Commissioner of Taxation v Consolidated Press Holdings

Taxation Administration Act 1953 s 14ZZ

Commissioner of Taxation v Consolidated Press Holdings [2001] HCA 32; (2001) 207 CLR 235

Cook v Commissioner of Taxation [2002] FCA 1315; (2002) 51 ATR 223

Commissioner of Taxation v Cooke [2004] FCAFC 75; (2004) 55 ATR 183

Commissioner of Taxation v Hart [2004] HCA 26; (2004) 217 CLR 216

Peabody v Commissioner of Taxation [1993] FCA 74; (1993) 40 FCR 531

Commissioner of Taxation v Peabody [1994] HCA 43; (1994) 181 CLR 359

Vincent v Commissioner of Taxation [2002] FCAFC 291; (2002) 124 FCR 350

Calder v Commissioner of Taxation (2005) 61 ATR 267

Commissioner of Taxation v Sleight [2004] FCAFC 94; (2004) 136 FCR 211

Commissioner of Taxation v Spotless Services Ltd [1996] HCA 34; (1996) 186 CLR 404

Eastern Nitrogen Ltd v Commissioner of Taxation [2001] FCA 366; (2001) 108 FCR 27

1. In 1997 Ms J. Macpherson invested in a project described as the Central Highlands Wine Grape Project N° 3 (Central Highlands Project). She claimed deductions for the 1997 and 1998 income years in relation to the Central Highlands Project. The Commissioner of Taxation (the Commissioner) disallowed her deduction claims and issued amended assessments.
2. On 29 November 2000 Ms Macpherson lodged amended Notices of Objection in respect of the amended assessments made by the Commissioner for the 1997 and 1998 income years. She sought the allowance of deductions totalling $46,100 for the 1997 income year and $17,000 for the 1998 income year.
3. On 7 January 2005 the Commissioner issued a Notice of Decision on Objection for the 1997 and 1998 income years. The Commissioner allowed a deduction of $6,000 for the 1997 income year and $17,100 for the 1998 income year.
4. Ms Macpherson is dissatisfied with the Commissioner's objection decision in respect of the 1997 income year and seeks a review of that decision pursuant to s 14ZZ of the Taxation Administration Act 1953 (the Administration Act).
5. The Commissioner disallowed the balance of the deductions claimed by Ms Macpherson because he concluded that the Central Highlands Project constituted a scheme which fell within the provisions Part IVA of the Income Tax Assessment Act 1936 (the Assessment Act). The Commissioner cancelled the claimed deductions, only to the extent that those deductions exceeded the amounts actually paid by Ms Macpherson in respect of the Central Highlands Project in the 1997 income year.
6. In addition to objecting to the Commissioner's decision regarding the claimed deductions, Ms Macpherson, who invested in three projects in the 1997 income year, disputes the correctness of the Commissioner's calculation of tax shortfall penalties and tax shortfall interest imposed on her in that year.

1. In May 1997, after discussion with her husband regarding the availability of investments which would ensure future income streams, Ms Macpherson consulted a financial planner, Mr R. Watts, for the purpose of having Mr Watts provide a financial plan for her and her husband. According to Ms Macpherson, she spent a couple of hours with Mr Watts discussing investments in businesses that would give strong taxable returns in the future. Mr Watts introduced Ms Macpherson to what he described as tax effective investments including the Central Highlands Project.
2. Ms Macpherson said that the Central Highlands Project impressed her as a viable business with a sound and certain future income stream due to its long term sale of grapes contract with Southcorp Wines Pty Ltd (Southcorp). Mr Watts disclosed to Ms Macpherson that he had also invested in the Central Highlands Project and the other projects that he recommended.
3. Ms Macpherson obtained the prospectus for the Central Highlands Project. She satisfied herself as to the viability of the business and achievability of its income projections based on an independent expert's report. Ms Macpherson said she was also impressed with the comprehensive and positive tax opinion from Mr D. Lear, a qualified accountant, formerly with a recognised and a well regarded accounting firm. She said she relied heavily on Mr Lear's opinion in making the decision to invest in the Central Highlands Project. However, it appears Ms Macpherson had overlooked the fact that Mr Lear was also a director of the managing company for the project and a director of the company acting as lender to the project. Mr Lear's tax opinion could not accurately be described as independent.
4. Although Ms Macpherson said she appreciated that there may be a commercial risk involved in the vineyard/winery business, she was confident that the investment would not be high risk. She believed that although the business venture might not make as much money as was predicted, she saw it as a profitable business and fully expected to be paying tax on the profits it would attract between years 5 and 15 of the project (later extended to 17 years).
5. Ms Macpherson invested in two Central Highlands Project farms and paid $6,600 to the trustee of the project, comprising $6,000 interest pre-payment on the loan obtained to provide her with funds to participate in the project, and $600 for root stock. In addition, Ms Macpherson paid $12,000 by way of principal repayment on 1 October 1997, a further interest payment of $5,000 on 30 June 1998 and a further $5,000 principal repayment on 1 October 1998. These payments were made from her own funds. The only payment made in the 1997 income year was the first payment of $6,600.
6. In the 1997 income year, Ms Macpherson sought deductions of $46,100 in respect of her investment in the two Central Highland Project farms. These were for management fees, farm fees and interest on loan monies.

1. A summary of the investment in the Central Highlands Project is set out in the prospectus registered on 15 January 1997. It states:

Farmers in Central Highlands Wine Grape Project No. 3 will each have their own identifiable Farm consisting of 300 vines. Income after expenses from the sale of grapes harvested from the vines will belong to the Farmer.

