Commissioner of Taxation v Cooke

Income Tax Assessment Act 1936 ss 51(1), 82KJ, 82KK, 82KL, 177

Clowes v Federal Commissioner of Taxation (1954) 91 CLR 209 Colonial Mutual Life Assurance Society Ltd v Federal Commissioner of Taxation (1953) 89 CLR 428 Commissioner of Inland Revenue v BNZ Investments Limited (2001) 20 NZTC 17 Commissioner of Taxation of the Commonwealth of Australia v Spotless Services Limited (1996) 186 CLR 404 Commissioner of Taxation v Emmakell Pty Ltd (1990) 22 FCR 157 Commissioner of Taxation v Lau (1984) 6 FCR 202 Commissioner of Taxation v South Australian Battery Makers Proprietary Limited (1978) 140 CLR 645 Eastern Nitrogen Ltd v Commissioner of Taxation (2001) 108 FCR 27 Fairway Estates Pty Ltd v Commissioner of Taxation (1970) 123 CLR 153 Federal Commissioner of Taxation v Brand (1995) 95 ATC 4633 Federal Commissioner of Taxation v Consolidated Press Holdings Ltd (2001) 207 CLR 235 Ferguson v Commissioner of Taxation (1979) 37 FLR 310 Fletcher v Commissioner of Taxation (1991) 173 CLR 1 G.P. International Pipecoaters Pty Ltd v Federal Commissioner of Taxation (1989-1990) 170 CLR 124 Hallstroms Pty Limited v Commissioner of Taxation (1946) 72 CLR 634 Howland-Rose v Commissioner of Taxation (2002) 118 FCR 61 Merchant v Federal Commissioner of Taxation (1999) 99 ATC 4221 Metwally v University of Wollongong (1985) 60 ALR 68 Milne v The Commissioner of Taxation of the Commonwealth of Australia (1975-1976)133 CLR 526 Puzey v Commissioner of Taxation (2003) FCAFC 197 Rhoden v Wingate [2002] NSWCA 165 Ronpibon Tin NL and Tongkah Compound NL v Federal Commissioner of Taxation (1949) 78 CLR 47 Steele v Deputy Commissioner of Taxation (1999) 197 CLR 459 Sun Newspapers Limited and Associated Newspapers Limited v Federal Commissioner of Taxation (1938) 61 CLR 337 Ure v Federal Commissioner of Taxation (1981) 50 FLR 219 Vincent v Federal Commissioner of Taxation (2002) ATC 4742 COMMISSIONER OF TAXATION v GRAHAM GEORGE COOKE N 1228 OF 2002 COMMISSIONER OF TAXATION v HUGH HUNTER JAMIESON N 1229 OF 2002 COMMISSIONER OF TAXATION v GRAHAM GEORGE COOKE N 1230 OF 2002 LEE, SUNDBERG AND CONTI JJ 26 MARCH 2004 SYDNEY

ON APPEAL FROM A SINGLE JUDGE OF THE FEDERAL COURT OF AUSTRALIA

THE COURT ORDERS THAT:

1. The appeals be dismissed.
2. The Appellant Commissioner pay the Respondents' respective costs of the appeals. Note: Settlement and entry of orders is dealt with in Order 36 of the Federal Court Rules.

