Commissioner of Taxation v Normandy Finance and Investments Asia Pty Ltd

Facts and circumstances relevant to the first (the underlying transactions) and second (consequential orders) issues 71 Most of the primary facts were (and are) not in dispute. 72 Three companies were said to be borrowers - Pilmora Pty Ltd as Trustee for the Townsing Family Trust (Pilmora), Advant Pty Ltd (Advant), and Normandy Finance and Investments Asia Pty Ltd (Normandy Australia or NFIAPL). Mr Townsing was the directing mind and will of each of these companies, the taxpayers. 73 Three off-shore companies were said to be lenders. Normandy Finance and Investments Asia Ltd (Normandy Asia or NFIAL), Normandy Finance and Investments Limited (Normandy UK or NFIL) and Hua Wang Bank Berhad (HWBB). Each of these companies is owned by a company controlled by Vanda Gould. 74 The companies said to be lenders transferred funds at various times and in various amounts to the taxpayers. 75 The Commissioner assessed the taxpayers on the basis that the loans were shams and the amounts were ordinary income of the taxpayers and assessable under s 6-5 of the Income Tax Assessment Act 1997 (Cth) (the ITAA97). 76 The taxpayers lodged objections to the assessments. The basis of the objections was that the amounts assessed by the Commissioner were loan funds and not ordinary income in the hands of the taxpayers. 77 The objections were disallowed and the taxpayers appealed. They also applied to the Administrative Appeals Tribunal (the Tribunal) for review, insofar as presently relevant, of assessments of penalties and interest based on the assessments. The appeals to this Court and to the Tribunal were both heard by the primary judge, the latter in his capacity as a presidential member of the Tribunal. 78 The appeal statements filed by the parties put into issue whether the loan agreements under which the loan funds were claimed by the taxpayers to have been advanced to them were shams. The loans were said to have been advanced: (1) to Advant pursuant to two loan agreements, one with Normandy Asia and the other with Normandy UK; (2) to Normandy Australia pursuant to an oral loan agreement with Normandy Asia; and (3) to Pilmora pursuant to three loan agreements, one with HWBB, one with Normandy Asia and the other with Normanby UK. 79 In its revised appeal statement, Advant contended that both loan agreements were documented and each loan agreement executed (para 44) and that neither loan agreement was a sham because, amongst other things, "none of the signatories to the loan agreements intended them to do anything other create an obligation for the advance of funds along with a corresponding obligation of repayment" (para 67). Advant also contended, in the alternative, that even if the loan agreements were shams, the monies advanced to it did not have the character of income and were not assessable because the monies were not derived by Advant beneficially, or received by it in connection with any income earning activity, or the monies were received by it on capital account (para 68). 80 In its revised appeal statement, Normandy Australia contended that the fund transfers to it were and "had the character of" loan monies under an agreement "which was not a sham" (para 29, 30) or, in the alternative, the amounts paid to it "had the character of a capitalisation of [Normandy Australia], a gift, or non-assessable receipts" (para 31). 81 In its revised appeal statement, Pilmora contended that it had received money from the three entities "in a context where a written loan agreement was executed between Pilmora and each of the three entities" (para 7). Further, that the three loan agreements were executed in 2002 between Pilmora and HWBB, in March 2002 between Pilmora and Normandy UK, and in April 2002 between Pilmora and Normandy Asia, and that the parties as relevant "intended to give [each] agreement legal effect" (paras 14, 15 and 16). Pilmora also contended that these loan agreements were not shams because, amongst other things, the loan agreements were documented and executed by or on behalf of the lender and borrower, none of the signatories intended the documents to do other than create an obligation for the payment of funds and repayment, and there was "no common intention that any of the three arrangements be something other than what it purported to be" (para 25). Alternatively, it was contended that if any one or more of the loan agreements was a sham then Pilmora did not receive the money beneficially or did not receive the money in connection with any income earning activity or received the money on capital account (para 26). 82 The primary judge heard the appeals and the application to the Tribunal together on 1-5 June, 10-12 June, 15-19 June, 24 June, and 8-9 July 2015. He delivered judgment on 17 December 2015 (see Normandy Finance Pty Ltd v Commissioner of Taxation [2015] FCA 1420), as well as reasons for decision in the Tribunal on the same day (Pilmora Pty Ltd as Trustee of the Townsing Family Trust and Commissioner of Taxation (Taxation) [2015] AATA 976). 83 In extensive written opening submissions before the primary judge the taxpayers advanced their cases consistently with their appeal statements. However, in one paragraph, para 84, in the written opening submissions this was said: In the event there is doubt about the execution or enforceability of any of the individual written loan agreements, or the oral agreement for a loan between [Normandy Asia and Normandy Australia], then it is submitted there was still a loan obligation, for the following reasons: (i) The court should infer the entry by the relevant Applicant into a loan contract with the lender from the conduct of the parties…; (ii) In the alternative, the relevant Applicant was estopped from denying that an obligation arose for the Applicant under the debt facility and the Applicant had an enforceable obligation to repay the loan principal… 84 The oral opening submissions for the taxpayers before the primary judge were also consistent with the appeal statements - that there were five loan agreements in writing which were not shams and under which moneys were advanced (albeit that some advances occurred before the loan agreements were executed), and one oral loan agreement which was not a sham under which moneys were advanced. 85 When dealing with the admissibility of the written loan agreements, senior counsel for the Commissioner said that the Commissioner did not object to their admission and, in passing, observed that insofar as advances had been made before execution of the agreements "this would depend on an established agreement existing. Presumably, it would be an oral agreement. That seems to be what it would be". By this it may be inferred that what was meant was that for such advances to be loans, some agreement for repayment other than the written agreements must presumably be asserted (given that the essence of a loan is a contemporaneous obligation of repayment - see the primary judge's reasons, about which there is no issue, at [67]-[72]). 86 Senior counsel for the Commissioner objected to the taxpayers' company accounts (which recorded loans) being treated as evidence of the truth of the accounting entries. In response, the primary judge made a direction under s 136 of the Evidence Act 1995 (Cth) that the accounts of the taxpayers be treated as evidence of entries into the accounts and no more. 87 Apart from the fleeting reference by the Commissioner's senior counsel to a suppressed presumption that might be part of the taxpayers' case (referred to above), the hearing proceeded in the usual course and on a basis consistent with the appeal statements. Numerous witnesses called by the taxpayers gave evidence and were cross-examined between 2 and 12 June 2015 (11 in total). One of the witnesses who gave evidence in this period was Daud bin Yunus, a representative of the asserted lender, Normandy Asia, who was called by the taxpayers and cross-examined on 4 June 2015. Another was Susan Beach, a representative of the asserted lender, Normandy UK, who was called by the taxpayers and cross-examined on 5 June 2015. Only two witnesses were left in the taxpayers' case as at 12 June 2015 - Mr Townsing, the relevant directing mind and will of the taxpayers, and another person who is not material to these appeals. 88 Before Mr Townsing could give evidence the primary judge had to deal with various objections to his evidence. One objection was to para 47 of Mr Townsing's affidavit of 20 March 2015. The primary judge said he would not allow para 47. Paragraph 47 (with the part that seems to have drawn the primary judge's attention in bold) said: From 1994 through until 2007 my understanding was that NFIL was the sole owner of NFIAL and Mr Digby Hubbard, as the director of NFIL, was the person to whom I was ultimately responsible in my own capacity as a director of NFIAL (although subject to the duties I owed to NFIAL itself as a corporate entity). I assumed Mr Hubbard was the economic owner of NFIL but I do not recall ever seeing the register of shareholders of NFIL, or being informed by anybody about details of the company's ownership. 89 The following exchange ensued between the primary judge and counsel for the taxpayers (again, with any particularly important parts shown in bold): HIS HONOUR: The next one is 47. I'm not going to allow 47. MR HYDE PAGE: Well, your Honour - - - HIS HONOUR: You want to press it? MR HYDE PAGE: Well, your Honour, I was simply going to comment that this is more the respondent's case than the applicant's case that there's anything - that anything turns on Digby Hubbard or Vanda Gould or JA Investments or these other entities hovering - - - HIS HONOUR: But it's common ground that - I'm sorry, but it's common ground that - well, it may not be explored in the evidence, but it's common ground that Mr Vanda Gould is up the top of the tree controlling this JA Investments. It's common ground that JA Investments wholly owns - beneficially - Normandy UK. It's common ground that Normandy UK wholly owns Normandy Asia. It's common ground that Normandy Asia wholly owns Normandy Australia. It's common ground that Mr Vanda Gould, as a chartered accountant based in Sydney, provided accounting and taxation services to Mr Townsing and his associated entities. And I - that second sentence of paragraph 47 is nearly laughable. Wasn't Mr Hubbard in the same shoes as Ms Beach, wasn't it? Total nominee. MR HYDE PAGE: Well, if Mr Townsing ever does give evidence about it, his evidence is that he would discuss the affairs of Normandy Hong Kong - - - HIS HONOUR: But if Mr Vanda Gould was - I don't know what the position of Mr Vanda Gould vis-à-vis JA Investments was, but it couldn't be seriously suggested, I put to you, that Mr Vanda Gould would act contrary to the instructions and interests of Mr Townsing in relation to any of the Normandy companies. MR HYDE PAGE: It has, as far as I know, never been suggested that Mr Vanda Gould has ever sought to direct - - - HIS HONOUR: No, just act contrary to the instructions and interests of Mr Townsing. As night follows day. What I'm going to say - there's a lot of pretension in the documents that I've seen to date. But you're not seriously suggesting, are you, that the Normandy companies - Normandy UK, Normandy Asia, Normandy Australia - were at arm's length with Mr - the companies - entities associated with Mr Townsing, are you? MR HYDE PAGE: We're not suggesting that they're at arm's length. HIS HONOUR: No. And that's the basis of my putting to you that it's as plain as the nose on your face, it seems to me, that one could - it is open for me to find that Mr Gould, having regard to his longstanding relationship with Mr Townsing, as his professional advisor, would not have acted contrary to the instructions or interests of Mr Townsing in relation to the running of the Normandy companies. MR HYDE PAGE: Your Honour, I don't cavil with that as a bare proposition. What is, I think, in issue - or at least not agreed between the parties is whose money was actually being lent by Normandy UK. I mean, Mr Townsing says that he has no idea where the money came from and it wasn't his. The respondent's position, as always, seems to be rather - - - HIS HONOUR: I'm only concerned about whether the parties - my first concern is whether the picture that's painted by the documents is a true reflection of the relationship. MR HYDE PAGE: Well, your Honour - - - HIS HONOUR: But for this witness to say that he assumed Mr Hubbard was the economic owner of NFIL beggars belief. Anyway. MR HYDE PAGE: Well, your Honour, the applicant's submission will ultimately be that, whether or not transactions are loans and whether or not they are - - - HIS HONOUR: But that's a different question, Mr Hyde Page. Whether they're a sham or not a sham is a different issue. I'm only speaking on the position as to whether - it seems to me that there's a lot of things being documented in this case which I've seen and are in evidence to date where the parties have sought to create the impression - and I will put it no higher than that - the impression that they were dealing with each other at arm's length. And having regard to the way they conducted themselves, of which there has been evidence to date, that seems to me to be somewhat of a pretence. Now, that doesn't mean to say that the underlying transaction is a sham, but it does suggest that there's provisions and agreements and things of the nature which the witnesses have been taken to, time and time again, that this is all pretence. Now, the pretence is obviously designed to give the impression that the parties were dealing with each other at arm's length. But you can't be seriously suggesting that their conduct is consistent with that. MR HYDE PAGE: Well, I mean - - - HIS HONOUR: Mrs Glover agreed on a number of occasions with questions put to her by Dr Jakes that various amounts that were in evidence about payments, that they were the only payments were made. People who are dealing with each other at arm's length don't behave like that. No, that doesn't go to veracity of the underlying transaction, but it doesn't, you know - to suggest that, as this witness does: I assumed Mr Hubbard was the economic owner of NFIL. beggars belief. MR HYDE PAGE: Well, your Honour, the tenor of the applicant's - again, to the extent that this is an issue - the applicants say that of course they're not at arm's length in the sense that - - - HIS HONOUR: The money didn't come out of the blue sky. MR HYDE PAGE: There's no suggestion that it did. Well, your Honour, paragraph 47 has been adjudicated. Should we proceed with the next paragraph? HIS HONOUR: Well, are you pressing paragraph 47? MR HYDE PAGE: No. HIS HONOUR: You're not. Okay, well, I will exclude paragraph 47. Okay. 90 This exchange is important because, as the taxpayers contend in these appeals, the Commissioner was thereby put on notice of the primary judge's view that while the written loan agreements might be shams, this did not mean that the "underlying transactions" were also shams. It also discloses the primary judge's apparent view that the purpose of the sham was to make it appear as if the lenders and borrowers were dealing with each other at arm's length, a matter about which it is apparent the primary judge was highly sceptical. The taxpayers also point to the statement by their counsel that "We're not suggesting that they're at arm's length", as evidence in support of the proposition that the taxpayers adopted the primary judge's apparent case thesis at this point in the hearing (that is, before Mr Townsing gave evidence). 