To participate in the Project, an intending Farmer will require per Farm $300 to purchase 300 professionally cultivated rootstock from selected varietal clones, the first year's Farm and Management fees of $20,000, the second year's Farm and Management fees of $6,000, and the third year's Farm and Management fees $1,751.50.

An intending Farmer, may borrow 100% of the first three (3) year's Farm and Management fees from the lender.

Should an intending Farmer elect to borrow the amount of $27,751.50 then he/she may pay the first year's interest of $3,000 in advance, and pay the second year's interest of $2,500 in advance on 30 June 1998, must reduce the outstanding principal by $6,000 by 1st October 1997, and further reduce the outstanding principal by $2,500 by the 1st October 1998. This gives a total outlay, including the cost of the rootstock, of $14,300.

All additional payments for interest, principal reduction, Management and Farm fees are payable only out of Farm proceeds with no personal obligation attaching to the Farmer - provided that the Farmer has met all his/her obligations.

1. The land on which the Central Highlands Project was to operate was owned by Snowleaf Pty Ltd. It leased the project land to Australian Rural Group Limited, the trustee, which then agreed to sub-lease the project land to Snowleaf Pty Ltd to allow it allocate licences to each farmer (investor) under the Farm Agreement. Under the Farm Agreement the farmer was required to pay an annual fee to the land owner which was $50 for years one and two. In the following years to the conclusion of the project, farm fees were to be calculated for each farm by increasing the farm fee by three per cent in each successive year.
2. The farmer was required to enter into a Management Agreement with Central Highlands Management Limited which was the manager of the Central Highlands Project and trustee of the Central Highlands Management Unit Trust. Snowleaf Pty Ltd was the holder of 10 capital units in the unit trust. The farmer was required to pay annual management fees to the manager. The manager, by way of consideration, agreed to carry out, at its expense, various duties set out in the agreement including the management and day-to-day running of the farm and harvesting the crop. Management fees were only payable by the farmer from the farmer's own funds or from borrowings for the first three years of the Central Highlands Project after which they were paid out of the proceeds from the sale of grapes and wine. If the proceeds from the sale of grapes and wine were insufficient to cover the fees, the unpaid balance of management fees accrued against the following year's income.
3. The lender to the Central Highlands Project was C.H. Finance Pty Ltd. An intending farmer could borrow the entire first, second and third year's management and farm fees. If the farmer elected to do that, he or she was required to prepay interest yearly in advance for the first two years. The farmer was also required to make principal repayments on 1 October of each year. Therefore a farmer's liability under the project was limited to $14,300 on each investment in a farm. The balance of principal and interest was payable from the sale of wine and grapes.
4. As for the farmer's tax position, at 30 June 1997, the farmer would claim a tax deduction for $23,000 for a total outlay of $3,300. At 48.7 cents per dollar, the deduction would result in a tax saving of $11,201. In the 1998 income year, the farmer was required to outlay a further $8,500 from his or her own monies and the deductions claimed for that year would be $8,550. At 48.7 cents per dollar, that would result in tax saving of $4,163.85. Therefore, over the first two income years, for an outlay of $11,800, the farmer should receive a tax saving of $15,365. As at 30 June 1999, for an outlay of $14,300, it was suggested that the farmer would have a deduction of $33,376 resulting in a tax saving of $16,254. The overall financial improvement in the farmer's position for the first three income years was 13.6 per cent. The prospectus indicated that the investment return for a farmer who had borrowed management and farm fees would average 16.5 per cent over the 15 year life of the project.
5. Under an Investment Deed dated 18 December 1996, each farmer granted a power of attorney to Central Highland Management Limited and Australian Rural Group Limited jointly and severally to do any matter or thing which the trustee or manager was empowered or obliged to do on behalf of the farmer under the Deed or under the Farm Agreement or Management Agreement.
6. On 16 April 1997, the project life was extended to 17 years, commencing on 30 June 1997.

1. Under s 177F of the Assessment Act, where a tax benefit has been obtained or would but for s 177F be obtained by a taxpayer in connection with a scheme to which Part IVA of the Assessment Act applies; and where the tax benefit is referable to a deduction or part of a deduction which is allowable to the taxpayer in relation to a year of income, the Commissioner may determine that the whole or a part of the deduction shall not be allowable to the taxpayer in relation to that year of income.
2. The term tax benefit is defined under s 177C of the Assessment Act_,_ which, relevantly, provides:

(1) Subject to this section, a reference in this Part to the obtaining by a taxpayer of a tax benefit in connection with a scheme shall be read as a reference to:

(a) ...

(b) a deduction being allowable to the taxpayer in relation to a year of income where the whole or a part of that deduction would not have been allowable, or might reasonably be expected not to have been allowable, to the taxpayer in relation to that year of income if the scheme had not been entered into or carried out; or

...

and, for the purposes of this Part, the amount of the tax benefit shall be taken to be:

...

(d) in a case to which paragraph (b) applies - the amount of the whole of the deduction or of the part of the deduction, as the case may be, referred to in that paragraph; and

...

1. A scheme for the purposes of Part IVA is defined in s 177A(1) of the Assessment Act as follows:

scheme means:

(a) any agreement, arrangement, understanding, promise or undertaking, whether express or implied and whether or not enforceable, or intended to be enforceable, by legal proceedings; and

(b) any scheme, plan, proposal, action, course of action or course of conduct.