ON APPEAL FROM A SINGLE JUDGE OF THE FEDERAL COURT OF AUSTRALIA

REASONS FOR JUDGMENT THE COURT 1 The appellant ('the Commissioner') appeals from judgments of the primary judge, given on 29 October 2002, whereby her Honour allowed appeals by the respective respondents against disallowance of their objections to notices of assessment issued by the Commissioner in respect of the fiscal years ended 30 June 1988 and 1989 in the case of Mr Cooke, and 30 June 1988 in the case of Mr Jamieson. The appeals concern the Commissioner's treatment of losses and expenses incurred by the respondents pursuant to their participation in a project known as the Australian Horticultural Project Number 1 ('AHP No 1'), promoted to the public by Growth Industries Pty Limited ('Growth Industries'). The proceedings at first instance and the appeals were heard together. Background circumstances 2 Information about AHP No 1 was set out in a prospectus dated 16 May 1988, which was lodged and registered with the Corporate Affairs Commission of New South Wales as delegate for the National Companies and Securities Commission. The prospectus offered to the public subscription in units in a unit trust known as the Australian Horticultural Trust Number 1 ('the Trust'). The function and purpose of the Trust was said to be to use the funds subscribed pursuant to the prospectus on behalf of persons who wished to conduct a business of growing proteas and Australian native flowers for domestic and overseas consumption. The sum payable for a unit in the Trust was $10,000. The minimum subscription stipulated in the prospectus was 500 units. That was satisfied by 2,500 units being underwritten by well-known Australian stockbrokers. In fact approximately 3,314 units were subscribed. Of the sum payable for each unit in the Trust, $250 was to be paid to Growth Industries Management Limited ('the Plantation Manager'), for what was described in the prospectus, firstly, as a 'service fee' and later as 'establishment costs'. On an acquisition of units, an investor (called therein and hereafter a 'Grower') would enter into a plantation agreement, in the form annexed to the prospectus, with the Plantation Manager and the trustee of the Trust, namely A.T.A. Services Limited (called therein and hereafter 'the Trustee' and referred to in certain of the documentation as the 'Grower's Representative'). For that purpose, the application form for units contained a power of attorney in favour of each director of the Trustee to execute a plantation agreement on a Grower's behalf. Clause 10 of the trust deed provided for the so-called redemption of the units, once the minimum subscription was attained. The sum of $9,750 payable on redemption of each unit was to be paid to the Plantation Manager on behalf of the Grower. 3 AHP No 1 had an estimated life of 15 years. Projected returns per unit in the first five years of operation ending 30 June 1993 were set out in the prospectus as follows: On the basis of On the basis of 2,500 units 3,500 units 1989 $1,996 1989 $2,006 1990 $2,380 1990 $2,422 1991 $4,424 1991 $4,466 1992 $4,938 1992 $4,799 1993 $5,641 1993 $5,681 These projected returns were based on assumptions set out in the prospectus. 4 The plantation agreement was expressed to commence on the date the units were redeemed, and to continue, unless sooner terminated, until 30 June 2003. Pursuant to the plantation agreement, a Grower was to acquire from the Plantation Manager one plantation per redeemed unit at a price of $250 per plantation. A plantation consisted of a holding comprising at the time it is physically constituted 192 seedlings each contained in its own Growth Bag together with growing material. A growth bag was a special container made of spun polypropylene material, designed to promote efficient and healthy plant growth. It had a limited life and one-third of the plantations were to be 'rebagged' each year after the first three years. The price paid for a plantation was said to include the cost of transporting the seedlings from a propagation site to a production site. It was the duty of the Plantation Manager under the plantation agreement to 'physically constitute' each plantation by planting each seedling in a growth bag with growing material, to deliver and establish the plantations at a production site, and to tag each growth bag with the name of the Grower who owned it. In fact the latter step did not occur and the location of each Grower's property was said to be ascertained according to computer records. The remainder of the proceeds payable on redemption of each unit was to be applied in payment of $45 to the Plantation Manager as a sub-licence fee for use of the production site for the plantation, and in payment of $9,455 to the Plantation Manager as a fee for management services. The product of each plantation was to be transported from the production site to a market. There were two large production sites made available to the Growers, one near Wellington in New South Wales, being part of the land known as Narroogal Park, and one that was part of the Longerenong campus of the Victorian College of Agriculture and Horticulture near Horsham in Victoria. For an annual fee, the owners of the production sites licensed the Plantation Manager to locate the plantations at the sites, and to otherwise use the sites for the purposes of AHP No 1. As noted above, sub-licence fees were payable by the Growers to the Plantation Manager. The Plantation Manager, pursuant to the plantation agreements, engaged VCAH Services Limited ('VCAH') as technical manager and Growth Industries Marketing Pty Ltd as marketing manager. The Plantation Manager and Growth Industries Marketing Pty Ltd were related companies of the promoter Growth Industries. The facility agreement and the investments made by the respondents 5 A facility agreement made on 24 May 1988 between Growth Industries, Mid-West Finance Pty Limited ('Mid-West'), the Plantation Manager and the State Bank of New South Wales ('the Bank') provided that the Bank would make a facility available to Growth Industries for an amount not exceeding $255,500,000. The purpose of the facility was stated to be, inter alia, to make funds available to Mid-West so that it could provide loans to Growers to participate in AHP No 1, and for like purposes in respect of several other unit trusts promoted by Growth Industries. Mid-West also appears to have been a related company of Growth Industries. 6 On or about 23 June 1988, Mr Cooke subscribed for 45 units in the Trust, by filling out the application form contained in the prospectus for that number of units, and by borrowing the full amount required for that subscription, namely $450,000 from Mid-West, pursuant to a loan approval given four days later on 27 June 1988. The interest rate charged on that borrowing was 15.65%. On the redemption of the units the Plantation Manager, on behalf of Mr Cooke, received the redemption sum of $438,750, which was appropriated, as to $11,250 for the purchase of 45 plantations, $425,475 for management fees and $2,025 for sub-licence fees. 7 In November 1988, Mr Cooke subscribed for a further 10 units in the Trust at a total cost of $100,000, again borrowed from Mid-West on similar terms. The process undertaken was the same as that in relation to the 45 units, the numbers involved in terms of plantations and outgoings being commensurately smaller. 8 On or about 19 May 1988, Mr Jamieson subscribed for 25 units in the Trust and borrowed the whole of the subscription sum of $250,000 from Mid-West. On redemption of the units the funds payable to the Plantation Manager on behalf of Mr Jamieson, namely $243,750, were appropriated as to $6,250 for the purchase of 25 plantations, $236,375 for management fees, and $1,125 for sub-licence fees. 9 In November 1988, Mr Jamieson gave notice of an intention to subscribe for a further 15 units in the Trust but it appears that the subscription did not proceed. The plantation agreement 10 The relevant terms of the plantation agreement may be summarised as follows: (i) the Plantation Manager was to be responsible for the cultivation, harvesting, marketing and sale of the flowers, and for the provision of all necessary equipment and ancillary services; (ii) the flowers for sale harvested from each plantation were to be pooled with the flowers of the plantations of all the other Growers; (iii) the property in the flowers was to pass to the Plantation Manager at the time of pooling; (iv) the Plantation Manager was to distribute the proceeds of sale of the flowers to the Growers, each being entitled to the percentage of the proceeds that his or her number of plantations bore to the total number of plantations (called the 'Grower's percentage'), without reference to the quality, volume, prices or any other factor in relation to the Grower's flowers or those of any other participant; (v) the Plantation Manager was to receive from each Grower: (A) a management fee of $9,455 in respect of each plantation, for management services to be rendered by 30 June 1989, out of which the Plantation Manager was to pay to the Trustee $18 as remuneration for the year ending 30 June 1989; (B) a productivity fee equal to 10% of the Grower's percentage of the gross sale proceeds derived after 30 June 1989; and (C) reimbursement of all costs, expenses and liabilities incurred by the Plantation Manager after 30 June 1989, with the intent that each Grower should bear the proportion of such costs represented by the number of plantations owned; (vi) the Plantation Manager was given 'full and unqualified' powers of management, including powers in relation to all things incidental to such management, to be exercisable subject only to the duty of the Plantation Manager to act bona fide in the interests of each Grower; (vii) the Trustee was entitled, on reasonable notice, to enter the production sites and inspect the books and records of the Plantation Manager and to give the Plantation Manager instructions concerning the provision of the management services; (viii) subject to instructions given to the Trustee, the Plantation Manager had absolute and uncontrolled discretion as to the exercise of its powers under each plantation agreement; (ix) the Grower was to have the benefit of a so-called guaranteed return option, and if the Grower elected to exercise the option in the application form for units in the Trust and paid the necessary fees, the Plantation Manager undertook to pay to the Grower a guaranteed return of $10,000 per plantation for the year ending 30 June 1993; (x) the Grower was to pay to the Trustee by way of remuneration $18 per plantation for years 2, 3, 4 and 5 of AHP No 1 and increased remuneration in subsequent years; and (xi) the Grower was to pay a sub-licence fee to the Plantation Manager of $45 per annum per plantation increased according to Consumer Price Index increases after the first year. 11 The guaranteed return was secured by an irrevocable letter of credit issued by the Bank in favour of the Trustee, to be held on behalf of each Grower electing to take the guaranteed return. A Grower was to receive the guaranteed return from the Plantation Manager by no later than 31 August 1993. Exercise of the option prevented the Grower from receiving any return for the year ended 30 June 1989, and limited the Grower to a net return of $2,000 per plantation for each of the financial years ended 30 June 1990, 1991 and 1992, and $12,500 for the financial year ended 30 June 1993, 'provided there [was] a Grower's net return available for distribution'. Any additional income per plantation otherwise available for distribution to a Grower in respect of those financial years was to be paid to the Plantation Manager, and for the later years ending 30 June 1994 to 30 June 1998, the Plantation Manager was entitled to receive 25% of the Grower's annual net return in respect of each plantation. The Plantation Manager would meet any contributions payable by the Grower in the financial years up to and including the year ending 30 June 1993. Presumably that included not only costs incurred in maintaining the plantation but also the sums the Grower was required to pay for licence fees and trustee remuneration. It followed that if AHP No 1 failed to provide a net return in those years, the Plantation Manager would have to meet all costs from its own resources. The cost of the guaranteed return was an up-front fee equal to 0.5% of the amount of the sum subscribed. 12 The respondents elected to exercise the guaranteed return option. Mr Cooke paid a fee of $2,250 in respect of the 45 plantations he acquired in June 1988 and $500 for the 10 plantations he acquired in November 1988. Mr Jamieson paid a fee of $1,250 in respect of the further 25 plantations he acquired in May or June of 1988. The claimed deductions 13 The prospectus contained the following statement concerning the taxation benefits for investors: 'For investors who become Growers, income from the Project will be assessable for income tax. However as investors become Growers in their own right their expenses in the business are tax deductible. On redemption of each unit $9,500 of the amount invested of $10,000 per unit is applied in payment of deductible expenses. Therefore, based on existing law, investors who become Growers can expect to receive a tax deduction for ninety five percent (95%) of the amount they subscribe.' The learned primary judge observed that the statement was consistent with the taxation opinion of Mallesons Stephen Jacques, although the opinion contained what her Honour described as more detailed qualifications and assumptions; the primary judge extracted the following therefrom:

'In our view expenses relating to the maintenance of a grower's plantation and the harvesting and sale of blooms will be deductible under section 51 of the Income Tax Assessment Act 1936 ("the Act") by reason of such expenses being characterised as outgoings necessarily incurred in carrying on a business of bloom production for the purpose of gaining or producing assessable income. Subject to our comments in relation to various disentitling provisions of the Act set out below such outgoings under the Project will be deductible in the year of income in which they are incurred. The fact that the benefit resulting from expenditure by a taxpayer will not enure to the taxpayer until a year beyond the year of assessment is not relevant to the question of deductibility according to the general principles of law … The deductibility of a grower's outgoings is, however, subject to various anti-avoidance provisions of the Act.' The opinion then discussed the anti-avoidance provisions of ss 82KJ, 82KK, 82KL and Part IVA of the Income Tax Assessment Act 1936 (as amended) (the 'Tax Act'), and concluded that these provisions were unlikely to affect the tax deductibility of a Grower's expenses. 14 The expenses or outgoings incurred pursuant to the plantation agreements and claimed by the respondents as deductions were as follows: (i) as to Mr Cooke in relation to the year ended 30 June 1988: (a) $425,475 for management fees; (b) $2,025 for licence fees; and (c) $2,250 for the guaranteed income return fee; (ii) as to Mr Cooke in relation to the year ended 30 June 1989: (a) $94,550 for management fees; (b) $450 for licence fees; and (c) $500 for the guaranteed return fee; and (iii) as to Mr Jamieson in relation to the year ended 30 June 1988: (a) $236,375 for management fees; (b) $1,125 for licence fees; and (c) $1,250 for the guaranteed return fee. On 20 February 1995 and 18 July 1995, by notices of amended assessments, the Commissioner disallowed Mr Cooke's claims for management, licence and guaranteed return fees for the fiscal years ending 30 June 1988 and 30 June 1989, and on 9 March 1995 the Commissioner did likewise in relation to Mr Jamieson's management, licence and guaranteed return fees for the fiscal year ended 30 June 1988. The expert evidence 15 The expert evidence adduced at the hearing before the primary judge was given on behalf of the respondents, with the exception of evidence given by a Mr Geurtsen on behalf of the Commissioner. The first expert witness was Mr Flude, the managing director of the Trustee. He had qualifications in agricultural and biological sciences, and had long experience in consulting in agricultural management. Mr Flude established the Trustee in order to provide agricultural consultancy, production and management services. As summarised by the primary judge, he addressed the following matters in chief and under cross-examination: (i) the history of AHP No 1 and the difficulties the project encountered;

(ii) the breakdown of the relationship between the Plantation Manager and VCAH, and the eventual appointment of a liquidator to Growth Industries in 1991;

(iii) the agreed circumstance that the new technology involved in AHP No 1, including the use of growth bags, meant that the project involved risks beyond those affecting more conventional horticultural projects;

(iv) it was not unusual to cultivate Australian natives and proteas, although cultivation for export was unusual; and

(v) the scale of the project created risk, and expert opinion in Australia was divided as to the applicability to Australian conditions of the technology adopted for AHP No 1.

16 The next expert witness was Mr Hunter, the Associate Director (Curriculum Business Development and Head of Department (Management Studies)) at the Dalby Agricultural College in Queensland. In 1988, he was the manager of Agri Valuers Australia, the technical consultant to AHP No 1, and he addressed the viability of the VCAH report and the Plantation Manager's marketing report contained in the prospectus, and the overall viability of the project. The primary judge summarised his conclusions as supporting the following propositions: (i) the reasonability of the projected yields set out in the prospectus; (ii) the suitability of the production sites for the project; and (iii) the appropriateness of the production budgets and the flower varieties selected.