91 While dealing with this exchange it is convenient to note also that, after this statement which the taxpayers emphasise, their counsel said that the issue was the source of the money, Mr Townsing's evidence being that it was not his money and he had no idea where it came from (a proposition which supports the arm's length transactions thesis). The other thing to note is that para 47 was Mr Townsing's own evidence, Mr Townsing being the directing mind and will of the taxpayers. 92 Mr Townsing gave evidence in chief on 12 and 15 June 2015. His cross-examination started on 15 June 2015. There is no suggestion by the parties that Mr Townsing altered any material part of his affidavit evidence in his oral evidence in chief. 93 Understandably, given the primary judge's comments about para 47 of Mr Townsing's affidavit, senior counsel for the Commissioner returned to the subject matter of that excluded paragraph. This evidence was given (again, with particularly important parts shown in bold hereafter): MR McGOVERN: Well, perhaps I can just ask you this, rather than anything else: I want to put to you that Mr Digby Hubbard was just a nominee for you? MR TOWNSING: No. MR McGOVERN: And there was no arm's length arrangement between the Normandy entities and either yourself or Normandy Australia or Advant or Pilmora, was there? MR TOWNSING: No, I don't agree. 94 In other words, Mr Townsing maintained the very evidence which the primary judge had described as "nearly laughable" and, in so doing, necessarily rejected the thesis that the written loan agreements were entered into by the parties for the purpose of creating the pretence that the taxpayers and lenders were at arm's length from one another, when they were not. 95 Subsequently, this exchange occurred: MR McGOVERN: And what I want to suggest to you is that you were able to effect a transfer of funds from Normandy Asia to Advant Proprietary Limited, simply by telling Mr Yunus that you wanted the money transferred. You didn't have to do more than that, I'm suggesting? MR TOWNSING: No. I don't think that's the case. MR McGOVERN: Right. And I want to suggest to you that you didn't need to have any loan agreement in a written form in place as between Advant Proprietary Limited and Normandy Asia before you could effect a transfer of funds from Normandy Asia to Advant Proprietary Limited; isn't that the case? MR TOWNSING: A written agreement, that appears to be the case. MR McGOVERN: Right? MR TOWNSING: But verbally, that's not the case. … MR McGOVERN: But just setting aside the agreement itself, this written document itself, I asked you to point to anything that you indicated represented the agreement or, in effect, the agreement between Normandy Asia and Advant, and you pointed to paragraph 98 of your affidavit, your first affidavit, didn't you? MR TOWNSING: Yes, with the correction 2001. MR McGOVERN: Right. But there's no reference in paragraph 98 to any discussion between you and Mr Yunus pursuant to which it was agreed that there would be a faculty limit of $650,000, is there? There's just nothing in the affidavit about that at all? MR TOWNSING: I will take it that there's not. MR McGOVERN: Right. And the reason that there isn't is because there was no antecedent discussion between you and Mr Yunus about a facility limit of $650,000. That's what I want to put to you? MR TOWNSING: No. MR McGOVERN: Are you able to explain why there's nothing about that subject matter in your affidavit, if there was such a discussion between you and Mr Yunus? MR TOWNSING: No. MR McGOVERN: And what I want to suggest to you that you brought this document - which is the document of 12 April 2002 - you brought that document into existence after the event to try to justify the reason for the transfer of the two amounts in September 2001, to give an appearance that there were loan funds being transferred from Normandy Asia to Advant when, in fact, that wasn't the case. That's what I want to put to you? MR TOWNSING: No. … MR McGOVERN: Right. And the whole idea of having these series of conditions in clause 2, as conditions precedent - none of those provisions were ever intended to have any operative effect, were they? MR TOWNSING: If you - could I read the - the - - - MR McGOVERN: Of course. Yes? MR TOWNSING: I will read them? MR McGOVERN: No, you're - that's probably right. Right. And? MR TOWNSING: Yes. They were all waived in that regard. MR McGOVERN: Right? MR TOWNSING: Because the loan had already been drawn down. MR McGOVERN: Well, where we're at odds is that I'm suggesting to you it was never a loan at all, and that these conditions were just fabricated to give an impression that there was a loan. You say these conditions were waived. That's where we're at odds; is that right? MR TOWNSING: Yes, these - those conditions were waived, and the loan was always just that: a loan, a borrowing of money that had to be repaid at some future point in time, with other conditions such as interest being payable etcetera along the way. MR McGOVERN: Who waived condition 2.1? MR TOWNSING: I don't know that the - there was ever even any discussion in - when this deed was signed in April 2002 of the conditions precedent, because the loan had already been advanced. MR McGOVERN: Well, the only purpose of having these conditions precedent, as expressed in clause 2, was to give an appearance that certain things had to be satisfied before money was advanced. Do you agree with that proposition? MR TOWNSING: No. MR McGOVERN: You don't agree with that? MR TOWNSING: No. MR McGOVERN: So you say that these conditions were operative and expected to have effect, but were waived at some point; is that what you're saying? MR TOWNSING: Well, I think they're a carryover as a result of taking a template document off the Normandy UK - it's a - yes, that's - they did carry through from the - I presume they reflect what's in the Normandy UK loan agreement. MR McGOVERN: If they were just a carryover from the Normandy UK agreement, then they were there by error, were they? MR TOWNSING: Error. Perhaps there is an error in oversight. I don't mean to be with the semantics, but it is - it's an oversight - - - MR McGOVERN: Right? MR TOWNSING:--- rather than perhaps an error. MR McGOVERN: Right. It's an oversight by you, is it? MR TOWNSING: Well, there's two sides to the transaction. One is Normandy, on that side, and Advant on my side. MR McGOVERN: Right. And on that side of the transactions it's Mr Yunus, in this particular instance, is it? MR TOWNSING: I don't think exclusively Mr Yunus. MR McGOVERN: Well, there's nothing - we've looked at that paragraph 98 of your affidavit. Apart from that reference, there's no reference to anybody else, is there? MR TOWNSING: Not in paragraph 98. MR McGOVERN: And there's no reference to any waiver of any terms or conditions anywhere in any of your affidavits, is there? MR TOWNSING: No. MR McGOVERN: And what I'm suggesting to you is that you've found yourself in an impossible position where you're now trying to justify these conditions precedent when the position is, you simply haven't got an answer at all? MR TOWNSING: No, I don't think I am trying to justify the conditions precedent. MR McGOVERN: Now? MR TOWNSING: They were - they're there. That's clear. And, in effect, they're waived, because the money has already been drawn. MR McGOVERN: When you say they're "in effect waived, because the money has already been drawn", you're suggesting that there was no communication between you, on behalf of Advant, and anyone on behalf of Normandy Asia which would establish that the conditions were waived; is that what you're saying? MR TOWNSING: Well, I'm not - well - - - MR McGOVERN: Is it a? They're redundant, aren't they? MR TOWNSING: They're - the conditions precedent are just that. They're precedent - they're conditions precedent to something else happening, and that was the drawing of the money. And - but it's actually in reverse. MR McGOVERN: Right. Okay. Well? MR TOWNSING: So they're - it's redundant. MR McGOVERN: Right? MR TOWNSING: And I guess it's sloppy. That's - it's sloppy work. MR McGOVERN: Right. What, sloppy by you or by Normandy Asia or? MR TOWNSING: All round. MR McGOVERN: Right. Well, it's not sloppy; it's just that it's a pretence. This document is just a piece of paper that pretends to be a loan agreement when there was never a loan agreement in place between Advant and Normandy Asia. That's the fact, isn't it? MR TOWNSING: I don't agree. 96 After some further evidence the primary judge intervened and this occurred (before the adjournment for lunch): HIS HONOUR: I don't understand some of your evidence. I'm sorry. I hesitate to intervene, but if you look at 2.7 of those agreements. It suggests that - with respect, that the property known as 26 Olive Street is an asset of each borrower. Is it - who owns that property? MR TOWNSING: Gaynor and I own that property. HIS HONOUR: So your wife and you own that property? MR TOWNSING: Owned, yes. HIS HONOUR: How can that be an enforceable obligation in those circumstances? Because your wife is not a party to the agreement. Do you understand what I'm - - -? MR TOWNSING: Yes, I do. I do, your Honour. HIS HONOUR: Understand the point of my question? MR TOWNSING: Yes, I do. HIS HONOUR: You're a part owner - well, you're party to both, but you're a party to one of these documents, but how has that created an enforceable obligation to provide that security when the asset is owned by you and your wife? It just can't, can it? MR TOWNSING: I will accept that, your Honour. I don't know that nuance of the law. HIS HONOUR: It's just a sort of pretence, isn't it, that particular provision? MR TOWNSING: Well, not - - - HIS HONOUR: It's not intended to be operative, because? MR TOWNSING: Not from my point of view, your Honour. HIS HONOUR: It can't be implemented. There's no way that Normandy Asia could compel your wife to execute a mortgage over Olive Street, because she's not party to that document? MR TOWNSING: Could I not mortgage my part? I don't know that part of the law. HIS HONOUR: Look, forget about questions of law or what you can do and what you can't do. The plain fact of the matter is that provision, 2.7, is just in there, like a lot of other provisions are in there..... to give the impression that Normandy Asia and Pilmora on the one hand and Normandy Asia and Advant on the other were dealing with each other at arm's length, to give the impression that they're independent. That's what this is all about, isn't it? MR TOWNSING: No, not to give the impression. HIS HONOUR: Not to give the impression that they're not at arm's length? I would have thought [that's] exactly what these provisions are. You by your own evidence are saying, well, they're redundant. They're clearly redundant, because the money has been lent, and they're there merely to create the impression that if someone comes along and says "Well, provide me with a copy of the loan agreement", you provide them with a copy of the loan agreement, and it has provisions in there which are designed to create the impression that the parties have negotiated these after a period of hard bargaining… [Is that] not the case? MR TOWNSING: Well, I don't agree, your Honour. 