1. Section 177D of the Asessment Act is central to the application of Part IVA in that it establishes the schemes to which that part applies. It provides:

This Part applies to any scheme that has been or is entered into after 27 May 1981, and to any scheme that has been or is carried out or commenced to be carried out after that date (other than a scheme that was entered into on or before that date), whether the scheme has been or is entered into or carried out in Australia or outside Australia or partly in Australia and partly outside Australia, where:

(a) a taxpayer (in this section referred to as the relevant taxpayer) has obtained, or would but for section 177F obtain, a tax benefit in connection with the scheme; and

(b) having regard to:

(i) the manner in which the scheme was entered into or carried out;

(ii) the form and substance of the scheme;

(iii) the time at which the scheme was entered into and the length of the period during which the scheme was carried out;

(iv) the result in relation to the operation of this Act that, but for this Part, would be achieved by the scheme;

(v) any change in the financial position of the relevant taxpayer that has resulted, will result, or may reasonably be expected to result, from the scheme;

(vi) any change in the financial position of any person who has, or has had, any connection (whether of a business, family or other nature) with the relevant taxpayer, being a change that has resulted, will result or may reasonably be expected to result, from the scheme;

(vii) any other consequence for the relevant taxpayer, or for any person referred to in subparagraph (vi), of the scheme having been entered into or carried out; and

(viii) the nature of any connection (whether of a business, family or other nature) between the relevant taxpayer and any person referred to in subparagraph (vi);

it would be concluded that the person, or one of the persons, who entered into or carried out the scheme or any part of the scheme did so for the purpose of enabling the relevant taxpayer to obtain a tax benefit in connection with the scheme or of enabling the relevant taxpayer and another taxpayer or other taxpayers each to obtain a tax benefit in connection with the scheme (whether or not that person who entered into or carried out the scheme or any part of the scheme is the relevant taxpayer or is the other taxpayer or one of the other taxpayers).

1. The necessary purpose referred to in s 177D must be read as including a reference to the scheme or the part of the scheme being entered into or carried out by the person for two or more purposes of which that particular purpose is the dominant purpose (s 177A(5)).
2. In Commissioner of Taxation v Spotless Services Limited [1996] HCA 34; (1996) 186 CLR 404, the High Court said, at 416:

Much turns upon the identification, among various purposes, of that which is "dominant". In its ordinary meaning, dominant indicates that purpose which was the ruling, prevailing, or most influential purpose.

1. As was submitted by the Commissioner, the definition of scheme under Part IVA of the Assessment Act is very broad. McHugh J said in Spotless, at 425:

"Scheme" is defined widely for the purposes of Pt IVA and includes any "action, course of action or course of conduct".

1. In Commissioner of Taxation v Hart and Others [2004] HCA 26; (2004) 217 CLR 216, Gleeson CJ and McHugh J said, when referring to the decision of the Full Court of the Federal Court, at 225:

...

The judges were making the point, which is undoubtedly correct, that, where the tax benefit in question is part of an allowable deduction for interest, a search for the purpose of a scheme, identified in a manner that does not include the borrowing, is not an undertaking that conforms with the requirements of the legislation. In a given case, a wider or narrower approach may be taken to the identification of a scheme, but it cannot be an approach which divorces the scheme from the tax benefit. Here, the borrowing was an indispensable part of that which produced the tax benefit...

...

Moreover, it is important to notice that "scheme" is defined, in s 177A(1), in terms that may not always permit the precise identification of what are said to be all of the integers of a particular "scheme". So much follows from the inclusion, within the statutory meaning, not only of arrangements that are not and are not intended to be enforceable by legal proceedings, but also of "any scheme, plan, proposal, action, course of action or course of conduct". This definition is very broad. It encompasses not only a series of steps which together can be said to constitute a "scheme" or a "plan" but also (by its reference to "action" in the singular) the taking of but one step. The very breadth of the definition of "scheme" is consistent with the objective nature of the inquiries that are to be made under Pt IVA...

1. According to the Commissioner, the making and implementation of the prospectus, the application form and the Principal Agreement (which incorporated the Farm Agreement, the Management Agreement, the Loan Deed and Amended Deed) constitute a scheme within the meaning of s 177A(1) of the Assessment Act. In my view, the proposal set out in the prospectus and the entry by the proposed investor/farmer into the Principal Agreement clearly constitutes a scheme for the purposes of Part IVA. By signing the Principal Agreement, and upon acceptance of the application form by the landowner, the manager, and where applicable, the lender, became a party to and were bound by the various agreements comprising the scheme. I have briefly summarised the effect of those agreements above.
2. Ms Macpherson argued that the whole of the project must be considered when attempting to identify a scheme and that includes looking at the project over a 17 year period. She sought to rely on the decision in Commissioner of Taxation v Peabody [1994] HCA 43; (1994) 181 CLR 359 where the High Court said that part of a scheme which cannot be regarded as a scheme in itself, although entered into or carried out by a person who had the purpose or dominant purpose under s 177A(5), cannot give rise to a tax benefit for the purposes or Part IVA. However, the High Court also pointed out that it does not mean that if part of a scheme may be identified as a scheme in itself, the Commissioner is precluded from relying upon it as well as the wider scheme (at 384). In my view, the Commissioner is correct in stating that the making and implementation of the prospectus, completion of the application form and the Principal Agreement, constituted a scheme within the meaning of s 177A(1) of the Assessment Act.
3. I also agree with the Commissioner's submission that the parties to the scheme included Ms Macpherson, the manager, the landowner, the lender, and the trustee (Australian Rural Group Limited).
4. According to the Commissioner, the tax benefit which Ms Macpherson obtained or would but for s 177F of the Assessment Act obtain in connection with the scheme include those deductions which she sought to have allowed in the 1997 income year. In her Notice of Objection, Ms Macpherson claimed an entitlement to losses and outgoings of $46,100 which were necessarily incurred in that year for the purposes of gaining or producing assessable income. I accept that is the tax benefit Ms Macpherson obtained or would have obtained, but for s 177F.

