is a risk that the respondent will be doubly punished in respect of the relevant acts or omissions that make up the multiple contraventions" (Australian Building and Construction Commissioner v Construction, Forestry, Mining and Energy Union [2017] FCAFC 113; 254 FCR 68 at [148] (Dowsett, Greenwood and Wigney JJ)). 26 In cases where multiple separate penalties are sought to be imposed on the contravener, the "totality" principle requires the Court to be satisfied that the total penalty is not out of proportion to the overall misconduct (Australian Competition and Consumer Commission v Master Wealth Control Pty Ltd (Penalty) [2024] FCA 795 at [26] (Jackman J)) by assessing the penalties as a whole to ensure that they are proportionate to the gravity of the contraventions. 27 Although the proposed penalties are agreed as between the Commissioner and Mr Bakarich and Ms Nguyen respectively, the appropriate penalty amount is ultimately a matter for the Court, having regard to all relevant matters. The Court should not act as a mere "rubber stamp". Some of the established considerations that the Court should take into account when determining whether the agreed penalty is appropriate are as follows. (a) The appropriate penalty is not a "precise figure", but rather a figure that falls within a "permissible range in all the circumstances" (NW Frozen Foods at 290-291). (b) The Court should not ask whether it would have arrived at the same penalty in the absence of agreement and it "should not reject an agreed figure simply because it would have been disposed to select some other figure" (Minister for Industry, Tourism and Resources v Mobil Oil Australia Pty Ltd [2004] FCAFC 72; ATPR 41-993). (c) The Court "should generally recognise that the agreed penalty is most likely the result of compromise and pragmatism on the part of the regulator, and to reflect, amongst other things, the regulator's considered estimation of the penalty necessary to achieve deterrence and the risks and expense of the litigation had it not been settled" (Volkswagen Aktiengesellschaft v Australian Competition and Consumer Commission [2021] FCAFC 49; 284 FCR 24 (Volkswagen) at [129] referring to Commonwealth v Director, Fair Work Building Industry Inspectorate [2015] HCA 46; 258 CLR 482 (Agreed Penalties Case) at [109])). 28 Where the Court is "persuaded of the accuracy of the parties' agreement as to facts and consequences, and that the agreed penalty jointly proposed is an appropriate remedy in all the circumstances", it is "highly desirable" for the Court to impose the proposed penalty (see Volkswagen at [126] referring to the Agreed Penalties Case at [58]). It was also emphasised in the Agreed Penalties Case (at [46]) that accepting proposed agreed penalties promotes the predictability of outcomes for regulators and wrongdoers which may encourage entities to acknowledge contraventions and assist in avoiding lengthy litigation.