97 After the adjournment for lunch counsel for the taxpayers raised the issue of the primary judge's intervention and there was this exchange: MR HYDE PAGE: Your Honour, before we get Mr Townsing back in, there are just two preliminary matters I was hoping to raise. HIS HONOUR: Yes. MR HYDE PAGE: Your Honour, before the adjournment, you personally did put to Mr Townsing - and I won't pretend to be able to recall the precise words - but you indicated that you thought that some of the documents Mr Townsing created were a pretence, might be a pretence. HIS HONOUR: Well, I - no. What I said to Mr Townsing was that some of the clauses in those documents were a pretence, and in fact he admitted it beforehand and sought to resile from the admission. MR HYDE PAGE: Your Honour, it may - - - HIS HONOUR: His words were "they were redundant". MR HYDE PAGE: Yes. HIS HONOUR: They weren't necessary, so therefore they're window dressing, they're a pretence. MR HYDE PAGE: Yes. Your Honour, that - for all I know, that is - in fact, I'm sure that is the correct characterisation of what went on. The only point I was hoping to make was that, where those sort of points that are perhaps more argumentative do need to be put to Mr Townsing, I would respectfully submit it is better if my learned friend is the one who does it, simply so that Mr Townsing is - can be confident at all times that, I mean, the outcome of his case is going to HIS HONOUR: If I've got a query, why shouldn't I raise it with the witness? MR HYDE PAGE: Well, your Honour - - - HIS HONOUR: This whole thing came out in the context. MR HYDE PAGE: Yes. HIS HONOUR: In the context of - about his knowledge about the ownership of the Normandy Group. Now, I heard what he said. MR HYDE PAGE: Yes. Your Honour, I noticed, with respect, after your questions to Mr Townsing a very noticeable change in his demeanour. Perhaps - - - HIS HONOUR: Well, I can't help that. MR HYDE PAGE: Respectfully, your Honour, I'm simply submitting that those sort of propositions, while they unquestionably do need to be put to Mr Townsing, are better put by - best put by cross-examining counsel. HIS HONOUR: Well, Mr McGovern had cross-examined him on a whole range of these - the same matters, and I was - it had been put to him at the end of these questions that this was really a pretence, and he said "No, both conditions are not a pretence". And then I raised the question with him about the security. I said "Well, what about that?" I said "These assets are not owned by the borrowers". That's how the matter developed. I reject your submission that in some way or another I shouldn't do that. If I've got queries about matters, I will always raise them. If I can forensically analyse a document and it seems to be that it has passed the eye of the cross-examiner, I will certainly raise questions with the witness. … MR HYDE PAGE: Yes. Whether or not the loan agreements were as you say, a - in certain respects a pretence or simply -- - - HIS HONOUR: A number - it didn't need my questioning of the witness to bring that out; it had come out previously over the cross-examination that had been conducted by Mr McGovern that a number of the clauses in those agreements were just window-dressing, pretences. They were dressed up to make it look to an objective reader these parties are dealing with each other at arm's length, without drilling down. MR HYDE PAGE: What I understood Mr Townsing's evidence to be, that it was a template that he very sloppily amended. Now, ultimately, that will be perhaps not even a - well, certainly in respect to the conditions precedent - - - HIS HONOUR: Let me put to you, not only the documents which Mr Townsing adapted for use by Normandy Asia, but also the Bishop & Sewell documents, contain a large number of clauses which are pretences. Sorry. MR HYDE PAGE: Well, your Honour, we seem to have slipped into oral argument, which certainly was not my intention, and - - - HIS HONOUR: But I don't understand the purpose of it. If your purpose of these submissions is to seek to dissuade me from asking questions when I think they arise, then I'm afraid it's going to be unsuccessful, because I will raise them with the witness, whether it's Mr Townsing or someone else, and I don't see why I shouldn't. MR HYDE PAGE: Your Honour, the point I was seeking to make in that latter respect was simply that the role of Mr Gould and Mr Izelaar has not been fully canvassed in the evidence, although it could have been. HIS HONOUR: So you think I should sit here and not seek to discover it for myself. MR HYDE PAGE: No, your Honour. As I've said, I'm simply making the point that the proceedings have not been conducted in a way - - - HIS HONOUR: You can be sure of one thing. I will certainly allow Mr McGovern to be the cross-examiner, but if something comes out of that cross-examination which I don't understand, I will ask the question. MR HYDE PAGE: Well, your Honour, those are the two matters that I sought to raise. HIS HONOUR: You've raised them. MR HYDE PAGE: I will turn things over to Mr - - - MR McGOVERN: Could I very briefly say this, your Honour, that we would submit nothing that your Honour said before lunch was in any way exceptionable, and I'm reminded of the observations of the late Justice Meagher in one of the cases: a judge doesn't have to sit by - I don't think it could really be said of your Honour, but - in silence or with a ladylike serenity. So your Honour is entitled to. 98 Mr Townsing continued to give evidence, including the following: • MR McGOVERN: And I again want to put to you that the document that was brought into existence on 12 April 2002 was not intended to create a legal relationship between Normandy Asia and Advant Proprietary Limited for the advance of the $650,000. Do you agree or not? MR TOWNSING: I disagree. … • MR McGOVERN: Right. And clause 2.7 was just a pretence again, not intended to have operative effect? MR TOWNSING: I don't agree. … • MR McGOVERN: Well, what I want to suggest to you, Mr Townsing, is that this agreement of 7 May 2008 - it wasn't intended to govern the legal relationship between those two parties? MR TOWNSING: I disagree. MR McGOVERN: In relation to Pilmora's borrowing from time to time how was it ever going to repay? MR TOWNSING: Its borrowing from - - - MR McGOVERN: Well, from anybody. From Normandy UK, for example? MR TOWNSING: Well, Normandy - sorry, Pilmora over time has generated income and from our income we would expect to be able to repay. MR McGOVERN: But it had a massive deficiency in trust funds in 2001 in excess of $5 million at the same time as Normandy Asia - in that instance advancing $674,000. How was that going to be repaid? MR TOWNSING: Well, that - largely that - the largest part of that deficiency was money owing to Gaynor and I. MR McGOVERN: Again in 2002 there was a deficiency in excess of $5 million in trust funds in the same year that Normandy UK had advanced $500,000. How was that going to be repaid? MR TOWNSING: On - by going about its business and generating income from which it would repay the loans, ultimately. MR McGOVERN: I want to suggest to you that basically year by year there were substantial deficiencies in funds and no real capacity to repay on account of Pilmora. Do you agree or disagree? MR TOWNSING: On the face of the accounts. Yes. But in general terms and the support that Gaynor and I provided to the trust over the years the expectation was that we were - eventually be able to repay the money. MR McGOVERN: And I want to suggest to you you never intended to repay it. Pilmora never intended to repay? MR TOWNSING: I disagree. MR McGOVERN: And in the case of Advant there was no capacity to repay any loans either was there? MR TOWNSING: I - - - MR McGOVERN: On the face of the accounts there was no capacity to repay? MR TOWNSING: I disagree. MR McGOVERN: Well, in 2002 there was a deficiency of $72,000, but Normandy Asia had advanced 650,000 and Normandy UK had advanced 500,000. So how was that going to be repaid? MR TOWNSING: Again, we had the - in Advant we had the investment property at 6 Normandy Road. We had a plan in conjunction with 4 Normandy Road ultimately to redevelop the property and the - there's - as at today it's not relevant to your question, but as at today the property has increased in value very, very substantially. MR McGOVERN: Well, I want to suggest to you that you knew and intended that there would never be a repayment of any of these loans? MR TOWNSING: I disagree. MR McGOVERN: And in the case of Normandy Australia and Normandy Australia's capacity to repay was similarly impaired. It had accumulated losses year by year with no capacity to repay any loans. That's what the accounts show, aren't they? MR TOWNSING: Well, no. I disagree because in - I think it was 2005 or six Normandy Australia made quite a good profit and it - the profit was used to repay a good portion of the loan. MR McGOVERN: Right. Now, just in relation to the structure of Normandy Asia I think you said somewhere that - this is in paragraph 34, in fact, that the ownership structure of Normandy Australia was designed to make it more difficult, you said, for competitors, investors and the market generally to ascertain the ownership of Normandy Australia. Do you see that in paragraph 34? MR TOWNSING: Yes. MR McGOVERN: And it's common ground that Normandy Asia owns Normandy Australia according to the agreed facts and Chapway Limited was simply your nominee, wasn't it? Mr Ross was just your nominee. MR HYDE PAGE: Objection. MR McGOVERN: All right. I'm sorry. I - - - MR HYDE PAGE: There's no foundation for that. MR McGOVERN: Well, I will put it differently. Chapway Limited was a nominee entity which was doing your bidding from time to time, wasn't it? MR TOWNSING: I - no. MR McGOVERN: And Mr Gould was the chartered accountant in Sydney that was providing the taxation and accounting services for yourself and your associated entities, wasn't he? MR TOWNSING: In this period - no. MR McGOVERN: And I want to suggest to you that Mr Hubbard and Ms Beach in their times were simply nominees acting at your bidding? MR TOWNSING: No. MR McGOVERN: And the Normandy companies, that is Normandy UK, Normandy Asia, Normandy Australia were not at arm's length with you and entities associated with you in Australia? MR TOWNSING: I disagree. MR McGOVERN: Now, in paragraph 39 of your second affidavit you refer to Mr Ross and in paragraph 40 you refer to a conversation with Mr Ross. And now that conversation never happened, I suggest? MR TOWNSING: I disagree. MR McGOVERN: You've got no contemporaneous record of that discussion, have you? MR TOWNSING: No. I don't believe I do. MR McGOVERN: And as far as you were concerned Mr Ross was somebody whom you were able to give directions to rather than an independent contracting parties' representative. Isn't that the case? MR TOWNSING: I disagree. MR McGOVERN: And when you refer to paragraph 45 you say you implemented transfers by liaising with Andrew Ross and ..... Unice. [sic] What you mean by that is that you gave instructions to Mr Unice [sic] to ensure that money was taken from the HSBC Hong Kong bank account from time to time in accordance with your directions. That's what you mean by liaising, don't you? MR TOWNSING: Well, the request to draw down the - some money to fund the operations. MR McGOVERN: Right. And I want to suggest to you that you never talked about making another draw down on the loan facility. You see what you've said in paragraph 45. There was never any loan facility - a loan facility, was there? MR TOWNSING: Yes. There was. MR McGOVERN: And what was the total facility level? MR TOWNSING: The facility level was essentially what money is required to run the business in the year ahead, which - and the facility change. We incurred losses for the first few years of the operation ..... budget. MR McGOVERN: There was - - -? MR TOWNSING: And that would indicate this is where we might be over the course of the year. MR McGOVERN: I want to suggest to you that there was no facility, but rather there were a series of individual advances with no repayment date, no security and no interest. Do you agree or not? MR TOWNSING: Well, there was a facility, but the loan was on the basis of no interest, no fixed date of repayment and no security. … • MR McGOVERN: Now, I want to suggest to you that the agreement - the written agreement between Normandy UK and Advant - the two versions of which I've just been showing you - those written documents were never intended to have contractual effect between the parties? MR TOWNSING: I disagree. … • MR McGOVERN: Right. And this is referring to the situation after you returned to Australia and the way in which the activities of Normandy Hong Kong or NFIAL were being conducted? MR TOWNSING: Yes. MR McGOVERN: And in 44 you say that they were being carried on by Mr Yunus and his staff. Now, that was subject to your direction and control, your personal direction and control, wasn't it? MR TOWNSING: Well, ultimately as a director of the company, yes. MR McGOVERN: And bearing in mind that the other director of the company was Chapway Limited as personified through Mr Ross, you were in charge of everything in Normandy Asia, weren't you? MR TOWNSING: As the director, I was ultimately responsible for the business. MR McGOVERN: And you were the beneficial owner of Normandy Asia? MR TOWNSING: I disagree. MR McGOVERN: And in relation to the Normandy companies in a general sense, you were the beneficial owner of those companies? MR TOWNSING: I disagree. MR McGOVERN: And the funds that were held by Normandy Asia and transferred to companies in Australia which were associated with you was because of the fact that you had the ultimate ownership and control of Normandy Asia, I suggest? MR TOWNSING: I disagree. … • MR McGOVERN: And in relation to transfers of funds from time to time, Mr Hubbard was accustomed to act in accordance with your instructions. Do you agree? MR TOWNSING: I disagree. MR McGOVERN: And, subsequently, Ms Beach and Mr Izelaar were accustomed to act in accordance with your instructions? MR TOWNSING: I disagree. MR McGOVERN: And Mr Gould, as your accountant, was also accustomed to act in accordance with your instructions? MR TOWNSING: I disagree. 