1. The Commissioner submitted that the test posited by s 177D of the Assessment Act is an objective one. He contended that the test does not require, or even permit, any enquiry into the subjective motives of the taxpayer or others who entered into or carried out the scheme or any part of it. On the other hand, Ms Macpherson submitted that the objective nature referred to by the Commissioner relates to the findings of fact and that her subjective intentions to ensure a future business income stream; to diversify her investments; and to ensure that her then husband did not divest the family of their funds, although not decisive, must be given some weight.
2. I cannot accept Ms Macpherson's submission in respect of this point. The authorities are entirely consistent and point to the fact that the eight matters referred to under s 177D(b) of the Assessment Act are posited as objective facts (Spotless; Peabody; Commissioner of Taxation v Consolidated Press Holdings Ltd [2001] HCA 32; (2001) 207 CLR 235; Eastern Nitrogen Ltd v Commissioner of Taxation [2001] HCA 32; (2001) 207 CLR 235; Commissioner of Taxation v Sleight [2004] FCAFC 94; (2004) 136 FCR 211; Calder v Commissioner of Taxation (2005) 61 ATR 267; Commissioner of Taxation v Cooke [2004] FCAFC 75; (2004) 55 ATR 183; and Hart). The High Court in Spotless said at 422:

...

In the present case, the question is whether, having regard, as objective facts, to the matters answering the description in par (b), a reasonable person would conclude that the taxpayers entered into or carried out the scheme for the dominant purpose of enabling the taxpayers to obtain a tax benefit in connection with the scheme...

In Hart, Gummow and Hayne JJ when referring to s 177D(b), said at 243:

That provision requires the drawing of a conclusion about purpose from the eight identified objective matters; it does not require, or even permit, any inquiry into the subjective motives of the relevant taxpayers or others who entered into or carried out the scheme or any part of it.

1. Also, the Full Court of the Federal Court in Vincent v Commissioner of Taxation [2002] FCAFC 291; (2002) 124 FCR 350 said, at [100], that it is clear from the language of s 177D and the decision of the High Court in Consolidated Press Holdings that a determination (under s 177D) can be made if there is any person, whether it is the taxpayer, a promoter of a tax scheme or a legal or accounting adviser of whom it would be concluded entered into or carried out the scheme or any part of it for the dominant purpose of securing for the taxpayer a tax benefit.
2. It is clear that each of the factors set out in s 177D(b) must be considered (see Peabody and Calder). In Peabody v Commissioner of Taxation [1993] FCA 74; (1993) 40 FCR 531 Hill J said at 543:

This does not mean that each of those matters must point to the necessary purpose referred to in s 177__D_. Some of the matters may point in one direction and others may point in another direction. It is the evaluation of these matters, alone or in combination, some for, some against, that s 177__D_ requires in order to reach the conclusion to which s 177D refers.

The Commissioner also submitted that the relevant purpose may be apparent on the evidence taken as a whole regarding the factors set out in s 177D(b). The Commissioner relied on the statement made by the Full Court in Calder where it stated at [79-80]:

It is important, however, to bear in mind that the ultimate judgement as to purpose under s 177D is holistic, albeit it required that regard be paid to each of the eight factors listed in s 177D(b). Indeed it can be expressed as a global or overall judgement provided that it is apparent that those factors have been considered.

SECTION 177D(b)(i) - MANNER THE SCHEME WAS ENTERED INTO OR CARRIED OUT

1. Ms Macpherson was provided with a prospectus dated 10 January 1997 and a supplementary prospectus dated 11 April 1997 which related to the extension of the term of the project from 15 to 17 years. She obtained the prospectus and supplementary prospectus after consulting Mr Watts. In a report prepared for Ms Macpherson and her then husband, Mr W.F. Toune, Mr Watts noted Ms Macpherson's desire for long term income generation and advised that there were investment opportunities which would provide sound retirement planning strategies for her and her husband; and strategies to better manage her taxation position, particularly with regard to the superannuation surcharge. Mr Watts referred to tax effective investing and said that such investments utilise the money a taxpayer would ordinarily pay in tax, allowing the taxpayer to divert the money into primary production or other Australian industries. He specifically noted that tax effective projects are commercial ventures which provide taxation deductions for the participant as a consequence of the venture. Mr Watts also said:

The projects we are recommending to you will ensure that your salary will be repositioned below the $70,000 superannuation surcharge level.

1. Mr Watts advised Ms Macpherson to enter into two other tax effective projects. He then said that if Ms Macpherson entered into those projects, her taxable income would be reduced to approximately $38,500, thereby effectively eliminating the two highest tax brackets. He also said that by reducing her income to that level, she would have eliminated the need to pay the 15 per cent surcharge on her superannuation contributions. Mr Watts then said:

The Consolidated Tax Position also indicates the outlay for the project will be more than be covered by the tax savings you will enjoy, and that, in fact, the tax savings will be significantly greater than the commitment required to the projects.