Maximum penalty 29 Section 290-50(4) of Schedule 1 to the TAA as it existed at the relevant times (see above at [21]) prescribes the maximum penalty for a contravention of s 290-50(1) as the greater of 5,000 or 25,000 penalty units (for an individual or a body corporate respectively) and twice the consideration received or receivable by the entity and associates of the entity in respect of the scheme. The amount of a penalty unit is fixed by s 4AA of the Crimes Act 1914 (Cth), with the appropriate value of a penalty unit being that which was in place at the time of the contraventions. The last alleged promoting conduct for the 12 schemes occurred between November 2015 and October 2016 for Mr Bakarich, TDC and TDA and between May 2016 and September 2016 for Ms Nguyen, at which time a penalty unit for individuals and bodies corporate was $180.00 (see Crimes Legislation Amendment (Penalty Unit) Act 2015 (Cth), Sch 1, Item 5). 30 In Pattinson (at [53]), the High Court approved the following statement by the Full Court in Australian Competition and Consumer Commission v Reckitt Benckiser (Australia) Pty Ltd [2016] FCAFC 181; 340 ALR 25 at [155]-[156] (Jagot, Yates and Bromwich JJ) regarding the role of the maximum penalty amount when determining a civil penalty amount. The reasoning in [Markarian v The Queen [2005] HCA 25; 228 CLR 357] about the need to have regard to the maximum penalty when considering the quantum of a penalty has been accepted to apply to civil penalties in numerous decisions of this Court both at first instance and on appeal. As Markarian makes clear, the maximum penalty, while important, is but one yardstick that ordinarily must be applied. Care must be taken to ensure that the maximum penalty is not applied mechanically, instead of it being treated as one of a number of relevant factors, albeit an important one. Put another way, a contravention that is objectively in the mid-range of objective seriousness may not, for that reason alone, transpose into a penalty range somewhere in the middle between zero and the maximum penalty. Similarly, just because a contravention is towards either end of the spectrum of contraventions of its kind does not mean that the penalty must be towards the bottom or top of the range respectively. However, ordinarily there must be some reasonable relationship between the theoretical maximum and the final penalty imposed. (Citations omitted and emphasis added.) 31 The following table, reproduced from the Commissioner and Mr Bakarich's joint submissions on contravention and relief and the Commissioner's submissions in relation to TDC and TDA, shows the maximum penalty for each contravening scheme for individuals and bodies corporate calculated by reference to penalty units, the consideration receivable by TDC, and the consideration that was actually received by TDC. Scheme Individual maximum (penalty units) Body corporate maximum (penalty units) Consideration receivable by TDC (excl GST) Monies actually received by TDC (excl GST) Basebuild $900,000 $4,500,000 $237,274.05 $237,274.05 BASSA $900,000 $4,500,000 $5,613.98 $5,613.98 Compass $900,000 $4,500,000 $17,103.94 $Nil Create $900,000 $4,500,000 $8,782.72 $Nil CIC $900,000 $4,500,000 approx. $2,883.83 Unclear HBS $900,000 $4,500,000 $7,962.32 $Nil Implemented Portfolios $900,000 $4,500,000 $55,165.73 $55,163.73 Learoy $900,000 $4,500,000 $73,221.92 $Nil PAE $900,000 $4,500,000 $23,032.46 $23,032.46 Precision Air (2015) $900,000 $4,500,000 $117,605.50 $117,605.50 Precision Air (2016) $900,000 $4,500,000 $41,008.00 $Nil Signature Cellars $900,000 $4,500,000 $1,153.58 $Nil Total $10,800,000 $54,000,000 approx. $590,808.03 approx. $438,691.72

32 The following table, reproduced from the Commissioner and Ms Nguyen's joint submissions on contravention and relief, shows the maximum penalty for each contravening scheme for individuals calculated by reference to penalty units, the consideration payable to TDC, the consideration payable to TDA and the consideration that was actually paid to TDA. Scheme Individual maximum (penalty units) Consideration receivable by TDC (excl GST) Consideration receivable by TDA (excl GST) Monies actually received by TDA (excl GST) Compass $900,000 $17,103.94 $3,420.79 $Nil HBS $900,000 $7,962.32 $1,592.46 $1,592.46 Implemented Portfolios $900,000 $55,165.73 $11,033.15 $Nil Total $2,700,000 $80,231.99 $16,046.40 $1,592.46

Assessment of penalties 33 When determining the penalty amounts, I applied the principles outlined above and had regard to all matters relevant pursuant to s 290-50(5) of Schedule 1 to the TAA. Below I refer to some matters of particular relevance to explain my assessment of the appropriate civil penalty for each respondent.