99 In re-examination this evidence was given: MR HYDE PAGE: Mr Townsing, during the course of cross-examination, the following proposition was put to you, and I will quote it directly. My learned friend said: You say, don't you, that NFIAL was at arm's length from Pilmora? And your response to that was: Yes. So can you tell us why that - why you accepted that proposition. MR McGOVERN: I object to that. HIS HONOUR: I will allow the question. THE WITNESS: In the case of the loans, I - I'm - I'm dealing with experienced people ..... my entities or my family entities are going to borrow money. They want commercial terms. We arrived at approximately 10 per cent. That's how it turned out. It was LIBOR plus five in the UK loans, and it was 10 per cent in - ended up being 10 per cent in Normandy Hong Kong's case, and they - they wanted - you know, they wanted a fair return, and that was - it was around that 10 per cent, as we look back. As they were lending the money - the entities were lending the money, obligation to repay. But on the other hand, at arm's length, I'm - I'm not saying - I don't mean to say that, you know, in the case of Vanda by 2002 - - - 100 The oral evidence was completed on 24 June 2015. The issue of the tender of further documentary evidence remained to be resolved. Counsel for the taxpayers returned to the issue of the source of the money for the advances and sought to tender material said to support the proposition, put in opening for the taxpayers, that the source of the advances was Mr Gould who was "an independently wealthy businessman who invests in start-up ventures", via an entity called Chemical Trustee. The primary judge expressed some surprise at the attempt to tender this material and, in exchanges with counsel for the taxpayers, this was said: HIS HONOUR: The only question is whether they're loans or whether they're not. If they're not loans, then you have not discharged the onus of showing that the assessments are excessive. MR HYDE PAGE: That's accepted, your Honour, just as it is accepted that the key question is what was the nature of the relationship between the lending entities and the borrowing entities. HIS HONOUR: Well, they were…not at arm's-length. Let's put it that way. MR HYDE PAGE: There's no suggestion that they were. HIS HONOUR: Although your client denied that. MR HYDE PAGE: Well, your Honour, I mean, what Mr Townsing said, I think, deserves close analysis, and that will undoubtedly be the subject of submissions. But for the time being, yes, the key question is what was the nature of the relationship? Was there an advance of funds, coupled with a legal obligation in the borrower to repay the funds? HIS HONOUR: Your client's case is that he has no relationship at all, other than as an officer of the two lower tier Normandy companies. He doesn't have any relationship with the Normandy companies at all. He doesn't have any economic interest at all. That's what his case is. MR HYDE PAGE: He said that he had no economic interest in Normandy UK. That's correct. HIS HONOUR: And by "economic interest" I mean any sort of interest, as an owner of shares, an owner of some options, or anything. MR HYDE PAGE: That's correct, your Honour. HIS HONOUR: Yes. MR HYDE PAGE: He also says - - - HIS HONOUR: Which, to tell you the truth, I have great difficulty accepting that evidence at face value. MR HYDE PAGE: Yes. Well, your Honour, that's precisely the reason why the applicants are seeking to lead this evidence, which shows that the money comes from somewhere else - in this case, from Chemical Trustee. HIS HONOUR: That doesn't have anything to do with the point that concerns me about his evidence. His evidence is that, "I didn't know anything about" - you know, he passes it all off to the nominees, the nominee directors and some people Lubbock Fine. I just find that's farcical. MR HYDE PAGE: What his evidence was was that he had no economic interest in Normandy UK. HIS HONOUR: Yes. MR HYDE PAGE: But it was the company that owned Normandy Hong Kong, and that he had been dealing with on and off for 20 years. HIS HONOUR: Yes. MR HYDE PAGE: So he accepts that it's an entity he has had a lot to do with over 20 years, and - - - HIS HONOUR: What? Normandy UK, or Normandy Asia? MR HYDE PAGE: Normandy UK. I mean, it was the company that owned Normandy Hong Kong, and there's certainly evidence of Normandy - - - HIS HONOUR: But even on the face of it, Mr Hyde Page, the overwhelming conclusion which one would come to is that Normandy UK was controlled by, and indeed perhaps owned by, Mr Gould. Ms Beach gave evidence that she only ever acted on the instructions of Mr Gould. MR HYDE PAGE: Yes. HIS HONOUR: Yes. MR HYDE PAGE: Well, that's - - - HIS HONOUR: But are you trying to separate Mr Gould from Mr Townsing? MR HYDE PAGE: I am, your Honour. HIS HONOUR: Well, I find that a very, very high hurdle to take, because Mr Gould has been a confidant and adviser to Mr Townsing for many, many years, and I can't believe that Mr Gould knew something which he wouldn't convey to Mr Townsing if it was contrary to Mr Townsing's instructions, or contrary to Mr Townsing's interests. MR HYDE PAGE: What the evidence shows, the applicants will ultimately submit, is that Mr Gould has a long history of investing in Mr Townsing's ventures, going all the way back to Jenolan Innovations, and that is, in fact, what some of these documents show. In 1992 Mr Townsing formed Normandy Hong Kong, and, again, to the extent it's relevant, the applicant's submission is that Mr Gould used Normandy UK, the offshore entity, to stake the new business and Normandy UK continued to own it from then onwards. HIS HONOUR: Well, that might be something you know about but there's no evidence about that before the court. MR HYDE PAGE: Well, the evidence is that Mr Townsing went to Mr Gould and Mr Gould referred Mr Townsing to Normandy UK and Mr Hubbard - - - HIS HONOUR: But those people were all nominees. They're nominees because the company was incorporated in the UK but its management and control was put outside the UK where - in the principality of Monaco where the company is managed. MR HYDE PAGE: Yes. That - all of that is accepted, your Honour. The applicant's point is that Mr Townsing would not have known whose money it was. HIS HONOUR: Well - - - MR HYDE PAGE: I mean, he could have guessed. He certainly - his evidence certainly was - - - HIS HONOUR: Mr Hyde Page, I didn't come down in the last shower. You're not dealing with a judge who has not been kicked around in the tax area. I've kicked around more than anyone in this court in the tax area. I know what went on. I know what goes on. MR HYDE PAGE: Well, I mean, I would never suggest otherwise, your Honour. HIS HONOUR: But this - a lot of the evidence your client gave, unfortunately, is just - I don't believe it. I don't believe it. I'm sorry to say. I threw him a few lifelines there a couple of times but he wasn't prepared to take them up. MR HYDE PAGE: Well, your Honour, what - what we're talking about at this point is whether or not Mr Townsing knew that these people who, with the exception of Mr Hubbard, he accepts were nominees. He accepted that Tony Izelaar and Susan Beach and Hasmukh Vara - - - HIS HONOUR: Your client, with respect, knew that Gould controlled Normandy UK at the relevant times. He could organise things. He more or less admitted it in the question I put to him today. MR HYDE PAGE: Well, that is certainly conceded, your Honour. HIS HONOUR: He knew who pulled the strings for Normandy UK and he knew that was Gould. MR HYDE PAGE: Your Honour, I don't cavil with the proposition that - - - HIS HONOUR: He - when he needed some funds, he would speak to Gould and make sure they had funds. He probably knew in advance of that, with respect, that they had the funds. All these transfers occurred too quickly. MR HYDE PAGE: Your Honour, I don't - the applicants wouldn't necessarily submit - - - HIS HONOUR: Anyway. We're - - - MR HYDE PAGE: --- anything to the contrary. HIS HONOUR: We're getting away from what you want to do. MR HYDE PAGE: Well - - - HIS HONOUR: What I want you to come back to is I want to understand how Chemical Trustees is relevant to these proceedings. Because this is the first time I've heard anything about Chemical Trustees. 101 The primary judge said he had better hear from senior counsel for the Commissioner about the attempt to tender documents said to show the role of Chemical Trustee. This was said: HIS HONOUR: I know that. And you rely on the fact the taxpayer carries the onus. I know all about - - - MR McGOVERN: Yes. And the central issue is as articulated by your Honour. The question is whether or not these particular ..... it gets more narrow than the debate that your Honour has had with my learned friend. As we understand it, the taxpayer's case stands or falls on the validity of the written loan agreements. Except for the - and possibly also including the Normandy Australia loan agreement, albeit brought into existence in May 2008 and our case has always been that they're shams and the - as we understand it, the - - - HIS HONOUR: Well, the instruments might be shams, Mr McGovern, but that doesn't mean to say the underlying transaction is a sham. MR McGOVERN: Well, your Honour, we've understood that the underlying transaction is manifest in the writing and - - - HIS HONOUR: Well, that might be the case in the case of certain of the loans, but others of the loans were made in advance, as you've ably been to extract in cross-examination. MR McGOVERN: Well - - - HIS HONOUR: And the question is…whether the underlying transaction is a sham ..... without using a pejorative word, a whole lot of those provisions in those instruments are just a pretence. They're window dressing, as I called them, I put that to the - a couple of the witnesses. They're just window dressing to try and create the impression that we're dealing with arm's length parties. MR McGOVERN: Yes. HIS HONOUR: But - - - MR McGOVERN: And - and - - - HIS HONOUR: That may lead to the view that because there's so many of those provisions which are just a pretence that the instruments are a pretence themselves but it does not necessarily lead to the conclusion that the underlying transaction is not one by way of loan. So I put you on notice of that. MR McGOVERN: Yes. HIS HONOUR: It's an important aspect of the matter and there's plenty authority that supports that view, so - I'm struggling to see the relevance of this material. MR McGOVERN: Well, your Honour, it hasn't been - certainly, on the face of the identification in this index it's less than apparent. HIS HONOUR: Yes. Yes. MR McGOVERN: And we haven't actually looked at any particular document but, for example, to - - - HIS HONOUR: Well, perhaps what I will do - you just sit down for the moment. I will get Mr Hyde Page to take me to some of these documents. 102 The hearing was adjourned on 24 June 2015 for closing submissions on 8 and 9 July 2015. 103 The primary judge was burdened with written submissions of extraordinary length by the parties immediately before 8 July 2015. 104 For their part the taxpayers filed written submissions of 102 pages on 7 July 2015 which contained these paragraphs: [93] First, for the Applicants to succeed in these proceedings it is necessary only for the advances of funds to the Applicants to have carried a contractual obligation of repayment and, in appropriate cases, a contractual obligation to pay interest at the rate at which deductions were claimed. The court may conclude that some aspects of one or more of the transactions were a sham, but should still conclude that the transaction was intended to be a loan that bore interest…. [94] Second, if some of the documents were intended to give the false impression that the parties were at arms-length, when in fact the parties were not, this false impression was intended in relation to something other than the essential legal rights on which the efficacy of the loan transactions depends. It is not an essential element of a loan that the parties deal with at [sic] each other at arms-length, or on commercial terms…. … [98] Fifth, in the event that some of the essential clauses from one or more of the loan agreements are a sham, the court is then required to give effect to the real transaction between the offshore lending entities and the Applicants. These underling transactions were also intended to be loans; that is, advances of funds that were non-assessable as ordinary income, and which gave rise to obligations to pay interest. 105 It is not possible to say how many pages there were in the Commissioner's submissions because they were divided into separate chapters. Suffice to say they take up almost a whole lever arch folder. In one paragraph of this sea of paper, amongst a list of propositions said to support the conclusion that the taxpayers had not discharged their onus of proof, this was said: [10.3]…In their closing submissions, the Applicants now contend that there was an oral agreement for a loan. However, being made at this late stage this contention suffers for not having adequate evidence to support it. The evidence does not prove an antecedent oral agreement. An agreement requires an offer, and acceptance, and consideration (being the promise to repay). The limited evidence that there is of antecedent discussions is insufficient to support a finding of these elements of a loan contract. 106 Before the oral closing submissions for the taxpayers on 8 July 215 the primary judge said: HIS HONOUR: And even absent that finding, there might be a possibility of a finding à la Albion Hotel, for example, where - I don't wish to be taken to be pre-empting anything but the possibility exists that there could be a whole host of findings where, for example, I might find that the underlying transaction was a loan but, for example, the loan instrument was a sham and, therefore, what was said to be interest payments were voluntary payments and, therefore, not deductible no matter how they were used. Well, I would have thought they were real possibilities in a case like this. 107 "Albion Hotel" is a reference to Albion Hotel Pty Limited v Commissioner of Taxation [1965] HCA 4; (1965) 115 CLR 78 (Albion Hotel), a matter in which a document said to embody a loan transaction was held to be a sham, but there was found to be a genuine loan in any event. 