1. Mr Watts noted that, aside from the tax advantages Ms Macpherson would enjoy by participating in the tax effective projects, she would also have the right to earn income which complemented her retirement planning strategy.
2. Ms Macpherson relied on the prospectus and the advice provided by Mr Watts when she entered the project. Both documents emphasised the positive cash position (or surplus), assuming of course that the tax deductions were allowed in the first three income years.
3. Ms Macpherson signed an authority in favour of Mr Watts who then proceeded to implement her investment in the Central Highland Project. Ms Macpherson provided a cheque in favour of Australian Rural Group for $6,600 which satisfied the first payment for two farms. Other than the obligation to make a further interest pre-payment on 30 June 1998 and two principal re-payments in October 1997 and October 1998, nothing further was required of Ms Macpherson for her participation in the project. Accordingly, Ms Macpherson's capital was never exposed to any commercial risk attached to the project. As the Commissioner submitted, the large upfront fees had no commercial function and their only possible function was to gear up the available deductions.
4. In carrying out the scheme, the lender was required to satisfy its obligations to make loan funds available to those applicants who sought them by advancing funds, not to the borrower, but rather to the manager and the landowner. However, the Commissioner submitted that in satisfying those obligations, the lender did not in fact provide to the manager and landowner any monies whatsoever. The participants in the project, who are all related, entered into a round robin arrangement involving book entries reflecting notional loans to farmers which were paid to the manager. The manager then placed the funds on deposit with the lender. The book entries were supported by bills of exchange drawn by the lender and payable to the manager and landholder. The acceptor on the bills was Jamesgate Finance Pty Ltd. Jamesgate Finance Pty Ltd was not required to meet its obligation to pay the face value of the bills of exchange at maturity date, as each bill was drawn and cancelled within minutes. As the Commissioner submitted, these transactions quite clearly produced no additional funds which could be used by the manager in carrying out the Central Highlands Project. The only funds made available to pursue the project were those provided by the participants themselves by way of advance interest payments, repayments of principal, payment of farm fees and payment for root stock. In my opinion, this clearly supports the contention of the Commissioner that the upfront fees had no commercial function and that the purpose of the loans was to gear up the available deductions.
5. Ms Macpherson submitted that she was not aware of the round robin transactions between the various parties to the project and therefore those transactions cannot be part of a Part IVA scheme. She relied on the primary decision made in Cooke which she said was not overruled on appeal to the Full Court of the Federal Court. However, in my opinion, that is incorrect. It is true that the primary judge accepted the submissions of the respondents in Cooke that, because they knew nothing about the transactions setting up the loan arrangements between various participants, those transactions could not be part of the scheme. Her Honour relied on a New Zealand Court of Appeal case by way of authority for that proposition. However, on appeal the Full Court in Cooke pointed out at 216 that Part IVA of the Assessment Act is distinguishable from the New Zealand legislation in that regard. It referred to Consolidated Press Holdings where the High Court said at 264:

One of the reasons for making s 177D turn upon the objective matters listed in the section, it may be inferred, was to avoid the consequence that the operation of Pt IVA depends upon the fiscal awareness of a taxpayer.

1. I therefore cannot accept Ms Macpherson's submission on this point.
2. According to the Commissioner, the result of the financing arrangement, which involved three separate related entities, created a complex structure with no commercial purpose. It did, nevertheless, facilitate the making of loans to participants without the support of actual monies. I accept that submission.

SECTION 177D(b)(ii) - FORM AND SUBSTANCE OF THE SCHEME

1. The form of the scheme, which is set out in the prospectus, indicates that each investor was to be a farmer having their own identifiable farm consisting of 300 vines. The scheme involved the business of farming and harvesting grapes and processing them to produce wine. Each farmer was obliged to personally manage their farm in accordance with good farming practice. However, the Farm Agreement did not specify the location where each of the farmer's vines was growing so it was simply not possible for the so-called farmers to meet their obligations under the Farm Agreement. In substance, the so-called farmers were passive investors in the scheme.
2. I agree with the Commissioner's submissions that the financing arrangements constituting the form of the scheme did nothing to enhance the stated commercial outcomes from the project. In a similarly structured scheme involving tee tree oil farming, Hill J in Sleight v Commissioner of Taxation [2004] FCAFC 94; (2004) 136 FCR 211 said at 233:

Finally, it should be noted that the financial structure that the management agreement, loan agreement and indemnity agreement created was not necessary to the success of a tea tree project. Presumably the promoters, for example, could have still received the same amount of return by limiting the first year management fee to the actual cash outlay of the investor, and then adjusting the management fee in subsequent years to achieve this result. Arguably, an investor would thus have a legitimate, albeit significantly reduced, tax deduction for his cash outlay because it was actually a necessary cost of the project. This fact points towards a dominant tax incentive purpose because it could be objectively determined or concluded that an investor, who had a dominant commercial purpose, would prefer the project with a normal structure, rather than one which was so structured that it maximised the deductions available by the use of a somewhat artificial structure.

SECTION 177D**(b)(iii) - TIME AT WHICH THE SCHEME WAS ENTERED INTO AND THE LENGTH OF THE PERIOD FOR WHICH THE SCHEME WAS CARRIED OUT**

1. Ms Macpherson entered into the scheme in May 1997. It enabled her, for the modest outlay of $3,300 per farm, to claim a tax deduction of $23,000 for each farm for the 1997 income year. Although the prospectus was issued in January 1997, actual payments by Ms Macpherson for the first year were not required before 30 June 1997. In my view, this delay to the last day of the income year suggests the dominant purpose of the project was to obtain a tax benefit..
2. Although the Central Highlands Project was to run for 17 years, it in fact ceased in 2004 with the liquidation of the manager and the appointment of a receiver/manager to the lender in 2004. A receiver/manager was also appointed to the landowner in 2003.