Mr Bakarich 34 The Commissioner and Mr Bakarich jointly submit that the proposed agreed penalty of $4,500,000 is appropriate in the circumstances. 35 The maximum penalty: The table at [31] above shows that the aggregate maximum penalty applicable to Mr Bakarich is $10,800,000 (which is equal to 5000 penalty units or $900,000 for each of the 12 contraventions) because it is greater than twice the consideration received or receivable (s 290-50(4)). The parties submit that there is a "reasonable relationship" between the proposed agreed penalty of $4,500,000 and the maximum penalty. 36 The deterrent effect any penalty may have: The parties submit that it is important for the Court to impose the proposed agreed penalty because it is a powerful general deterrent to others considering promoting similar schemes because: (a) The present proceeding emphasises the inherent difficulties for the Commissioner in detecting schemes of the present kind, in that TDA and/or TDC provided the R&D Schedule to the taxpayer and there was no link on the face of the income tax return between the claim submitted and Mr Bakarich. His connection to the scheme was only discovered as a result of a significant forensic investigation. (b) The success of the schemes relied on the Commissioner never discovering the fact that the taxpayer was not entitled at law to the R&D offset claimed, which is evident by Mr Bakarich's admission that his conduct involved tax evasion. (c) There were significant compliance costs to the Commissioner (and the Commonwealth) in investigating the schemes, bringing the proceeding and prosecuting it. In relation to specific deterrence, while the Commissioner acknowledges that Mr Bakarich has ceased the scheme promotion activities and has acknowledged liability, the admitted conduct reveals a culture at TDC and TDA which did not have regard to whether or not a client's claim for the R&D tax incentive was reasonably arguable. Some of these admissions include encouraging employees to maximise claims for the R&D tax incentive to secure higher commissions for TDC; training employees to prepare AusIndustry applications and pitch the business to new clients; and being dismissive of employees who raised concerns about the R&D claims. 37 The nature and extent of the contraventions and circumstances of the contravening conduct: The parties submit that the following features of the contraventions contributed to the seriousness of the conduct. (a) Mr Bakarich accepts that his conduct was "central to the creation, operation and marketing of each of the 12 schemes" and that he was "largely, if not solely, responsible for the conduct" of TDC and TDA (Bakarich SOAF at [440]-[441]). He directly recruited scheme participants and provided assurances about their eligibility to claim the R&D tax incentive, and had significant control over the TDC and TDA employees who prepared and submitted AusIndustry applications. (b) Mr Bakarich admits that his conduct involved tax evasion and the parties submit that it did not involve any honest or reasonable mistake of law. There was a complete disregard as to whether or not a client's activities even qualified for the R&D tax incentive, and broadly, whether the claim for the R&D tax incentive was reasonably arguable. (c) He recruited employees with limited or no work experience with R&D tax incentives and directly involved them in conduct which he admits involved tax evasion. (d) There were multiple contraventions rather than a single contravention. The scale of the fraud on the revenue sought to be perpetrated was significant: as noted earlier, the schemes would have produced refundable tax offsets of around $7 million had they gone undetected. 38 The consideration received or receivable (directly or indirectly) by the entity and associates of the entity in respect of the scheme: As shown in the table at [31], the consideration was significant ($590,808.03 was receivable by TDC, $438,691.72 of which was actually received). TDC received a percentage (typically 15%) of the refund received by the taxpayer after submitting an income tax return including an R&D claim, which was then paid to TDA. Mr Bakarich admits that as the sole director and shareholder of TDC, and a director of TDA, he enjoyed the benefit of the consideration received or receivable by TDC and TDA. As mentioned above, Mr Bakarich instructed employees to maximise the value of R&D claims (regardless of their legitimacy) to maximise the remuneration received. 39 The loss or damage incurred by scheme participants: In Commissioner of Taxation v Bogiatto (No 2) [2021] FCA 98 (Bogiatto), Thawley J (at [63]) held that loss or damage incurred may include financial loss (including the monetary loss involved with the scheme, legal fees and loss of time and effort) and non-financial harm (including the health and wellbeing of the participants). The Bakarich SOAF details the impacts of the schemes, including the loss and damage suffered by each participant. In Bogiatto, the Court did not consider the amounts that participants were required to pay back to the Commissioner as losses but did take into account penalties and interest. Some scheme participants (Basebuild, Implemented Portfolios, PAE and Precision Air) suffered financial loss by way of administrative penalties and interest charges which were incurred as a direct consequence of wrongful R&D claims for tax incentives to which they were not entitled. Other financial impacts include, for example, Precision Air being unable to pay its tax debt and debts owed to other creditors, and being placed in liquidation in August 2018. The non-financial harm suffered includes significant personal distress for officers and senior managers of the taxpayers involved, and reputational damage for TDC and TDA employees as a result of being associated with Mr Bakarich. 