108 In oral submissions counsel for the taxpayers nevertheless said: MR HYDE PAGE: There is, however, I would suggest, a very important difference between the sloppy legal work of people without law degrees and an intention on the part of laypeople to deceive others and there's plenty of authorities that say that one doesn't draw the conclusion of sham lightly, and in particular, one also looks for alternative explanations for the execution of documents other than an intention to deceive. Having regard to that and the issues of the case, I would suggest that what is really central to the resolution of this question is an inquiry into what exactly it was the respondent says the parties were trying to hide. There has been a suggestion that they were trying to create the impression that they were at arm's length and - I mean, perhaps that does have some substance. I will come to that in a moment, but certainly there hasn't been, I would submit, a particularly credible suggestion of why these parties needed to mislead one another as to the fact that there was an obligation of repayment or an obligation to pay interest. The suggestion that they were trying to mislead others becomes particularly weak, I would submit, if one considers what actually went on after the execution of these documents and it will be one thing to see if there were misleading loan documents and then absolutely nothing had happened except no tax was paid on these sums, but rather the position is that gargantuan amounts of money, more than $4 million, was paid by these borrowing entities back to the lending entities in accordance with the rate of interest that they assert. Now, this is something that the respondent deals with, as far as I can tell, in only one place in their submissions. 109 Later the transcript shows this exchange between counsel for the taxpayers and the primary judge: MR HYDE PAGE: Henry Townsing is - was at all times the director of Normandy Hong Kong and the director of Normandy Australia. If he actually set out to try to persuade people that Normandy Hong Kong was at arm's length from him and he had no connection with them, then it was a pretty - I would submit it was a rather incompetent act of deception to think that he could hide the related nature of these dealings from anybody. HIS HONOUR: He couldn't because - it's what I said before. Normandy Asia and Normandy Australia are ostensibly - not ostensibly, are quite transparently related. One owns the other. Try and dress that up in the cloak of some agreement which seeks to suggest, as some of the other agreements do, that the parties are at arm's length would be to no avail. MR HYDE PAGE: Yes. Your Honour, what - - - HIS HONOUR: That's the very point I was making earlier. MR HYDE PAGE: I understand that, your Honour. I'm not talking about the Normandy Australia loan. I'm talking about the loan from Normandy Hong Kong to Normandy - from Normandy Hong Kong to Pilmora. Now, as I said, there is a suggestion that the reason why that document was executed was to deceive others into thinking that these parties were at arm's length. The submission is that only a complete fool would believe that he could deceive anybody - - - HIS HONOUR: I don't know. And you look at the face of the document. You could believe that the parties were at arm's length having regard to its terms. The fact of the matter was the difficulty with the things that - the evidence quite clearly shows that Mr Townsing was the mind and will of both companies, to use the expression that Lord Denning used in Bolton's case. Both Normandy Asia and Pilmora, Normandy Asia and Normandy Australia, and Normandy Asia and Advant - the mind and will of all those companies was Mr Townsing. MR HYDE PAGE: That's accepted, your Honour, and the fact that he was - - - HIS HONOUR: Each company's state of mind was the state of mind of Mr Townsing. Now, the difficulty that I see in the way of concluding that they are sham transactions is that he quite clearly intended that they be loans. He denied that they were otherwise. No one else's intention is relevant. Not the intention of Mr Gould; it's the intention of Mr Townsing. He determines the intention of each of those parties because he's the guiding mind and will of those companies. Now, there has to be a common intention to deceive. So - - - MR HYDE PAGE: Your Honour, again I don't cavil with what you've just said. HIS HONOUR: But that's not all the case. That doesn't necessarily apply in the case of Normandy UK. MR HYDE PAGE: That is correct. That is correct. HIS HONOUR: So, you know, I don't think - this is not the sort of case where you can generalise about things. MR HYDE PAGE: Well, your Honour, I will seek to come back to intention in a moment, but my point was that, at least in respect of the loans from Normandy Hong Kong, it's very hard to see what it is that Mr Townsing was seeking to deceive others of. The most credible formulation of the deceit, I would suggest, is that he was trying to deceive others as to the fact that they were at arm's length. Now, it's well established that you need to be precise about what part of a transaction is a sham and it's only the part that's a sham that gets cleared away. The applicants don't rely on the arm's length nature of the lending and the borrowing entities in order to characterise the l oans or to claim the interest. If that is the deceit, which is not admitted, then it's a deceit as to something external to the relevant legal rights and obligations. If that's the correct view of the facts, it doesn't cover anybody with glory, I suppose, but there are numerous cases of the court seeing a document, in some cases, that is full of fictional information and saying none of this really touches the key aspects of the transaction. 110 Other relevant parts of the taxpayers' closing submissions, however, included this statement (adopting the primary judge's comments): MR HYDE PAGE: Yes. Well, that is what we have sought to separate out. So the applicants' submission simply is that if the loan agreements are swept away in their entirety, that it's still possible for the applicants to succeed on the basis of an oral agreement. The evidence for the agreement is set out both in the submissions and in the extracts I've handed up. One point that does seem important to make in that context is that the evidence of people such as [Daud Yunus] or Kathy Glover as to things that Mr Townsing said and did can still help show the formation of a contract because they help identify points in time when the parties were ad idem. 111 In closing submissions for the Commissioner senior counsel said that: what has evolved in the course of the case is that the applicants now seek to rely, to some greater or lesser extent, on so-called antecedent oral agreements…. 112 The primary judge then again raised Albion Hotel and the notion that the written loan agreements might be a sham but nevertheless there might exist a genuine underlying loan transaction. Senior counsel for the Commissioner responded in these terms: MR McGOVERN: Yes, your Honour. But in the circumstances of this case, in the way in which the case has been argued by the applicant and the way in which the evidence has been put forward, the asserted oral agreements do not lead to the outcome that, in effect, the applicants can depart from the reliance that they initially placed upon the writing. So that, in a sense, one can't have it both ways. If the - if the agreements between the parties were intended to be wholly oral then it begs the question why was there writing? And if there is an inconsistency between the antecedent oral arrangements and the writing, then the writing would prevail so that it drives the applicants back to relying upon the written agreements in each instance. Which, on our case of course, are shams. 113 The primary judge returned to the point a short time later and put to senior counsel for the Commissioner that the obligation of repayment had "not been impugned by you" and that there were lots of cases in which parts only of a written document had been found to involve a sham. Senior counsel said: But your Honour, when we come to the written agreements, and they're all, as your Honour knows, of pretty much one piece, if you take the condition precedent which is all of the obligations that are required before the drawdown can be made, and let it be assumed favourably to my case that that is a pretence, then that would mean we would submit that it could not be said there was any established binding contract between the parties in writing which supported the transfer of funds from A to B. And in those circumstances there would not be any extant loan agreement. So it's not just the obligation of repayment, but we appreciate ..... that's another necessary element. … MR McGOVERN: Yes. Yes. And your Honour, there are features of the case that we say point strongly in favour of the proposition that the loan documentation is a pretence, and that it follows on the primary case that was put on the affidavits we submit that if there was a case to be made that there was an antecedent oral agreement, also interpolating the proposition that in the case of Mr Townsing and the dealings between Normandy Asia and Normandy Australia, the way the case was developed and explained in the evidence was that it was put on the - in effect on the basis that this was an arm's length arrangement between the parties as opposed to - I mean by that, that the - it's purported to be a situation where Mr Yunus is speaking on one side and Mr Townsing on the other, and by inference that the parties are entering into arrangements as a consequence of hard bargaining as opposed to - - - HIS HONOUR: Well, that's - as I said, I - that doesn't accord with the factual circumstances. MR McGOVERN: No. And - but it leads to two propositions. One is it leads to a difficulty with the acceptance of the evidence of Mr Townsing, interpolating there of course if one rejected or could not accept him on one point wouldn't necessarily mean that you couldn't accept him on other points. But it also leads to the proposition that the idea of the arm's length negotiated agreement which is in effect what he was contending for, could not be established on the probabilities. HIS HONOUR: I don't think the Normandy Australia, Normandy Asia loan could ever be put on an arm's length basis because as I said to Mr Page yesterday, it's a transparently related dealing. … MR McGOVERN: But let it again be assumed that the written agreements go - that they can't be relied upon; that they are window dressing. One goes back to this affidavit of Mr Townsing, the primary materials ..... start of the case. But for the cross-examination that tested the credibility of whether these matters could be relied upon as operative according to their terms. When confronted with the advances that are made prior to the agreements there is this declaration, so to speak, for the first time, that these are the subject of oral agreements. And we submit that the only logical conclusion is that that must be material that has come forward from the witness in the witness box in response to the difficulties confronting the inability to continue to support the written agreement. And if that be the case then that casts real doubt upon the proposition that one could see that there was an antecedent oral loan agreement, but we're not talking here, with respect, about an inference that could be drawn from the conduct of the parties based upon a course of dealing which may put the Normandy Asia Normandy Australia into a different category; we're talking about these other putative arm's length arrangements and, indeed, with Normandy Asia there's a putative arm's length arrangement as well. And we submit, therefore, that the court should reject the previously unstated case - unstated in any of the affidavit evidence, but volunteered for the first time in the course of the hearing and, as I say, when we come to look at the matters in a bit more detail we will see, in our submissions, that there are a lot of other features of the case that would demonstrate that these are not real loans. And the question of obligation to repay can't be cauterised from the question of whether there's a loan in the first place. 