Mr Hunter stated that based on his examination of those reports and further documentation provided by the Plantation Manager, he was of the opinion that AHP No 1 was a viable project as conceived or planned. 17 The respondents then provided evidence from Dr Martin, described by the primary judge as a highly qualified scientist, having more than 25 years experience in horticultural research, including flower production, and having held senior academic appointments. Among his consultancies, he was the principal landscape and aboriconsultant to the Centennial Park and Moore Park Trust, and a tree consultant to the Royal Botanic Gardens in Sydney. He furnished a report in the proceedings as to whether, at about the time the respondents subscribed funds to the Trust, AHP No 1 was horticulturally viable. Dr Martin's report was described by the primary judge as 'a detailed and carefully reasoned report'. He analysed the suitability of the production sites in terms of access to international airports, climatic conditions (including the incidence of frosts, disease and weeds), the availability of established site facilities, the adequacy of water and growing media supply, and the availability of labour, technical management and administration services. Based on his consideration of all of those factors, and his analysis of the suitability of the plantation sites, he expressed conclusions affirmatively in favour of the horticultural viability of the project, and the potentiality thereof to reach its goal of production of high-value cut flowers for export, and in particular, the prospects for the marketing thereof in the United States, Japan and Europe. 18 Expert evidence was also given on behalf of the respondents by Mr Weeks of Deloitte Touche Tohmatsu. His source material included the business consultant's report contained in the prospectus, prepared by Mr Wehby of Coopers & Lybrand, concerning the cash distributions projected in the prospectus, and also certain papers contained in the Coopers & Lybrand files. His conclusion was that on the figures so derived, the rate or basis of calculation of the management fees payable to the Plantation Manager was reasonable, and not greater than might reasonably have been expected under an arm's length transaction. Four of Mr Weeks' conclusions provided areas of controversy in the appeals, and the text thereof appears below: '7.24 As can be seen from the table, the estimated total cost for 2,500 units is $7,059. In my opinion it would be reasonable for [the Plantation Manager] to recoup costs equal to this amount through the management fee because there was a risk that only 2,500 units would be issued under the Prospectus. This amount is not materially different to the amount of $7,170 that was deducted from the prepaid management fee to calculate the margin to [the Plantation Manager]. 7.25 On the basis of the two foregoing analyses, in my opinion, the amount of $9,455 incurred by the respondents in respect of the management fees for the first 13 months of the project was reasonable and not greater than might reasonably be expected under an arm's length transaction. 7.26 The Geurtsen Report concludes that the prepaid management fee of $9,455 for the period up to 30 June 1989 was too high on the basis that the management fee margin was excessive. Section 9 of the report states "It is apparent that there is a large margin between the expenses of the project in the first year and the prepaid management fee. This margin appears to be $8,000 to $9,000 per plantation or $28 million to $31 million over 3,500 units." 7.27 This margin is based on the projections calculated in the Geurtsen Report which are in turn based on certain assumptions which vary significantly from those adopted in the Prospectus. In particular, the margin is calculated on the assumptions of no income and minimal expenses in the year ended 30 June 1989.' 19 The Commissioner's expert witness Mr Geurtsen was qualified academically in science and economics, and he was an experienced horticulturist and agronomist, and an analyst of farming systems and enterprises, including cut flower production. He had prepared a report jointly with another author. The primary judge permitted Mr Geurtsen to testify only in relation to the parts of the report for which he had been responsible, consistent with the approach taken in Rhoden v Wingate [2002] NSWCA 165 per Heydon JA at [61], an appeal which was determined after the hearing of the present proceedings at first instance, and before judgment was given. Her Honour's ruling in that regard was not challenged on the appeal. Those parts of that joint report admitted into evidence did not include a segment related to economic viability, being a subject addressed by the other author. As to the issue of the horticultural viability of the project, Mr Geurtsen expressed the view that 'several critical areas lacked adequate consideration', being:

• site selection in relation to intended species;
• risk assessment and management;
• flower periods in relation to markets and site location;
• plant yields; and
• field growth bag system. 20 Mr Geurtsen's evidence in chief concluded that horticulturally, the project was not viable. Under cross-examination, however, he agreed that his conclusions as to the unsuitability of the growth bags was pessimistic, and moreover that his report identified implicitly significant advantages in relation to a number of aspects of the project. Ultimately in the view of the primary judge, Mr Geurtsen's reservations as to capacity for viability appeared to depend on his opinion that the cultivation of flowers in AHP No 1 was for cut flower production, and in any event, the information with which he was briefed was too general in nature, or else related to the production of plants for general landscape purposes. Mr Geurtsen considered that cut flower production is a 'very different field' from the production of plants for general landscape purposes, but according to the primary judge, he did not explain why or in what way that was so. Instead, as the primary judge recorded, Mr Geurtsen merely said that he would need evidence to the effect that the species used for cut flower production would respond in the same manner as plants cultivated for general landscape production. 21 The primary judge recorded Mr Geurtsen's acknowledgment that there were some areas of agreement between his report and that of Dr Martin, and that Mr Geurtsen was not able to point to any specific part of Dr Martin's report with which he disagreed. Moreover Dr Martin disagreed with Mr Geurtsen's views on a number of issues, one of which her Honour thought appropriate to exemplify, namely Mr Geurtsen's opinion that the frost risk at Longerenong was 'extremely high'. The primary judge considered that Dr Martin had provided a convincing analysis of climatic data to support his contrary view, and in addition that Dr Martin had made the following observations of value: · the fact that the growth bags would elevate the plants above general ground level would have a moderating effect, thereby making the frost risk insignificant; and · the existence of research as to the use of growth regulators to promote frost resistance. Dr Martin also expressed the view that Mr Geurtsen's reservation as to the special nature of cut flower production was based on views informed by hindsight, and that in 1988, the growth regulator approach was sufficiently promising to warrant its inclusion in the prospectus. The conclusion of the primary judge was that Dr Martin provided a convincing rebuttal of many of the negative findings of Mr Geurtsen, and that Dr Martin's views were not seriously challenged in cross-examination. The primary judge considered that where Dr Martin's views conflicted with those of Mr Geurtsen, she should accept the former in preference to the latter. The primary judge's summary of the respondents' evidence 22 Mr Cooke became a partner in the firm of Allen Allen & Hemsley in 1963, and retired from the firm and from legal practice in 1989. During the period from 1970 to 1985, he spent most of his professional time working for one major corporate client. Following the break-up of that corporate client, his work for the client was dramatically reduced, and his legal practice as a partner correspondingly diminished. He was not optimistic about the prospect of building up another substantial clientele. Since retirement had thus become a real possibility, Mr Cooke turned his mind to his likely financial position as a consequence. He described the dilemma in which he found himself placed as follows (being a position which was reached at about the same time as he became aware of the promotion of AHP No 1, pursuant to an internal report of 7 June 1988 distributed within the firm by one of his partners Mr McKillop): 'I became interested in seeking out business ventures which would provide a good financial return for my retirement. In particular, I was looking for business ventures which would provide regular cash flow during my retirement. Typically, business opportunities that had significant up-side and little downside were attractive to me. At this stage in my life I could ill afford to place funds into ventures that carried significant risk of failure, although, I must admit, I was keen to make better than average returns. As part of my retirement objectives, it was also important to me to find a business opportunity that did not require every day "hands on" involvement in managing the business. Accordingly an opportunity to engage in a business, which could be managed by other persons was also attractive.' 23 Mr Cooke sought advice from Davey & Associates, accountants and financial planners, at the suggestion of Mr McKillop. That firm recommended inter alia that he invest in AHP No 1. Having read the prospectus, he formed the view that AHP No 1 was an attractive venture, having the potential to produce 'super' profits geared to later rather than earlier years, which suited his needs for retirement income. Mr Cooke further said that because he did not have cash available for investment, the finance to be available as described in the prospectus was important to him, as was the option for a guaranteed return of income, albeit limited in scope. He acknowledged an awareness of the risks inherent in the project, because this type of horticulture was relatively new. He recognised that the existence of the guaranteed return lessened, but did not eliminate, the risks he envisaged, which he explained as follows: '(a) … I recognised from my experience as a commercial lawyer that the guarantee was only as good as the legal efficacy and security under which it was set up. There was a limited but real risk that the guarantee may not be effective. Even if the funds were returned under the guarantee (as they eventually were) there was still a risk that the purchasing power of those funds was likely to be seriously reduced as a result of the then high rates of inflation and the fact that the guaranteed minimum return did not cover my net interest cost from June 1988 to 1 September 1993 (which was to be substantial). (b) I was also very much aware of the "opportunity cost" of making the investment in AHP No 1. Put simply, the fact that I was to participate in AHP No 1 meant that my financial ability to contribute to other business ventures would be curtailed. In addition, the fact that I had to borrow the funds meant that any further requests for loan from other sources would be met less than enthusiastically. (c) [U]nder the loan I took out to buy the original units in [the Trust] I was required to pay considerable interest payments all of which reduced my return on the overall business. I had no doubt that the project needed to succeed commercially for me to be put back into the same position as I was before commencement (even after allowing for the guaranteed minimum return).' 24 Mr Cooke admitted under cross-examination that towards the end of the 1988 financial year, he was aware that his income for that year would be considerably higher than for the previous year. He rejected however the suggestion that his dominant interest in the project was to gain the tax deduction for the 1988 fiscal year that he subsequently claimed. While he agreed that he was influenced by the memorandum of 7 June 1988 from Mr McKillop, in which the tax advantages of the project were highlighted, he said he was also influenced by the potential of the project for long-term income generation. Mr Cooke admitted that his investment was the largest amount he had ever privately invested, and that he was only able to do so because it was possible to borrow the whole of the amount required for the project. He also admitted that were it not for the availability of the represented tax deduction, he may have had to borrow to pay his income tax shortly to fall due for payment in respect of the 1988 fiscal year. It was evident to the primary judge that Mr Cooke had not read the AHP No 1 documents, or the agreements he was required to sign, with particular care. However Mr Cooke denied that the terms of that documentation were of little concern to him, or that his prime concern was the availability of the tax deduction. Mr Cooke insisted that the commercial and horticultural aspects of the project were his prime concern. 25 Mr Jamieson became a partner in Allen Allen & Hemsley in 1961, and retired from the firm in December 1995. During that time he engaged in legal work and in the administration of the firm. He said he had little time to devote to activities outside of the firm, and with one exception, he did not devote much time to any personal financial planning. That exception was his investment, through his wholly owned company, in an orchard which he had acquired and developed in Bilpin in the State of New South Wales. He said he visited the property as often as possible, supervising the orchard activities and, at times, physically participating therein. He further stated that the orchard generated significant revenue, most of which he put back into the orchard business, and further, that the orchard business had been subject to an audit by the Australian Tax Office in the early 1980s, following which he was in effect acknowledged by the Commissioner to be a bona fide primary producer. 26 Mr Jamieson further testified that during the 1980s, although his firm's legal practice was flourishing, he realised that he had not accumulated sufficient assets to provide for his retirement. Early in 1988, he also got in touch with Davey & Associates to obtain financial advice, and, inter alia, investment in AHP No 1 was recommended. From his discussions with Davey & Associates and his reading of the prospectus, he was attracted to AHP No 1 investment for a number of reasons, including the following:

Whether Part IVA of the Tax Act applies to the respondents 86 The relevant sections in Part IVA are as follows: '177A(1) [Definitions] In this Part, unless the contrary intention appears: … "scheme" means: (a) any agreement, arrangement, understanding, promise or undertaking, whether express or implied and whether or not enforceable, or intended to be enforceable, by legal proceedings; and (b) any scheme, plan, proposal, action, course of action or course of conduct; … 177C(1) [Obtaining a tax benefit] Subject to this section, a reference in this Part to the obtaining by a taxpayer of a tax benefit in connection with a scheme shall be read as a reference to: … (b) a deduction being allowable to the taxpayer in relation to a year of income where the whole or a part of that deduction would not have been allowable, or might reasonable be expected not to have been allowable, to the taxpayer in relation to that year of income if the scheme had not been entered into or carried out; … and, for the purposes of this Part, the amount of the tax benefit shall be taken to be: … (d) in a case to which paragraph (b) applies - the amount of the whole of the deduction or of the part of the deduction, as the case may be, referred to in that paragraph; … 177D This Part applies to any scheme that has been or is entered into after 27 May 1981, and to any scheme that has been or is carried out or commenced to be carried out after that date (other than a scheme that was entered into on or before that date), whether the scheme has been or is entered into or carried out in Australia or outside Australia or partly in Australia and partly outside Australia, where: (a) a taxpayer (in this section referred to as the relevant taxpayer) has obtained, or would but for section 177F obtain, a tax benefit in connection with the scheme; and (b) having regard to: (i) the manner in which the scheme was entered into or carried out; (ii) the form and substance of the scheme; (iii) the time at which the scheme was entered into and the length of the period during which the scheme was carried out; (iv) the result in relation to the operation of this Act that, but for this Part, would be achieved by the scheme; (v) any change in the financial position of the relevant taxpayer that has resulted, will result, or may reasonable by 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 reasonable 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 o 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). … 177F(1) [Commissioner's discretion to cancel tax benefit] Where a tax benefit has been obtained, or would but for this section be obtained, by a taxpayer in connection with a scheme to which this Part applies, the Commissioner may: … (c) in the case of a tax benefit that is referable to a deduction or a part of a deduction being allowable to the taxpayer in relation to a year of income - determine that the whole or a part of the deduction or of the part of the deduction, as the case may be, shall not be allowable to the taxpayer in relation to that year of income; …' 87 Her Honour gave compendious consideration to the matters required to be considered under s 177D(b). It was not submitted by counsel that her Honour erred in that regard. The primary judge recorded that the Commissioner's Part IVA case presented below concerned a scheme which 'included the Plantation Agreement, the Trust Deed, the prospectus, the application for units in the Trust, the Letter of Credit Agreement between Growth Industries and the Plantation Manager, the loan from Mid-West to the respondents, loans from the Bank to the Plantation Manager and from the Plantation Manager to Mid-West, the deposit of part of the management fees by the Plantation Manager with a subsidiary of the Bank in order to secure the letter of credit' (the emphasis was that of the primary judge). Alternatively a Part IVA scheme for present purposes was identified by the Commissioner as consisting only of the plantation agreement and the Trust Deed 'entered into in the context of the agreements, events and circumstances comprising the other documents and transactions identified', or alternatively again, all of the above as well as 'other similar AHP No 1 plantation agreements with other investors incorporating the "guaranteed return option" and/or similar loans from Mid-West to such investors financing their participation in AHP No 1'. 88 The primary judge found that the evidence of the respondents was to the effect that at the time of making their respective investments, they knew nothing about the transactions identified in the emphasized passage in the preceding paragraph. Upon that footing, her Honour accepted the submission of the respondents that those transactions could not be part of any scheme, and purported to apply the dictum of Blanshard J of the New Zealand Court of Appeal in Commissioner of Inland Revenue v BNZ Investments Limited (2001) 20 NZTC 17 at [103] to the effect that a taxpayer's ignorance of the arrangements the subject of an income tax avoidance scheme renders the New Zealand anti-avoidance legislation unavailable to the New Zealand revenue authority. However as was pointed out in Howland-Rose at [134], Part IVA of the Tax Act is distinguishable from the New Zealand legislation in that regard. Thus in Federal Commissioner of Taxation v Consolidated Press Holdings Ltd (2001) 207 CLR 235, in the joint judgment of Gleeson CJ, Gaudron, Gummow, Hayne and Callinan JJ at [95], it was pointed out that '[o]ne 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 Part IVA depends upon the fiscal awareness of a taxpayer'. 89 The reasoning of the primary judge proceeded thereafter as follows in relation to the transactions whereof the respondents were aware: 'In so far as the respondent contends that the persons who entered into the scheme or carried out the scheme include the applicants, the Plantation Manager and the other parties to the dealings and transactions identified by the respondent as included in the scheme, there is a difficulty. There is no evidence before me as to what the other investors did or did not do, for instance whether all or any of them took advantage of the guaranteed return.' Upon that basis, the primary judge continued as follows: 'In my view, it is only the [Commissioner's] alternative "scheme" that can be considered in this proceeding. This scheme meets the requirement noted by Hill J in Hart v Commissioner of Taxation [2002] FCAFC 222 at [44] that the definition of a scheme must be able to "stand on its own feet". The tax benefit identified by the [Commissioner] was the deductions that would be obtained by each applicant in respect of management fees, licence fees and guaranteed return fees. This leaves for consideration the question whether the sole or dominant purpose of the applicants in entering into the scheme was to obtain a tax benefit having regard to the matters set out in s 177D(b); see also s 177A(5).' The decision of the Full Federal Court in Hart is now reported at (2002) 121 FCR 206. 90 The primary judge referred in the present context to the evidence of the respondents, which she accepted, that they had not made adequate provision for their retirement, and for that reason each of them had wanted to participate in a relatively long-term project, yet they did not have sufficient personal resources to finance any such investments, and that therefore they needed to borrow money for that purpose. The primary judge further found that the respondents elected to exercise the option of receiving a guaranteed income return consistently with prudently protecting part of their investment. The primary judge referred also to the reality that each of the respondents expected a significant increase in income for the fiscal year ended 30 June 1988 which would generate an increased income tax liability, so that an investment which did not carry with it a substantial tax deduction would compromise their ability to invest in an income producing investments for the benefit of their retirement. Moreover the primary judge accepted that it was important to the respondents that they avoid incurring liabilities that would prejudice their respective approaching retirement situations, and that objectively it was reasonable that they would have regarded the success of AHP No 1 as important to them, irrespective of the steps they took to protect themselves if the project was not successful. In any event the guaranteed return was substantially less than the amount of interest each had to pay over five years, and moreover in effect only the after-tax portion of the guaranteed return would be available to repay the borrowings undertaken to subscribe for units in the project. 