40 The period over which the conduct extended: The schemes related to the 2014-2015 and 2015-2016 financial years and the contravening conduct itself occurred between around 2014 and October 2016. The parties submit that the conduct would have continued over a longer period had the ATO not intervened by reviewing the R&D claims submitted and commencing an investigation into Mr Bakarich's R&D activities in August 2016. I agree with the parties' submission that the fact that the conduct only spanned two years should not be given any significant weight because it would "effectively reward Mr Bakarich for the early action taken by the Commissioner in respect of each of the schemes". 41 Any steps taken to avoid the contravention: Mr Bakarich admits that he did not take any steps, and did not cause any TDC or TDA employee to take steps, to avoid any of the contraventions. After becoming aware in June 2016 that some R&D claims made by TDC and TDA clients were being investigated by the Commissioner, he did not take any steps to review the claims internally or cause clients to withdraw their claims. When the R&D Tax Manager of TDA, Navin Kirubairajah, advised Mr Bakarich that a particular claim under review should be withdrawn because it was unjustified, Mr Bakarich instructed him to defend the claim. 42 Any previous findings by the Court: Mr Bakarich has not previously been found by a Court to have engaged in similar contravening conduct. 43 Degree of cooperation with the Commissioner: Mr Bakarich has admitted the contraventions and cooperated with the Commissioner to resolve the proceeding, including by way of the Bakarich SOAF and joint submissions. However, the proceeding has been on foot since 2020 and Mr Bakarich's admission only occurred on the eve of the final hearing on liability. The Commissioner expended significant time and resources in investigating, commencing and prosecuting the proceeding (including conducting approximately 32 interviews with approximately 22 interviewees, obtaining evidence from 18 lay witnesses, preparing five expert reports, collating evidence and preparing submissions). Overall, the parties have factored in a small discount in the proposed agreed penalty for this reason. 44 Financial circumstances, remorse, contrition and other relevant matters: Mr Bakarich acknowledges that his conduct was serious and had real costs on the Commissioner and the scheme participants. He no longer operates a business or provides services in connection with R&D tax incentives. At the time of the Bakarich SOAF, he was employed as a business coach by a company owned and controlled by his wife, was renting a property and had limited assets. Mr Bakarich was declared a bankrupt in August 2019 and was discharged from bankruptcy on 21 August 2022. He admitted that his financial circumstances were largely, if not solely, the result of the contravening conduct he engaged in, including the costs of defending the proceedings until the eve of the hearing. I agree with the joint submission that while personal circumstances such as financial hardship and the contravener's capacity to pay are relevant, they must "be weighed against the need to impose a sum which members of the public will recognise as significant and proportionate to the seriousness of the contravention" (Australian Competition and Consumer Commission v Leahy Petroleum Pty Ltd (No 3) [2005] FCA 265; 215 ALR 301 (Leahy (No 3)) at [39] (Goldberg J)). 45 Course of conduct principle: Each of the 12 schemes is a separate and distinct set of conduct and so this is not a case where the contraventions arose from a single "course of conduct". Each of the R&D claims made with the ATO was idiosyncratic. There were discrete events, interactions and communications between Mr Bakarich and the scheme participants. The possible exception is the two schemes promoted in consecutive income years to Precision Air, which could be seen as arising from the same "course of conduct". Although the parties submit that the better view is that each of the Precision Air schemes is distinct, they have factored in a minor discount to the proposed penalty amount for this reason. 46 Totality principle: I am satisfied that the proposed aggregate penalty of $4,500,000, taking into account the reductions above, is proportionate to the seriousness of the contraventions. 47 Having regard to relevant matters, I am satisfied that the proposed aggregate agreed penalty of $4,500,000 is appropriate in the circumstances.