114 Senior counsel approached the same point from another perspective a little later, saying: In a case where the claim is made on the basis of these people being at arm's length and ..... negotiating parties and, by inference, engaged in a process of hard bargaining which is manifest in writing - in written agreements; if all of that collapses one then has the fact that there are transfers of funds which, in the circumstances, are analogous to an asset betterment in the sense that there's an amount of money which is otherwise unexplained. The loan agreement being the explanation that's offered up and is not accepted, then the taxpayer having ..... not to actually give fulsome evidence as to the nature of the payments and what they were really for, in those circumstances, fails to discharge the onus, we submit. … That really brings me back to the point that I was seeking to make earlier that the evidence does not establish offer acceptance and obligation outside of the written agreement and once the payments are accepted as not being the product of any written agreement, as alleged, and as sought to be propounded in the applicant's case, the conclusion must be that each transaction was intended by another means - sorry - to be another means by which money advanced - was advanced other than by way of loan. 115 Senior counsel continued in these terms: Accordingly, the new argument, based on the oral agreements for loan - which, we submit, are a recent invention - in the case of all loans, other than Normandy Australia, Normandy Asia - because there was never any loan agreement in the first place - that, in those circumstances, it's contrary to the affidavit evidence and, in our submission, the case that was being seriously propounded is the case that was in the affidavits and, given the centrality of the written agreements, it follows, we submit, that once the written agreements are impugned there is nothing to support the transfer of the money by the applicants as being a loan. 116 Towards the end of the submissions for the Commissioner the primary judge noted that it would be open to him to find that Mr Gould would not act contrary to the directions or interests of Mr Townsing. Senior counsel for the Commissioner accepted this proposition. The primary judge then said that "if you accept that then [Mr Gould's] just another puppet", which prompted this exchange with senior counsel: MR McGOVERN: But in all events, if I could just move back to the question of the written agreement. Your Honour expressed the proposition that the writing - the sham agreements may have come into existence in order to disguise the relationship between the parties. Now, that's not a proposition that has ever been advanced, either in evidence or otherwise by the applicants. HIS HONOUR: I appreciate that, but that's not to say ..... MR McGOVERN: But your Honour, there was some evidence of seeking to preclude third parties from having an understanding of the particular relationship between Normandy Asia and Normandy Australia, but there would be - in my submission, I stand to be corrected, that there is evidence to suggest that there is any other explanation that has been offered up for the sham agreements. And bear in mind that the agreements have been stoutly defended right up until the hearing and the cross-examination. It would be unexpected that they would have done so. So if your Honour made a finding that that was the explanation, then your Honour would be making a finding that would not be supportable by the evidence.

Primary judge's conclusions relevant to the first (underlying transactions) and second (consequential orders) issues 117 No issue is taken by the parties with the primary judge's identification of the relevant principles relating to shams ([46]-[66]) (although we note that the Full Federal Court has since handed down its decision in Millar v Commissioner of Taxation [2016] FCAFC 94; (2016) 2016 ATC 20-578 and the special leave application from that decision refused), loans (at [67]-[72]), or the drawing of inferences about a company's state of mind (at [73]-[78]). 118 The primary judge found at [16] that: Mr Townsing was the directing mind and will, not only of Normandy Australia, Pilmora and Advant, but also of Normandy Asia at all relevant times… and Mr Gould, or the firm through which he provided professional services to clients, Gould Ralph & Company, subsequently Gould Ralph Pty Ltd, provided accounting and taxation services to Mr Townsing and other Australian-based entities economically associated with Mr Townsing and the members of his family over the years with which these proceedings are concerned. 119 Also at [16] the primary judge said: Having regard to those matters, I also find that Mr Gould would not have acted contrary to Mr Townsing's instructions or interests in relation to transactions Normandy UK or HWBB had with entities in Australia economically associated with Mr Townsing or members of his family over this period. For that reason, the parties to those transactions could not be regarded as being, or as dealing with each other, at arm's length. So much is manifest in the conduct of the parties, if not in the terms of the instruments said to evidence those transactions. As indicated below, I have found many of these terms to be a disguise or pretence to convey the impression to a third party that the parties to them were, and had dealt with each other, at arm's length and to that extent these terms are shams. In saying this, I do not include dealings between Normandy Asia and Normandy Australia which, by reason of their parent company/wholly owned subsidiary relationship, were, at all times, transparently non-arm's length dealings between related parties which were not sought to be disguised as otherwise. 120 The asserted loan agreement between Normandy Asia and Normandy Australia, it will be recalled, was said to have been created orally, and thus is dealt with separately below. In this part of the reasons, the focus is on the loans said to have been created by the five written loan agreements. 121 The primary judge said this in respect of the advances from Normandy Asia to Advant: [104] Again, with little or no hesitation, I find that the two payments from Normandy Asia to Advant in September 2001 were intended by both parties to be subject to an obligation of repayment by Advant to Normandy Asia at the time each payment was made; that being the relevant time to determine whether the two payments were truly loans or something else. My finding in this regard is predicated not just on the evidence of Mr Townsing, but on the evidence of Mrs Glover, Mr Yunus and Mr Ross, as well as other relevant circumstances outlined in [107] below. That said, the evidence of Mr Townsing, as the driving mind and will of both companies, is paramount as to the finding of subjective intent on the part of each party at the time of making the payments. That was Mr Townsing's evidence and while the contrary was put to him, he denied it and there is no reason not to accept his evidence. [105] What was also put to Mr Townsing was that a number of the terms of an instrument dated 12 April 2002 between Normandy Asia as lender, Advant as borrower and Mr Townsing as guarantor setting out the terms and conditions upon which a revolving credit facility of $650,000 between Normandy Asia and Advant was to operate were pretences or shams and that therefore the two payments by Normandy Asia to Advant some seven months before were sham loans to and borrowings by Advant. Mr Townsing refused to accept that the relevant terms of the instrument to which he was taken in cross-examination by senior counsel for the Commissioner were pretences, but I do not accept his evidence in this regard. Clearly they were pretences, either because the payments from Normandy Asia to Advant had already occurred some seven months beforehand and the terms, insofar as they were conditions precedent to the making of loans thereunder, were "redundant", or because the terms were not complied with and were never intended to be complied with. [106] In my view, the relevant terms were pretences or "window dressing" in the sense that they were intended to create the impression or disguise to a third party observer that the parties were dealing with each other on an arm's length basis when in fact they were not. Such pretended terms did not, however, impugn the intention of the parties, manifested through Mr Townsing as the directing mind and will of both, that the payments from Normandy Asia to Advant at the time they were made in September 2001 were anything but loans to and borrowings by Advant from Normandy Asia. The terms and conditions on which those loans were made is not to be determined by reference to the terms and conditions of the instrument dated 12 April 2002, and while there is little evidence otherwise as to what those terms and conditions were, I accept that such payments by way of loan carried interest at the rate of 10% per annum. [107] The finding in [104] above that the two payments which Normandy Asia made to Advant in September 2001 were by way of loans is reinforced by the clear evidence that between May 2002 and August 2008 there were substantial payments made by Advant to Normandy Asia totalling over $304,000 in repayments of principal and payments of interest. The Commissioner did not contend that any of these payments from Advant to Normandy Asia did not occur, nor that they were not repayments of payments by Normandy Asia to Advant, but were something else. 122 The primary judge then rejected 20 reasons which the Commissioner had given to support the conclusion that the advances made by Normandy Asia to Advant in September 2001 were not loans (at [108]). Insofar as relevant to the present discussion, those reasons include the following: (2) No real negotiations of the loan agreement: One would not expect such "real negotiations" between lending and borrowing companies under the directing mind and will of the same individual. … (5) The parties never intended significant clauses in the written loan agreement to govern the relationship between them: So much may be accepted. Many of these clauses were mere "window dressing" and I agree that the parties never intended to be bound by them. … (13) Part X dividend payment not applied to loan balance: Irrelevant. (14) The use that Advant made of the funds is inconsistent with the third party funding business ventures: Irrelevant. (15) Advant had no ability to repay the transfers from Normandy Asia: Irrelevant. … (20) Normandy Asia's purported loan was used to defeat a genuine third party debtor: Irrelevant. 123 The primary judge's reasons for finding the other advances were loans follow a similar pattern. Accordingly, with respect to the advances from Normandy UK to Advant the primary judge said: [110] Again, with little or no hesitation I find that the payment by Normandy UK to Advant on 15 March 2002 was intended by both parties to be subject to an obligation of repayment by Advant to Normandy UK at the time the payment was made; that being the relevant time to determine whether the payment was truly a loan or something else. Advant's intention in this regard was manifest through the directing mind and will of Mr Townsing. That was Mr Townsing's evidence and while the contrary was put to him, he denied it and there is no reason not to accept his evidence. Normandy UK's like intention is to be inferred from the findings made at [16] above that Mr Gould would not have acted contrary to Mr Townsing's instructions or interest in relation to transactions Normandy UK had with entities in Australia economically associated with Mr Townsing or his family and as such, the parties to those transactions could not be regarded as being, or as dealing with each other, at arm's length. Even if it was not open from the findings made at [16] above to infer a like intention on the part of Normandy UK that the payment it made to Advant on 15 March 2002 was subject to an obligation of repayment by Advant to Normandy UK at the time the payment was made, the payment would not constitute a sham loan to, and borrowing by, Advant in the face of my finding that Advant, through Mr Townsing, had such an intention. As Diplock LJ said in [Snook v London & West Riding Investments Ltd [1967] 2 QB 786 at 802] in the extract reproduced in [53] above, "… for acts or documents to be a 'sham', with whatever legal consequences follow from this, all the parties thereto must have a common intention that the acts or documents are not to create the legal rights and obligations which they give the appearance of creating" (emphasis added). See, too, [Richard Walter Pty Ltd v Commissioner of Taxation (1996) 67 FCR 243] per Hill J at 257, 258 reproduced in [65] above; and Arden LJ in [Hitch v Stone (Inspector of Taxes) [2001] STC 214] at [69] reproduced in [64] above. [111] What was also put to Mr Townsing was that a number of the terms of an instrument dated 15 March 2002 between Normandy UK as lender, Advant as borrower and Mr Townsing as guarantor setting out the terms and conditions upon which a revolving credit facility of $500,000 between Normandy UK and Advant was to operate were pretences or shams and that therefore the payment by Normandy UK to Advant was a sham loan to and borrowing by Advant. Mr Townsing refused to accept that the relevant terms of the instrument to which he was taken in cross-examination by senior counsel for the Commissioner were pretences, but I do not accept his evidence in this regard. Clearly they were pretences, either because the payment from Normandy UK to Advant had already occurred at the time the instrument was executed, in other words the instrument was back-dated, and the terms, insofar as they were conditions precedent to the making of a loan thereunder, were "redundant", or because the terms were not complied with and were never intended to be complied with. [112] In my view, the relevant terms were pretences or "window dressing" in the sense that they were intended to create the impression or disguise to a third party observer that the parties were dealing with each other on an arm's length basis when in fact they were not. Such pretended terms did not, however, impugn the intention of the parties, manifested through Mr Townsing as the directing mind and will of Advant, and through Mr Gould's acquiescence with the instructions and interests of Mr Townsing on behalf of Normandy UK, that the payment from Normandy UK to Advant on 15 March 2002 was anything but a loan to, and borrowing by, Advant from Normandy UK. The terms and conditions on which the loan was made is not to be determined by reference to the terms and conditions of the instrument dated 15 March 2002, but there is no evidence otherwise as to what those terms and conditions were. 124 The primary judge then gave reasons at [114] for rejecting 21 propositions the Commissioner put in support of the conclusion that the advances from Normandy UK to Advant on 15 March 2002 were not loans. Insofar as relevant to the present discussion, those reasons include the following: (2) During the course of the audit, Advant maintained to the Commissioner that the loan agreement was signed on 15 March 2002: Irrelevant. … (4) The parties never intended significant clauses in the written loan agreement to govern the relationship between them: So much may be accepted. Many of these clauses were mere "window dressing" and I agree that the parties never intended to be bound by them. … (9) Negotiating the loans agreement prior to 15 March 2002: It was said that there was no documentary evidence of any negotiation in relation to the loan agreement prior to the initial transfer of $500,000 on 15 March 2002. I do not understand the use of the word "initial" because there was only ever one transfer. Having regard to the relationship between the parties, in particular Mr Townsing and Mr Gould, and the findings at [16] above, it is not at all surprising that there was no negotiations. … (11) Part X payment not applied to loan balance: Irrelevant. (12) The use that Advant made of the funds is inconsistent with the third party funding business ventures: Irrelevant. … (14) Advant had no ability at any time to repay the transfers from Normandy UK: Irrelevant. … (20) After foreshadowing that it would seek to recover the loan and not doing so, Normandy UK increased the facility: Irrelevant. 