91 Senior counsel for the respondents was adamant that as matters transpired in the course of the hearing before the primary judge, the Commissioner did not rely on the three alternatively alleged schemes as described above, and that what the respective parties ultimately contended in the course of addresses below, both orally and in writing, related to the most narrowly based scheme emerging from that recorded above. In particular, it was emphasised that the Commissioner did not put any alternative proposition, orally or in writing, to the primary judge that the relevant dominant purpose could be attributed to the Plantation Manager. Upon that footing, it was submitted that the Commissioner was bound by the conduct of the case at the trial, and reliance was placed on the following passage from the judgment of the High Court in Metwally v University of Wollongong (1985) 60 ALR 68 at 71, as follows: 'It is elementary that a party is bound by the conduct of his case. Except in the most exceptional cases, it would be contrary to all principle to allow a party, after a case has been decided against him, to raise a new argument which, whether deliberately or by inadvertence, he failed to put during the hearing when he had an opportunity to do so.' Senior Counsel for the respondents further submitted that there were no exceptional circumstances to justify the Commissioner raising the existence of alternative schemes on the appeal, irrespective of the primary judge's apparently unintentional oversight in her reasons by referring to the 'narrow scheme'. 92 The written response of counsel for the Commissioner to the objections raised on behalf of the respondents was in the following somewhat ambiguous terms: '…, it has always been the appellant's case to rely upon each of the three alternative particularised schemes (which under one alternative requires a consideration of the purpose of [the Plantation Manager]) as set out at paragraph [85] of the reasons of the learned primary judge. The appellant is entitled to do this. It was on this basis that the learned primary judge felt compelled to consider and reject (wrongfully in the submissions of the appellant) the wider scheme identified by the appellant. At trial counsel for the appellant did not abandon any of these alternatives. Further, the respondents do not contend that they are prejudiced by the appellant's continued reliance upon each alternative scheme for the purposes of this appeal. The alternatives pleaded in this case are not "new" arguments in the sense described in University of Wollongong v Metwally (No 2) (1985) 60 ALR 68.' Without deciding the entitlement of the Commissioner to pursue an issue which may not have been propounded appropriately before the primary judge, raising in particular the need for the Full Court to address de novo the intentions of the Plantation Manager, we will nevertheless address the full extent of the Commissioner's submissions on the subject. We observe, in so doing, that no application was made on behalf of the respondents in response to re-open their case at first instance or to lead further evidence on the appeal. 93 The Commissioner's principal Part IVA submission to the Full Court was that objectively ascertained, the dominant purpose of each respondent was to obtain the tax benefits available in connection with each so-called relevant scheme, or alternatively, that 'it was [the Plantation Manager's] dominant purpose, objectively ascertained, that each respondent, together with the other participants in the AHP No 1 project who elected to take the guaranteed return, obtain the tax benefits in connection with each relevant scheme'. The following passage from the judgment of Brennan CJ, Dawson, Toohey, Gaudron, Gummow and Kirby JJ in Spotless at 415 was said to reject the existence of a dichotomy between the presence of a dominant purpose of obtaining a tax benefit and the pursuit of a commercial gain: 'A person may enter into or carry out a scheme, within the meaning of Pt IVA, for the dominant purpose of enabling the relevant taxpayer to obtain a tax benefit where that dominant purpose is consistent with the pursuit of commercial gain in the course of carrying on a business.' The dominant purpose found in Spotless was to achieve a tax benefit in Australia in the form of an exemption from income tax upon a very large deposit of funds not for the time being required in relation to the taxpayer's Australian business operations. The following passage (at 423) was said by the Commissioner to support the case for the existence of a dominant purpose on the part of each respondent of obtaining a tax benefit, having regard to the particular means adopted by the respondents to invest for the benefit of their respective retirements from legal practice: '… The scheme was the particular means adopted by the taxpayers to obtain the maximum return on the money invested after payment of all applicable costs, including tax. The dominant purpose in the adoption of the particular scheme was the obtaining of a tax benefit… It is true that the taxpayers were concerned with obtaining what was regarded as adequate security for an investment made "off-shore". However, the circumstance that the Midland Letter of Credit afforded the necessary assurance to the taxpayers does not detract from the conclusion that, viewed objectively, it was the obtaining of the tax benefit which directed the taxpayers in taking steps they otherwise would not have taken by entering into the scheme.' Thus the scheme adopted must be first identified and the dominant purpose for entering into it objectively ascertained. In our opinion the evidence before the primary judge could not be described as compelling a conclusion of dominant purpose as reached in Spotless. 94 As noted above the Commissioner asserted that the High Court in Spotless 'rejected the existence of a dichotomy between the presence of a dominant purpose of obtaining a tax benefit and the pursuit of a commercial gain', and moreover 'considered the question of purpose having regard to the particular means adopted by the taxpayers'. The first of those assertions was pitched too widely. The circumstances in Spotless were thatsubstantial funds were deposited offshore in the 'tax haven' of the Cook Islands for a short term at a rate of interest of about 4% below applicable bank bill rates available in Australia. The Cook Islands levied withholding tax upon interest income at only 5%. It was contended inter alia that the interest derived in the Cook Islands fell outside the scope of operation of Part IVA. However the taxpayer forewent a higher interest rate obtainable in Australia for the purpose of achieving a lower fiscal exposure in Australia. 