SECTION 177D(b)(iv) - THE RESULT IN RELATION TO THE OPERATION OF THIS ACT THAT, BUT FOR THIS PART, WOULD BE ACHIEVED BY THE SCHEME

1. But for Part IVA, the scheme operated so as to entitle Ms Macpherson to deductions totalling $46,000 in the 1997 income year upon the actual expenditure by her of $6,600. This clearly suggests that the dominant purpose of the project was to obtain a tax benefit.

SECTION 177D(b)(v) - CHANGE IN FINANCIAL POSITION OF TAXPAYER RESULTING FROM THE SCHEME

1. Other than the cash payment of $28,600 over two years, Ms Macpherson was not required to contribute any other monies towards the project. Her borrowings totalled $55,503, leaving a balance of $26,902 owing under the Loan Agreement. The amount owing was to be recouped from the gross income the Central Highlands Project might generate. Whether the project generated any income made no difference at all to Ms Macpherson as her claimable deductions were more than sufficient to ensure recovery of the cash contributions which she was required to make.
2. The statements of income and expenditure in respect of the project disclose earnings of 84 cents for the 1998 income year, $122.24 for the 1999 income year, $968.38 for the 2000 income year, $2,133.22 for the 2001 income year and $3,149.22 for the 2004 income year. However, after setting off farm fees and management fees due against that income, Ms Macpherson received no income whatsoever. Therefore, as submitted by the Commissioner, Ms Macpherson's participation in the Central Highlands Project has not resulted in any change to her financial position other than the benefit created by the deductions claimed by her.
3. It is significant that Ms Macpherson, in addition to entering the Central Highlands Project, also entered into two other tax effective investments recommended by Mr Watts. Whether those other investments are caught by Part IVA of the Assessment Act is not material. However, Mr Watts in his advice suggested that entry into all three of the projects would result in Ms Macpherson reducing her taxable income to a level below the threshold for the superannuation surcharge. Therefore, by entering into all three projects, Ms Macpherson would obtain a significant taxation benefit. In Sleight, ascertainment of the respondent's marginal tax rate depended upon the tax outcome of two other schemes in which the respondent entered. Carr J said at 256:

In those circumstances, I consider that, on a proper construction of s 177D(b) the assessment should be made, in respect of this factor but not necessarily in respect of every factor, as at the time of entry into the scheme. A reasonable person would be entitled to draw his conclusion about dominant purpose on the basis that the respondent entered into three schemes at the one time and that each of those schemes would result (but for Pt IVA_) in the allowance of the deductions claimed._

1. Carr J also mentioned that the deductions available to a taxpayer must be compared with financial benefits which it was anticipated would result from the scheme.
2. According to the Commissioner, the Central Highlands Project was a speculative agricultural venture, growing wine in a new area. Ms Macpherson rejected that submission pointing out that there had been two previous grape growing projects in the same area which were operating. She also denied that there was any uncommercial speculation in relation to the Central Highlands Project because there was a ten year contract with Southcorp for the sale of grapes. However, as stated in the prospectus, Central Highlands Projects N° 1 and N° 2 were planted during Spring in 1995 and 1996. Given that it takes some three years between planting and the first production, it is my view that Ms Macpherson has overstated the position as no crops would have been produced from the area at the time that she entered the scheme. As to the contract with Southcorp, upon which the income projections are based, it was planned that Southcorp would take 100 per cent of the grapes produced in vintage 2000; 60 per cent in vintage 2001; and 50 per cent in vintage 2002 and the following years up to 30 June 2007. The contract price was dependent on the quality of the grapes delivered. The cash flow projections set out in the prospectus are based on a price of $1,600 per tonne commencing in the year 2000, and then increasing by three per cent per annum. However, the contract with Southcorp indicates that base grade value per tonne in the 2000 vintage year varied between $1,265 and $1,305 per tonne, dependent upon the variety. Furthermore, the supply of grapes to Southcorp was dependent on strict quality control standards with substantial price reductions for defect points allotted, resulting in up to 20 per cent price reduction or even rejection.
3. Further income was projected from sales of bottled wine on the basis of a net margin of $3.60 per bottle. There is no stated basis in the cash flow projections for the net margins, nor is there any estimate of the number of bottles expected to be sold. Yields are based on six tonnes of grapes per hectare for the third year of the project (the first year of production), doubling to 12 tonnes per hectare the following year and 14 tonnes per hectare in year five. However, these yields are based on optimum conditions as is explained in the independent expert's report. There seems to be no reduction for risks which are also outlined by the independent expert's report. In other words, the cash flow projections are extremely optimistic. Even with these optimistic projections, the internal rate of return set out on the prospectus is only 9.6 per cent. As the Commissioner submitted, this return does not compare favourably with diversified, lower risk share fund investments which were also recommended to Ms Macpherson. Also, Ms Macpherson's initial investment could only be recouped in the tenth year of the project. Therefore, according to the Commissioner, apart from the early taxation advantages, Ms Macpherson could only expect a return on investment in the later stages of the project when those projections are even more speculative. I agree with that submission.
4. Mr Watts prepared cash flow projections for Ms Macpherson based on the extended life of the project, 17 years. He calculated that the average return on investment would be 21.1 per cent compared with the original estimate in the prospectus of 16.5 per cent. The difference arises from the fact that from year 11 onwards, Mr Watts has not attributed any income to the sale of grapes but increased substantially the sale of bottled wine. No basis is set out for those projections. I have also noted that in the prospectus cash flow projections, the sale of grapes is projected to continue for 15 years to the year 2012, although the contract with Southcorp was for a period of 10 years commencing 1 July 1995. The absence of explanations for both of these apparent anomalies does not give me any confidence at all in the cash flow projections in either the prospectus or those prepared by Mr Watts. In my view, the cash flow projections are highly speculative.
5. The Commissioner submitted that in the end, Ms Macpherson could not reasonably expect any material return beyond the early tax benefits which her participation produced. Ms Macpherson could participate in the project without any risk to her own funds because of those early tax benefits and the limited recourse nature of the loan. Therefore, the speculative commercial nature of the Central Highlands Project would have been of limited concern. Ms Macpherson disagreed with that submission stating that she did consider going to her own bank to obtain a loan for the project. However, that would result in substantially increasing her risk in an already risky project. Were the commercial aspects of the project to fail, she would nevertheless be required to repay the entire loan sum which would be $55,503 irrespective of the outcome. By borrowing monies under the scheme, she reduced her risk exposure to $28,600. It is difficult to understand why Ms Macpherson would have even contemplated private borrowings. Consequently, I would regard this factor as indicating a dominant purpose of obtaining a tax benefit.