125 In respect of the various advances to Pilmora the primary judge concluded in these terms: [141] Again, with little or no hesitation, I find that the four payments from Normandy Asia to Pilmora referred to in [41(1)] above were intended by both parties to be subject to an obligation of repayment by Pilmora to Normandy Asia at the time each payment was made; that being the relevant time to determine whether the four payments were truly loans or something else. My finding in this regard is predicated on reasons similar to, albeit not coterminous with, my reasons for coming to a similar finding in relation to the payments (two) made by Normandy Asia to Advant: see [104] to [108] inclusive above. [142] Similarly, I find that the four payments from Normandy UK to Pilmora referred to in [41(2)] above and the two payments from HWBB to Pilmora referred to in [41(3)] above were intended by both respective parties, or if not by both, at least by Pilmora, to be subject to an obligation of repayment by Pilmora to Normandy UK and HWBB respectively at the time each payment was made; that being the relevant time to determine whether the payments were truly loans or something else. My findings in this regard are predicated on reasons similar to, albeit not coterminous with, my reasons for coming to a similar finding in relation to the payments made by Normandy UK to Advant: see [110] to [114] inclusive above. 126 In the reasons for decision of the Tribunal, his Honour said: 1. These reasons should be read in conjunction with the reasons for judgment in Normandy Finance Pty Ltd v Commissioner of Taxation [2015] FCA 1420 (Normandy Finance and Investments Asia Pty Ltd and Advant Pty Ltd v Commissioner of Taxation VID 1336 of 2013 and Pilmora Pty Ltd ATF The Townsing Family Trust and Henry George Townsing v Commissioner of Taxation VID 1337 of 2013) ("Federal Court proceedings"), which was published today. 2. In the case of all applicants in the Federal Court proceedings, the references to this Tribunal are confined to review of the Commissioner's decisions not to remit penalties and shortfall interest charges imposed at the time of the assessments of income tax and penalty tax. In the face of the findings in the Federal Court proceedings, a number of the assessments of income tax and penalty tax will be reduced, however, there should be no further remissions of penalty tax or shortfall interest charges so reduced. Either the applicants have no standing to seek such remissions, or they have not established the grounds upon which their applications for remission are made. The applications of the applicants for any such further remissions so reduced should be dismissed. 3. In the cases of the applicants in 2013/6572-6580 and 2013/6581 and 2013/6582, they seek review of their assessments of income tax - 2013/6572-6580 (2001 to 2009); 2013/6581 (2001) and 2013/6582 (2001) - on the same basis as Henry Townsing sought for the years ended 30 June 2000 to 2009 inclusive. For the same reasons there indicated, in particular at [141] to [144] inclusive, the Commissioner's objection decisions are set aside and their objections allowed to the extent there indicated. 4. The reference to the Tribunal for further remission of penalty tax so reduced on the part of the applicants in [3] above should be dismissed on the same grounds given in [2] above for the applicants in the Federal Court proceedings.

The first (the underlying transactions) and second (consequential orders) issues 127 A preliminary dispute between the parties concerns the proper characterisation of the primary judge's findings. The source of the debate is [106] where the primary judge found that the "relevant" terms of the written loan agreements were "pretences" or "window dressing". If the "relevant" terms include the obligation of repayment, then the primary judge must have found the written loan agreements as a whole to be sham documents because, as his Honour explained at [67]-[72], the essence of a loan agreement is an obligation of repayment which arises at the same time as the agreement to make or the making of the advance. The Commissioner submitted that the primary judge should be understood to have concluded that the written loan agreements as a whole were shams, and that the source of the agreements his Honour found must have been other than the written documents. For their part, the taxpayers contend that it appears from [106] (and other statements by the primary judge, for example, at [16]) that the primary judge did not consider the written loan agreements as a whole to be shams. Rather, it should be concluded that the primary judge considered many terms (such as the conditions precedent) to be shams but accepted that the key terms, involving the advances and the obligations of repayments, were genuine. 128 The Commissioner's principal case of error by the primary judge, whether characterised as involving a denial of procedural fairness or the making of findings not open having regard to the evidence, do not depend on the distinction explained in the preceding paragraph. Whether the primary judge found the written loan agreements to be shams in large part or in whole for the purpose of disguising the lack of an arm's length relationship between the lenders and the taxpayers as borrowers, the Commissioner's contention is that in the particular circumstances of this case it was not open to the primary judge to make either of those findings because both findings were inconsistent with the case the taxpayers had put for the purpose of discharging their onus of proving that the assessments were excessive (imposed on them by s 14ZZO of the Taxation Administration Act 1953 (Cth) (the TAA1953)) and the evidence that Mr Townsing, the directing mind and will of the borrowers, had given. 129 On the Commissioner's case, the kind of error into which the primary judge had fallen is best exemplified by Suvaal v Cessnock City Council [2003] HCA 41; (2003) 200 ALR 1 (Suvaal). Suvaal concerned a bicycle accident. The judge decided the case on the basis of a version of events the plaintiff had not only advanced but had expressly rejected. The plaintiff's case was that he had been forced to move to the left of the road because of a motor vehicle. The judge found he had moved to the left as a result of a loss of concentration, thus rejecting the plaintiff's version of events. Gleeson CJ and Heydon J noted that the fact that the judge had rejected the plaintiff's version of events "must have had a significant effect on the plaintiff's credibility, at least as a reliable narrator of events" (at [8]) and that (at [10]): even if the…judge formed the opinion that the plaintiff was, these instances apart, sincere, honest and reliable, the fact remains that she did not accept a fundamental element of his version of the events just before he was injured, even though it was an element to which he had stubbornly adhered. 130 At [16] their Honours said this: However, there is a more fundamental weakness in the plaintiff's position. Because of the way the proceedings were conducted and because of the primary judge's rejection of the plaintiff's evidence that a car forced him off the road, it was not open to the primary judge in this particular case to conclude that the plaintiff hit the potholes at the side of the road by reason of a loss of concentration. 131 This is because, their Honours explained, "the possibility that the plaintiff suffered a loss of concentration was a proposition which the plaintiff refused to let the Council explore" in that, when the issue was raised with him in cross-examination (at [17]): the plaintiff refused to contemplate the existence of that possibility [a loss of concentration], and repeatedly refused to answer questions on any assumption other than that a car forced him off the road. 132 Gleeson CJ and Heydon J continued, also at [17]: Those refusals meant that the plaintiff precluded examination by counsel for the Nominal Defendant and the Council of the factual rationalisation at which the primary judge eventually arrived in finding the Council liable. For the primary judge to reach conclusions about the cause of the accident which the plaintiff had rejected and which the plaintiff had prevented the Council from testing was in itself impermissible. 133 They continued at [18] in these terms: The truth is that the key finding of the primary judge that the plaintiff veered left into the potholes because of a loss of concentration was never mentioned by him to any of the numerous witnesses who reported to the court what the plaintiff said in the period beginning immediately after he was found injured beside the road and in the following months; was not specifically raised in the pleas of contributory negligence in the defences of the Nominal Defendant and the Council; was never asserted in the plaintiff's testimony; was a proposition which, by reason of the plaintiff's stance in cross-examination, could not be tested; was never advanced by his counsel in argument before the primary judge; was not advanced by any other party; and was a proposition rejected in the plaintiff's Notice of Cross-Appeal to the Court of Appeal. 134 At [23], their Honours said that: the alternative explanation for the plaintiff's presence on the road edges was outside the pleadings. It was thus not open to the primary judge to adopt it unless the course of the trial made that permissible. They concluded that various "passing allusions" to other causes of the accident "scarcely made the possibility of a loss of concentration a fact in issue", and that (at [32]): if the primary judge's finding could be said to have been foreshadowed in final address by these fleeting references after the evidence had closed, it was too late for the Council to deal with the matter in evidence. 135 They concluded in these terms: [35] Hence the primary judge's theory of a loss of concentration was never in issue before the close of the evidence at the trial; was rejected at all material times by the plaintiff; was, if raised in address at all, at most raised faintly and briefly in voluminous written submissions by the Nominal Defendant at a time too late to affect the evidence; and was never adopted by the plaintiff until oral argument began in the Court of Appeal. The plaintiff's contention that it was in issue at the trial is not correct. In these circumstances it cannot be relied on now. [36] A trier of fact, confronted with divergent cases being advanced by the parties, may decline to accept either case and may proceed to make findings not exactly representing what either party said. But that does not justify the creation of an entirely new case with which the losing party had no testimonial or other evidentiary opportunity to deal. 136 In reaching the same conclusion, that the primary judge had erred, Callinan J said that: [147] The finding by the Master distorted the issues joined between the appellant and the respondent. The latter was not to know, or indeed even to suspect, that a deviation as a result of momentary inattention might be found as the cause of the accident. If it had, then it would no doubt have cross-examined about it. The appellant having asserted and reasserted one cause only of the accident, the respondent was not bound to go on an excursion in cross-examination to identify and refute a version not even hinted at by the appellant. … [149] I agree with Giles JA that the Master's explanation of the accident was no more than "a rationalisation of what occurred ... from final overload before the [appellant] went into the potholes." The principle that findings by judges of first instance are owed much deference because of the judge's advantage over appellate courts by reason of seeing and hearing the witnesses can have little useful application to a case in which the judge has found in favour of a party who was a witness, a version which he has not only not given but which he has also resolutely and repeatedly rejected. [150] A further submission that the appellant made was that it was not his fault that the respondent did not explore at the trial the ramifications of a finding of loss of concentration by the appellant. The submission must be rejected. It was precisely because the appellant did not claim, indeed because he asserted the contrary of, a loss of concentration, that these were not explored. There may be multi-party cases in which an issue not initially raised between two of the parties, does become an issue between one or more of them and another party who raises it. This is not such a case however. As between the respondent and the appellant the issue that was critical was the one to which the appellant irrevocably committed himself, negligence by a motorist, and uncontrollable propulsion by that negligence on to a section of the roadway which he well knew was not nearly as even as the bitumen surface upon which he was riding. 