95 The Commissioner sought to contend, upon the footing of Spotless, that the particular means adopted by the respondents in entering into AHP No 1 displayed a dominant purpose of obtaining the tax benefits, being a purpose said to be revealed by the following steps, overt acts or circumstances reflecting matters enumerated in s 177D(b) of the Tax Act: (i) the fact that the partnerships drawings of each respondent from their legal practice had increased materially during the 1988 fiscal year, thus giving rise to a significantly increased tax liability. In the case of Mr Jamieson, in particular, he acknowledged that his investment in AHP No 1 was a 'drastic step' designed to deal with the income tax that would otherwise have to be payable in respect of professional earnings for that year; (ii) each respondent obtained the advantage of deferring income tax on their increased professional income for five years; Mr Jamieson claimed deductions relevantly of $238,750, and as a result, his income tax savings for the year ending 30 June 1988 year was said to be $119,971.87; Mr Cooke claimed deductions relevantly of $429,750.00 for that year, and as a result he also made commensurately a substantial income tax saving; in cross-examination Mr Cooke said that his disposable income from his professional practice for the 1988 fiscal year increased from $150,000 to $330,000; (That kind of fiscal result was described in Eastern Nitrogen Ltd v Commissioner of Taxation (2001) 108 FCR 27 at 47 (Carr J with whom Lee and Sundberg JJ agreed) as 'point[ing] towards a purpose of obtaining [a] tax benefit') (iii) those income tax advantages in respect of the 1988 fiscal year were obtained by each of them for a minimal cash outlay; in the case of Mr Jamieson, the evidence was that his cost of participation in AHP No 1 for the 1988 year of income was $3,750; in the case of Mr Cooke, his corresponding outlay for the 1988 year of income was $6,750; (iv) those income tax advantages were obtained by constructing a liability to pre-pay management fees at an inflated cost; (v) the income tax advantages were prominently presented in the internal memorandum of Mr McKillop sent to the respondents, and also in the prospectus under the heading 'Taxation' which stated that investors could expect to receive a tax deduction for 95% of the amount subscribed; that prospectus statement was supported by the tax opinion from Mallesons Stephen Jaques included in the prospectus; and (vi) putting to one side the available income tax benefits, the project was said to be un-tried, and carried significant risks of failure above and beyond the ordinary risks associated with a horticultural project; in that regard, Mr Flude admitted that the project exhibited a higher risk by reason of the new technology involving the use of growth bags; Mr Flude was said to have also admitted that the promoters were 'looking' at a scale of operations that had not been undertaken previously, and that so much involved an additional element or risk; he was also said to have conceded that there were problems in the two locations in which the flowers were to be grown, and that at Naroongonal Park in particular, there were problems in relation to water supply evident prior to the commencement of the project; the project was asserted, objectively speaking, to be not a suitable means of obtaining a 'regular cash flow during… retirement… that carried [no] significant risk of failure'. 96 The response of senior counsel for the respondents may be outlined as follows: (i) in determining the dominant purpose of a person who entered into or carried out a scheme, the only matters to be taken into account were those set out in s 177D(b), and what the Commissioner did not do, or do adequately, was to demonstrate how the matters enumerated above fell within s 177D(b); (ii) any such matters were then required to be weighed against the other commercial aspects of the scheme in order to determine the ruling, prevailing or most influential purpose of each respondent (Hart at 227-228); moreover the matters identified by the Commissioner could not be viewed in isolation, as the Commissioner had sought to do; (iii) a number of the matters referred to in the Commissioner's submissions were not supported by the evidence; for instance, it was said on behalf of the respondents that there was no evidence that the management fees were inflated; moreover whilst the project was untried and untested, the primary judge found that the project was horticulturally and economically viable and was the subject of genuine commercial objectives; (iv) whilst the respondents stood to receive a significant upfront deduction in respect of their outlays for management fees, their outlays were funded by loans bearing significant rates of interest; (v) the respondents were not aware that the management fees were used or to be used by the Plantation Manager, in part, to 'fund' letters of credit to be provided by the Bank, and whilst they obtained the guaranteed return, secured by letters of credit, the obtaining of that guaranteed return was consistent with their concern for prudent protection of their respective substantial commitments; (vi) the circumstance that each respondent borrowed funds, in order to fund the payment in advance of the management fees, did not establish the dominant purpose alleged by the Commissioner (being a borrowing to be repaid on which there was a substantial liability for interest); (vii) the circumstance that the respondents limited their participation in the businesses the subject of contention reflected no more than a recognition that each was conducting his separate business undertaking and involvement through the Plantation Manager, at least for certain activities, and did not point to any dominant purpose of obtaining the tax benefits; (viii) whilst the prospectus addressed (and highlighted) the income tax advantages of participation in the project, it also addressed (and highlighted) the commercial advantages thereof, including the potential income returns; (ix) the fact that neither respondent personally signed the plantation agreement executed on their behalf by the Trustee was essentially a matter simply of convenience; (x) whilst the commencement of the scheme took place towards the close of the 1988 fiscal year, so much was largely explicable by the fact that the prospectus was not registered until 16 May 1988, nor was there any certainty that it would be open to either respondent to participate in the project at a later time; and (xi) on the basis of the prospectus, each respondent was reasonably entitled to expect that he would receive income from the project from 1989 onwards; notwithstanding that expectation, they did not receive income until 1993, that being confined to the guaranteed return. 97 Having given the matter some thought, we are of the opinion that neither the functions undertaken relevantly by the Plantation Manager, nor any of the contractual obligations to which it was privy, provide any additional assistance to resolution of the Part IVA issues purportedly arising. In the particular circumstances of this case, and on the facts found by her Honour, there is no reason to conclude that the dominant purpose of the Plantation Manager in carrying out a scheme so defined was to obtain tax benefits for the respondents. 98 The remaining submissions of the Commissioner summarised above also face the considerable obstacle of the findings made by the primary judge relevant to the issue of purpose, and, in particular by reference to the expert evidence accepted by her Honour. 99 The primary judge found that the project was a genuine commercial enterprise and was potentially viable, based on the matters represented and portrayed in the prospectus. As observed by her Honour, Mr Cooke found the report in the prospectus as to income potential to be so attractive that he subscribed for further units in November 1988. 100 We are satisfied that her Honour applied the correct principles to the facts as found by her in respect of the Part IVA issues and that no error on the part of her Honour has been demonstrated by the Commissioner in his submissions on those issues. The findings of fact of the primary judge that were relevant to Part IVA were findings that were open on the evidence placed before her Honour, permitting her Honour to reach the conclusion she did as to the absence of a dominant purpose of either respondent of obtaining an income tax benefit or benefits, within the scope of operation of Part IVA, by entering into or carrying out a scheme as described by the Commissioner. 101 The Commissioner's appeal must be dismissed with costs. I certify that the preceding one hundred and one (101) numbered paragraphs are a true copy of the Reasons for Judgment herein of the Court.

Counsel for the Applicant: G T Pagone QC and S H Steward

Solicitor for the Applicant: Australian Government Solicitor

Counsel for the Respondent: R F Edmonds SC and M Richmond

Solicitor for the Respondent: Allens Arthur Robinson