SECTION 177D(b)(vi) - ANY CHANGE IN THE FINANCIAL POSITION OF ANY PERSON WHO HAS ANY CONNECTION WITH THE RELEVANT TAXPAYER WHICH RESULTS FROM THE SCHEME

1. The Commissioner submitted that the financial position of the Central Highlands Project and its entities did not change, other than by way of cash payments from investors, as a result of the scheme. No loan monies were provided by the lender to borrowers who, it was intended, would pay management fees. Until the loans were repaid, the promoter entities retained in excess of 50 per cent of the farmers' gross income by way of payment of farm and management fees as well as interest and repayment of principal. In addition, under the Management Agreement, the manager was to receive half of the surplus in any year of the gross income of the farm over the projections in the prospectus, and a fee of 10 per cent of the gross margins on the production and sale of bottled wine. Brokerage was also paid to personal financial planners who marketed the scheme, of which Mr Watts was to receive up to 50 percent.
2. However, this is not a case where Ms Macpherson had any real connection of a business nature with the promoters of the scheme. She merely sought the advice of Mr Watts regarding various possible investments and it just so happened that he recommended the Central Highlands Project. No doubt the promoter companies made money out of the scheme but, for the reasons expressed by Hill J in Sleight, they could hardly be described as entities having any real connection of a business nature with Ms Macpherson. In my view, this factor is neutral.
3. There is no material which would point one way or the other in respect of s 177D(b)(vii) or (viii) of the Assessment Act.

1. Having weighed each of the s 177D(b) factors individually and making a global assessment of purpose based on those factors, I am satisfied that a reasonable person drawing the conclusion required by s 177D would conclude that Ms Macpherson entered into or carried out the scheme with the dominant purpose of obtaining the tax benefits identified.
2. This conclusion would be reached despite the fact that Ms Macpherson said that she entered into a genuine commercial operation with an expectation that it would produce commercial returns. As the Commissioner submitted, pursuit of a commercial objective is not inconsistent with the existence of a dominant purpose of enabling a taxpayer to obtain a tax benefit. This was clearly pointed out by Gleeson CJ and McHugh J in Hart where they said at 227:

Even so, a transaction may take such a form that there is a particular scheme in respect of which a conclusion of the kind described in s 177D is required, even though the particular scheme also advances a wider commercial objective. In Federal Commissioner of Taxation v Spotless Services Ltd_, Brennan CJ, Dawson, Toohey, Gaudron, Gummow and Kirby JJ, after noting that revenue law considerations influence the form of most business transactions, and that the presence of a fiscal objective does not mean that a person entered into or carried out a scheme for the dominant purpose of obtaining a tax benefit, said:_

"Much turns upon the identification, among various purposes, of that which is `dominant'. In its ordinary meaning, dominant indicates that purpose which was the ruling, prevailing, or most influential purpose. In the present case, if the taxpayers took steps which maximised their after-tax return and they did so in a manner indicating the presence of the `dominant purpose' to obtain a `tax benefit', then the criteria which were to be met before the Commissioner might make determinations under s 177F were satisfied."

1. The evidence points to the fact that Ms Macpherson did not take a careful or critical view of the projected returns from the project. If her dominant purpose was to obtain a long term income stream, she would have done so and made some comparisons between the projected returns from the Central Highlands Project and other forms of investment return. For example, an investment in a managed fund holding a mixed portfolio of international and Australian equities, property and cash would have produced a higher and far more certain rate of return. Despite that, Ms Macpherson chose this project and other so called tax effective schemes, which created a substantial deduction in the first income year for minimal cash outlay. There is also ample evidence that Ms Macpherson entered into this scheme for the purpose of reducing her taxable income. Therefore, I do not accept Ms Macpherson's submission that she entered into this scheme predominantly for commercial returns.
2. It also appears that Ms Macpherson, in referring to Cooke, is of the view that it is sufficient to avoid the impact of Part IVA if a project exhibits a general commercial purpose. That, however, is not the test. The test is whether a person who entered into or carried out the scheme did so for the dominant purpose of enabling the relevant taxpayer to obtain a tax benefit.