TDC and TDA 48 As mentioned above, the liquidations of TDC and TDA are on hold pending the determination of this proceeding. The Commissioner submits that the proposed penalty of $4,500,000 each for TDC and TDA is appropriate and I note that the Commissioner does not seek leave to enforce any order for the payment of a pecuniary penalty in respect of any contraventions by TDC or TDA of s 290-50(1) of Schedule 1 of the TAA that the Court finds. 49 The considerations relevant to assessing Mr Bakarich's conduct also arise in respect of TDC and TDA in circumstances where Mr Bakarich had primary responsibility for the conduct of both corporate entities. The Commissioner adopts the joint submissions on penalty in relation to Mr Bakarich at [24] to [61] and [76] as submissions on factors relevant to the conduct of TDC and TDA. Below are additional matters relevant to determining penalties for TDC and TDA. 50 The maximum penalty: The table at [31] above shows that the aggregate maximum penalty applicable to each of TDC and TDA is $54,000,000 (which is equal to 25,000 penalty units or $4,500,000 for each of the 12 contraventions) because it is greater than twice the consideration received or receivable (s 290-50(4)). The Commissioner submits that relative to the theoretical maximum penalty, TDC and TDA should receive lower penalty amounts and that the proposed penalty of $4,500,000 bears a "reasonable relationship". The Commissioner submits that it would be appropriate for each of TDC and TDA to be ordered to pay the same penalty amount as the amount as is jointly sought in respect of Mr Bakarich because it reflects the extent of Mr Bakarich's culpability. Because Mr Bakarich was the "embodiment of the corporation", the "main instigator" and "main actor" of the contravening conduct (by causing TDC and TDA to be used as corporate vehicles for implementing each scheme), he should receive a higher penalty relative to the maximum for individuals than TDC and TDA receive relative to the maximum penalty for corporations (see Australian Competition and Consumer Commission v Geowash Pty Ltd (subject to a deed of company arrangement) (No 4) [2020] FCA 23; (2020) 376 ALR 701 at [142]-[147] (Colvin J)). 51 The deterrent effect any penalty may have: The Commissioner adopts the general deterrence arguments referred to above at [36] in relation to the penalties sought against Mr Bakarich. It is further submitted, and I accept, that the fact that TDC and TDA are in liquidation and are unlikely to pay the penalties should not prevent the Court from imposing them. As Beach J said in Australian Competition and Consumer Commission v Get Qualified Australia Pty Ltd (in liq) (No 3) [2017] FCA 1018 at [78]-[80], "the Court should not be dissuaded from imposing a penalty on a company in liquidation if to do so will serve the purpose of deterring others from engaging in the same or similar conduct". Failing to impose penalties on companies in liquidation may even have the effect of rewarding companies for "carrying on business in a manner that resulted in those companies having few, if any, assets available to pay a penalty when it is imposed" (see Australian Competition and Consumer Commission v Leahy Petroleum Pty Ltd (No 2) [2005] FCA 254; 215 ALR 281 at [11] (Merkel J)). Counsel for the Commissioner in oral submissions accepted that the proposed penalty against the corporations was purely a statement for deterrence purposes in the light of the undertaking. 52 Any previous findings by the Court: TDC and TDA have not previously been found by the Court to have engaged in similar contravening conduct. 53 Degree of cooperation with the Commissioner: TDC and TDA are in liquidation. TDC and TDA, and their liquidators, have not taken an active role in the proceeding, providing no cooperation or assistance to the Commissioner or the Court. 54 Course of conduct principle: I have outlined my findings above at [45] regarding the distinctness of each scheme and the minor discount in relation to Precision Air. I agree with the similar discount factored into the proposed penalty amounts for TDC and TDA to recognise the fact that Mr Bakarich exercised complete control, such that his acts were, in substance, the acts of TDC and TDA. 55 I am satisfied that the proposed penalty of $4,500,000 each for TDC and TDA is appropriate.

Ms Nguyen 56 The Commissioner and Ms Nguyen submit that the proposed agreed penalty of $100,000 is appropriate in the circumstances. 57 The maximum penalty: The table at [32] above shows that the aggregate maximum penalty applicable to Ms Nguyen is $2,700,000 (which is equal to 5000 penalty units or $900,000 for each of the three contraventions) because it is greater than twice the consideration received or receivable (s 290-50(4)). 58 The deterrent effect any penalty may have: The observations about general deterrence set out above in relation to Mr Bakarich at [36] also apply to Ms Nguyen. The parties jointly submit that it is not anticipated that Ms Nguyen would engage in similar conduct in the future so the need for specific deterrence is reduced. Ms Nguyen has ceased scheme promotion activities, admitted liability and shown contrition for her wrongdoing. She has also provided an undertaking that she will not apply for registration as, or provide services as, a tax agent without the Commissioner's consent. 59 The nature and extent of the contraventions and circumstances of the contravening conduct, including the deliberateness of the entity's conduct and whether there was an honest and reasonable mistake of law: Ms Nguyen's role in promoting the three schemes was important but relatively confined. Obtaining advice from a registered tax agent was a prerequisite for the registration of the R&D claims and Ms Nguyen's details were recorded in the tax agent section of the application forms after reviewing the applications. She also reviewed the information that formed the client's R&D claim and prepared R&D Schedules. Ms Nguyen's evidence is that she was not aware of the R&D legislative regime and relied on Mr Bakarich's explanation of it. She accepts that she should have made further enquiries. Her contraventions were not deliberate and the parties do not submit that they were a result of an honest and reasonable mistake of law. 60 The consideration received or receivable: The table at [32] shows the consideration receivable by TDC ($80,231.99) and the consideration actually received by TDA pursuant to an agreement with TDC ($1,592.46). Ms Nguyen's evidence was that she did not directly receive the consideration received or receivable by TDC or TDA but did receive an annual salary of $65,000 from TDA and was a 50% shareholder in TDA (which the Commissioner did not dispute). She did not receive any dividends or director's fees from TDA. 61 The loss or damage incurred by scheme participants: See above at [39] in relation to the financial loss suffered by the participants (by way of example, Implemented Portfolios) and the non-financial harm suffered. 62 The period over which the conduct extended: The Compass and HBS schemes commenced in March 2016 and concluded in May 2016 and the Implemented Portfolios scheme commenced in February 2016 and concluded in September 2016. The parties submit that each contravention was a result of conduct throughout the relevant period. However, the fact that the contraventions occurred in a confined time period was taken into account when the parties determined the proposed agreed penalty. 63 Any steps taken to avoid the contravention: Ms Nguyen did not take any steps to avoid the contraventions and did not cause any TDC or TDA employees to do so. Ms Nguyen was the tax agent responsible for ensuring the accuracy of the R&D Schedules lodged by scheme participants and did not conduct basic and prudent checks and controls. There is no evidence that once she became aware that some R&D claims were being reviewed, she caused other claims to be audited or took steps to cause clients to withdraw their claims. 64 Any previous findings by the Court: Ms Nguyen has not previously been found by a court to have engaged in similar contravening conduct. 65 Degree of cooperation with the Commissioner: Ms Nguyen has consented to the proposed declarations and civil penalty orders sought against her. She has acknowledged her wrongdoing and assisted in avoiding a contested hearing by joining with the Commissioner in the preparation of the Nguyen SOAF and submissions. Ms Nguyen deposed an affidavit to assist the Commissioner with proving the case against the other respondents and provided an undertaking not to register or practise as a tax agent without the Commissioner's consent (pursuant to s 290-200 in Sch 1 to the TAA). The parties have taken into account a 30% discount in the proposed penalty to recognise this cooperation and assistance. 66 Financial circumstances, remorse, contrition and other relevant matters: At the time of the Nguyen SOAF, Ms Nguyen was working for her husband's company and living in a house purchased by her husband. Ms Nguyen accepts, by having agreed to the penalty, that she has the capacity to pay it. Ms Nguyen acknowledges the seriousness of her conduct and the real costs incurred by the Commissioner and the participants. She has expressed remorse and contrition. In accordance with Leahy (No 3), these personal circumstances should be weighed against the deterrent purpose of the penalty. 67 Course of conduct principle: The Commissioner and Ms Nguyen jointly submitted that the schemes promoted to Compass, HBS and Implemented Portfolios were separate and did not form a single "course of conduct". 68 Totality principle: Having regard to the totality principle, I am satisfied that the proposed aggregate penalty of $100,000, taking into account the reductions mentioned above, is not disproportionate to the overall misconduct of the promotion of 3 tax exploitation schemes. 69 Having regard to relevant matters, I am satisfied that the proposed aggregate agreed penalty of $100,000 is appropriate in the circumstances.