1. Ms Macpherson suggested that there may be some confusion regarding additional tax which had been imposed on her by way of penalty under s 226 of the Assessment Act. According to Ms Macpherson, in her initial claim for a tax deduction regarding the Central Highlands Project in the 1997 income year, she only claimed for one farm ($23,000) as opposed to two farms. Ms Macpherson claimed that penalties were imposed on the total amount ($46,100) but that this was subsequently fixed up by a reduction of $23,100 from an amount disallowed from another business investment. Nevertheless she claimed that full penalties were applied to that business investment (which I understood to be another scheme which may be subject to Part IVA disallowance). Ms Macpherson also believed that she continued to be charged interest on the additional amount until this was paid.
2. Further, Ms Macpherson submitted that in the 1996 Taxpack, the Commissioner said:

If you follow Taxpack and you make an honest mistake, my staff, including my auditors, will accept that you have acted honestly in describing your tax affairs. You will not be subject to a penalty, although you may be asked to pay interest on any misleading tax.

1. Ms Macpherson submitted that a positive determination under Part IVA is not a finding of dishonesty and that there was sufficient uncertainty surrounding the application of Part IVA to the Central Highlands Project to warrant not applying an understatement penalty. She submitted that it had to be reasonably arguable that her claim was correct taking into account the Commissioner's approach to those matters at that time; the expert's report in the prospectus; and the fact that there was simply a deferral of tax because of the agricultural nature of the business. Ms Macpherson referred to public tax ruling TR94/4 and submitted that the reasonable care test set out in that ruling should apply to her. I have observed that the reasonable care test, applied to questions of interpretation, requires a taxpayer, if uncertain about the correct tax treatment of an item, to make reasonable enquiries to resolve the issue. There was no evidence that Ms Macpherson took those steps. That test is different to the reasonably arguable test which is in fact set out in public ruling TR94/5. Although Ms Macpherson submitted that TR94/5 should also apply to her, the ruling states that This Ruling does not attempt to deal with cases of tax avoidance... Part IVA is a general anti-avoidance provision and therefore TR94/5 does not apply to Ms Macpherson's case.
2. Ms Macpherson also referred to public ruling TR94/7 which deals with the discretion which may be exercised by the Commissioner to remit penalties. That ruling provides that the discretion to remit penalties should only be exercised in exceptional cases where, after regarding all of the circumstances, the application of a particular shortfall section and/or rate of penalty prescribed under that section would provide a clearly unreasonable or unjust result. Nevertheless, the ruling provides that each case should be decided on the basis of its own facts and circumstances. In fact, the Commissioner has applied s 226E of the Assessment Act on the basis that Ms Macpherson made voluntary disclosure of the scheme. The Commissioner reduced the additional penalty tax by 80 per cent to 10 per cent of the shortfall. In my view, the decision of the Commissioner to apply s 226E was correct and there should be no further remission of the additional tax imposed on Ms Macpherson by way of penalty.
3. In written supplementary submissions, the Commissioner explained how he had treated the tax shortfall penalty in respect of all three schemes which Ms Macpherson entered into in the 1997 income year. In addition to tabulating the penalties which were required by the adjustments made to the tax payable by Ms Macpherson in the 1997 income year for all three schemes, the Commissioner set out in a table the actual penalties imposed in the 1997 income year. Although there is a difference between the penalties required by the adjustments in respect of the Central Highlands Project and the actual penalties imposed on Ms Macpherson in respect of that scheme for the 1997 year, when all three schemes are taken into account, the total penalties and interest imposed on Ms Macpherson for the 1997 income year match the penalties and interest required by the adjustments made for that year. Of course this assumes that Ms Macpherson will be unsuccessful in arguing that the schemes other than the Central Highlands Project will also be caught by Part IVA of the Assessment Act. At the time of writing this decision, one of those schemes has been heard by the Tribunal but a decision has not been delivered, and the third scheme is yet to be heard by the Tribunal. Therefore, should Ms Macpherson succeed before the Tribunal in one or both of the other schemes, the Commissioner may be required to further consider the total penalties and interest imposed on her for the 1997 income year. At this stage, without attempting to pre-empt the outcome of Ms Macpherson's appeals in the other two schemes, it is my view that the tax shortfall penalties and interest imposed on Ms Macpherson in respect to the Central Highlands Project should remain unaltered. If she is successful in her reviews regarding one or both of the other two schemes, further adjustments can be made after the final position is determined.

1. The Central Highlands Project is a scheme which falls within Part IVA of the Assessment Act. It was entered into by Ms Macpherson for the dominant purpose of enabling her to obtain a tax benefit in connection with that scheme. Therefore, the Commissioner's decision to disallow part of the deduction claimed for expenditure in the Central Highlands Project in accordance with s 177F(1)(b) of the Assessment Act was correct. It follows that the objection decision made by the Commissioner on 7 January 2005 in respect of the 1997 income year must be affirmed. The Commissioner allowed Ms Macpherson's claimed deductions for the 1998 income year. Therefore, the objection decision made on 7 January 2005 in respect of the 1998 income year was not in dispute.

I certify that the seventy [70] preceding paragraphs are a true copy of the reasons for the decision herein of

Solicitor for the applicant: Nil - self-represented

Solicitor for the respondent: Australian Government Solicitor