Declarations 70 Section 21 of the Federal Court of Australia Act 1976 (Cth) confers on the Court a discretionary power to make declarations. It is well established that each of the following requirements must be satisfied before the discretion to make a declaration is enlivened (Forster v Jododex Australia Pty Ltd (1972) 127 CLR 421, 437-438; Ainsworth v Criminal Justice Commission (1992) 175 CLR 564, 581-582 (Mason CJ, Dawson, Toohey and Gaudron JJ)). (a) The question must be a real and not a theoretical question. (b) The person raising it must have a real interest in raising it. (c) There must be a proper contradictor, that is, someone who has a true interest in opposing the declaratory relief sought.

Mr Bakarich and Ms Nguyen 71 The Commissioner (with the consent of Mr Bakarich and Ms Nguyen in their respective joint submissions) seeks declarations of contraventions which outline that Mr Bakarich and Ms Nguyen each engaged in conduct which resulted in them being a promoter of tax exploitation schemes to secure R&D offsets for various taxpayers. 72 I agree with the arguments in the joint submissions that these requirements have been satisfied because: (a) there is a real question requiring the Court's determination whether each of Mr Bakarich and Ms Nguyen contravened s 290-50(1). (b) the Commissioner has a real interest because he is the relevant statutory body discharging hisstatutory task in bringing the proceeding. (c) Mr Bakarich and Ms Nguyen are the persons against whom declaratory relief is sought which makes them the proper contradictors (notwithstanding the fact that Mr Bakarich and Ms Nguyen have admitted the contraventions and consent to the relief sought: see Australian Competition and Consumer Commission v MSY Technology Pty Ltd [2012] FCAFC 56; 201 FCR 378 at [30]-[33] (Greenwood, Logan and Yates JJ)). 73 I have taken into account the submissions by the Commissioner in support of the making of the declarations, and the fact that these were agreed to by Mr Bakarich and Ms Nguyen. The joint submissions with Mr Bakarich read as follows (and are substantially similar to the submissions advanced in relation to Ms Nguyen). In the present case, the proposed declarations are desirable and appropriate because they will record the Court's disapproval of the contravening conduct, vindicate the concerns of the persons affected by it, assist the Commissioner in carrying out the statutory task conferred on him by the [TAA], and make clear to other would-be contraveners of Australia's promoter penalty regime that such conduct is unlawful (and will carry with it serious consequences should it be committed). (Footnotes omitted.) 74 While these reasons alone are sufficient for the making of the declarations sought, the Commissioner finds support for the utility of declarations of contraventions in civil penalty cases which set out the particular liability found and the basis for the penalties ordered (see summary in Australian Securities and Investments Commission v Axis International Management Pty Ltd [2009] FCA 852; 178 FCR 485 at [26]-[43] (Gilmour J); see Rural Press Ltd v Australian Competition & Consumer Commission [2003] HCA 75; 216 CLR 53 at [95]). 75 I will make the declarations of contraventions sought by the Commissioner in relation to Mr Bakarich and Ms Nguyen.

TDC and TDA 76 The Commissioner seeks declarations of contraventions which outline that TDC and TDA contravened s 290-50(1) (as sought in prayers 4 and 6 of the Commissioner's Amended Originating Application). 77 I am satisfied that: (a) there is a real question requiring the Court's determination whether TDC and TDA contravened s 290-50(1) of Schedule 1 to the TAA. (b) the Commissioner has a real interest because he is the relevant statutory body discharging his statutory task in bringing the proceeding. (c) TDC and TDA are the entities against whom declaratory relief is sought which makes the Commissioner the proper contradictor. I apply the same reasoning in [73] and [74] above to TDC and TDA, and will make the declarations of contraventions in relation to these respondents.

Disposition 78 The Court will make the declarations of contraventions sought by the Commissioner. 79 I am satisfied that the penalties proposed by the parties in relation to Mr Bakarich and Ms Nguyen are appropriate and should be imposed. Mr Bakarich is to pay the Commonwealth a civil penalty of $4,500,000 and Ms Nguyen is to pay a civil penalty to the Commonwealth of $100,000. In relation to TDC and TDA, I am satisfied that the entities contravened s 290-50(1) of Schedule 1 to the TAA and the Commissioner has demonstrated the appropriateness of the civil penalties sought. I will order that each of TDC and TDA pay to the Commonwealth $4,500,000. 80 The Commissioner does not seek his costs of the proceeding against Mr Bakarich or Ms Nguyen, in the light of the agreed positions reached with them. Costs are sought against TDC and TDA in the amended originating application. There is no reason why costs should not follow the event in respect of the Commissioner's claims against these companies. I certify that the preceding eighty (80) numbered paragraphs are a true copy of the Reasons for Judgment of the Honourable Justice Kennett.

Associate: Dated: 16 December 2024 SCHEDULE OF PARTIES NSD 217 of 2020 Respondents Fourth Respondent: THI CAM TU NGUYEN

ANNEXURE A Agreed statement of facts pursuant to s 191 of the Evidence Act 1995 (Cth) in relation to the first respondent ANNEXURE B Agreed statement of facts pursuant to s 191 of the Evidence Act 1995 (Cth) in relation to the fourth respondent

Crimes Legislation Amendment (Penalty Unit) Act 2015(Cth)

Crimes Act 1914(Cth)s 4AA

Forster v Jododex Australia Pty Ltd (1972) 127 CLR 421 Markarian v The Queen [2005] HCA 25; 228 CLR 357 Minister for Industry, Tourism and Resources v Mobil Oil Australia Pty Ltd [2004] FCAFC 72; ATPR 41-993 NW Frozen Foods Pty Ltd v Australian Competition and Consumer Commission (1996) 71 FCR 285 Rural Press Ltd v Australian Competition & Consumer Commission [2003] HCA 75; 216 CLR 53 Singtel Optus Pty Ltd v Australian Competition and Consumer Commission [2012] FCAFC 20; 287 ALR 249 Trade Practices Commission v CSR Ltd [1991] ATPR 41-076 Volkswagen Aktiengesellschaft v Australian Competition and Consumer Commission [2021] FCAFC 49; 284 FCR 24

At a glance

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Judgment (18 paragraphs)

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