137 By analogy to Suvaal, the Commissioner contends that the taxpayers irrevocably committed themselves to one case thesis for the purpose of discharging their onus of proving that the advances were loans. The case advanced by the taxpayers in their appeal statements and which they supported by the evidence of Mr Townsing, as the directing mind and will of the taxpayers, was that they had entered into genuine loan arrangements which were documented in the written loan agreements that were entered into. Mr Townsing repeatedly rejected the proposition that the written agreements or any part of them involved a sham. Mr Townsing also expressly rejected the proposition which the primary judge had put to him that the written agreements were entered into to create the false impression that the lenders and taxpayers were at arm's length from one another. Mr Townsing's rejection of what the primary judge put to him precluded the Commissioner from exploring the asserted purpose of the sham, yet the primary judge found that the sham which the parties intended by entering into the written loan documents was to create that false impression, which enabled his Honour also to find that, despite the sham, there were genuine loan arrangements. For convenience we will refer to this as the alternative case below. 138 We are persuaded by the Commissioner's contentions. This is so despite the fact that the case did not proceed by way of pleadings and, in one sense (given that the primary judge disclosed his thinking during the hearing), is not one involving surprise to the Commissioner. 139 Our first proposition, which must be beyond argument, is that an appeal against an objection decision under s 14ZZ of the TAA1953 is subject to the same requirements of fairness as any other judicial proceeding. Procedural fairness has been said to be the "defining characteristic" of a judicial proceeding (North Australian Aboriginal Justice Agency Ltd v Northern Territory [2015] HCA 41; (2015) 256 CLR 569 at [39]). It may be accepted that pleadings define the issue for trial, perform the function of ensuring that each party has a fair opportunity to meet the case which is put against it and, importantly, define the scope of the relief which is able to be granted. While not pleadings, appeal statements and affidavits perform the same functions other than that relating to relief. In an appeal under s 14ZZ of the TAA1953 against the Commissioner's objection decision, the relief available is that in s 14ZZP which provides that where: a court hears an appeal against an objection decision under section 14ZZ, the court may make such order in relation to the decision as it thinks fit, including an order confirming or varying the decision. 140 Section 14ZZO provides that: In proceedings on an appeal under section 14ZZ to a court against an objection decision: (a) the appellant is, unless the court orders otherwise, limited to the grounds stated in the taxation objection to which the decision relates; and (b) the appellant has the burden of proving: (i) if the taxation decision concerned is an assessment - that the assessment is excessive or otherwise incorrect and what the assessment should have been; or (ii) in any other case - that the taxation decision should not have been made or should have been made differently. 141 In the present case the objections were expressed at a higher level of generality (in effect, simply that the advances were by way of loans) than the appeal statements (which referred to the written loan agreements as discussed above). Accordingly, s 14ZZO(a) did not confine the taxpayers' case. The reason for any confinement of the case, if it existed, is the requirement of the common law that a judicial proceeding be fair to all parties. 142 Our second proposition, which requires some explanation, is that lack of notice and consequential surprise are not the only criteria by which the requirements of fairness are judged. This is exposed by the reasoning in Suvaal in which it was held to be impermissible for the primary judge in that matter to determine the case on a basis inconsistent with that which the plaintiff had claimed. While, in Suvaal, there was also held to be no notice to any party of a determination on that basis, had the judge in Suvaal exposed her thinking to the parties, the result would have been no different. This is because, as Callinan J said, the plaintiff's answers to questions in cross-examination effectively closed off any possibility of an explanation for the accident other than the involvement of another vehicle. Practical unfairness resulted because the issue of some alternative cause of the accident could not be explored given the plaintiff's evidence. This recognition is important to the resolution of the present case because there is no doubt that, from the eighth day of the hearing onwards (which was before the cross-examination of Mr Townsing, who was the directing mind and will of the taxpayers and thus a critical witness), the primary judge disclosed his interest in a case theory which later formed the basis for his determination of the case. The problem is that the primary judge's case theory was expressly rejected by the person who mattered most to resolution of the issues - Mr Townsing, who was the directing mind and will of the taxpayers. The question is thus whether the circumstances of this case involved unfairness to the Commissioner of a similar kind to that found in Suvaal. 143 Some further principles should be stated. Even in a case involving pleadings, the ultimate determinant of any unfairness inconsistent with a judicial determination is the conduct of the hearing as a whole. As said in Dare v Pulham [1982] HCA 70; (1982) 148 CLR 658 at 664 parties may choose to disregard pleadings and fight the case on other issues, in which event a party is not disentitled from obtaining relief based on the evidence. The question then is whether the case was "fairly fought out" (Gould v Mount Oxide Mines Ltd (in liq) [1916] HCA 81; (1916) 22 CLR 490 at 517). A common category of case where unfairness may arise is where one party has been surprised by the shift in position of the other party. Informal, rather than pleaded, notice may be sufficient to avoid unfair surprise (Banque Commerciale SA (En Liqn) v Akhil Holdings Ltd [1990] HCA 11; (1990) 169 CLR 279 at 293-294). In an appropriate case, such notice may come from the judicial officer rather than one of the parties (Southwick v Moore Stephens Melbourne Pty Ltd [2008] VSCA 164 at [28] (Southwick)). Moreover, a party may acquiesce in a departure from a pleaded or notified case by another party and, in the ordinary course, will be bound by any such acquiescence. Accordingly, in Southwick Nettle JA said this at [30]: Nevertheless, where as here a case is run in a particular fashion, despite the pleadings, and is decided in accordance with the way in which it was run, the results should be upheld unless some injustice be done. 144 What then is to be done with the present case given these principles? 145 Subject to one reservation, the taxpayers accepted that at all times before the eighth day of the hearing (12 June 2015) their case was that the advances to Advant and Pilmora were made pursuant to five written loan agreements. The one reservation is the reference in para 84 of the written opening submission for the taxpayers set out above. Senior counsel for the taxpayers in the appeal properly acknowledged, however, that para 84 was dealing with a proposition different from that which ultimately formed the basis for the primary judge's conclusions. The submission at para 84 assumed the existence of written loan agreements which were not shams but which might be found unenforceable for some reason and asserted that, in that event, the advances should still be found to be loans. The premise of para 84 is inconsistent with the alternative case. 146 Insofar as the concepts of notice and surprise are relevant to the kinds of unfairness the Commissioner contends arise from the primary judge's conclusions, para 84 of the taxpayers' written opening submissions did not purport to alter or extend their case so as to include the alternative case - that if the written loan agreements, or key parts of them, were found to be shams, the shams should be found to have been for a limited purpose (to fool third parties into believing the lenders and borrowers were at arm's length) and in any event either the key obligations in the written agreements (the advances and the obligation of repayment) were genuine or the key obligations arose from a source other than the written loan agreements (such as orally). 147 We should also note here that to the extent that senior counsel for the Commissioner referred to an "antecedent oral agreement" in the context of the advances said by the taxpayers to be loans under and in pursuit of the written loan agreements, it is reasonably clear that, until after the comments of the primary judge raising the alternative case on the eighth day of the hearing, these references did not involve any notion that the taxpayers' case was understood to include the possibility of the alternative case. Rather, senior counsel for the Commissioner was noting a lacuna in the taxpayers' case theory. The lacuna was that advances had been made before the written loan agreements had been executed, prompting senior counsel for the Commissioner to hypothesise a presumption, unstated and unproven by any evidence, of an antecedent oral agreement underpinning those advances. The point that was being made was that any such presumption would be unfounded because it was not part of the taxpayers' case. Accordingly, those references, far from disclosing that the Commissioner changed the ground on which the case was fought by introducing the prospect of oral agreements underlying the relevant loans, demonstrate to the contrary. 148 We come now to the eighth day of the hearing. As noted, numerous witnesses, including two representing the lenders' sides of the transactions, had already been cross-examined. The context was objection to parts of Mr Townsing's affidavits. Paragraph 47 was in issue. What excited the primary judge's interest was the second sentence of para 47 in which Mr Townsing's evidence was that he "assumed Mr Hubbard was the economic owner of NFIL [Normandy UK]". Given the relationships between the corporate entities the primary judge found this evidence from Mr Townsing "nearly laughable" as it seemed obvious that, in reality, Mr Hubbard (in common with Ms Beach who had already been cross-examined) was a "total nominee" of Mr Townsing (via Mr Gould who was providing taxation and accounting services to Mr Townsing). His Honour then put to counsel for the taxpayers "you're not seriously suggesting…that the Normandy companies…were at arm's length with…Mr Townsing". Counsel said that they "were not suggesting that they're at arm's length" but said also that while he did not cavil with that as a "bare proposition", the real issue was where the money had come from and Mr Townsing's case was that the money was not his. In other words, the taxpayers' case remained that the transactions were at arm's length. It is in this exchange that the primary judge also raised for the first time the alternative case - that the written loan agreements seemed to be shams for the purpose of fooling third parties into believing that the lenders and taxpayers were at arm's length from one another, when they were not, but that the underlying transactions could be genuine. 149 The problem, of course, is that Mr Townsing was asserting that the lenders and taxpayers were at arm's length from one another in respect of the asserted loan agreements and that the agreements did not involve a sham of any kind As set out above, senior counsel for the Commissioner put to Mr Townsing the very proposition that the primary judge had found "nearly laughable" in para 47 of Mr Townsing's affidavit, that Mr Hubbard was Mr Townsing's nominee, and Mr Townsing rejected that proposition. Senior counsel also squarely put to Mr Townsing that the written loan agreements were not at arm's length and, again, Mr Townsing disagreed with that proposition. Senior counsel put to Mr Townsing that the written loan agreement between Normandy Asia and Advant was intended to give the appearance that the earlier transfers were loans when they were not (that is, were shams), which Mr Townsing denied. He also denied that any provisions of the written loan agreements involved any kind of pretence, but instead suggested that some terms had been waived or involved an oversight in using a template or were simply redundant or merely "sloppy", but rejected any suggestion that any of the written loan agreements as a whole or any terms of them involved a "pretence". 150 It may be accepted that senior counsel also dealt with the possibility of antecedent oral agreements, putting to Mr Townsing that there were no discussions before the transfer of funds, and that Mr Townsing disagreed with this but could not explain why he had given no evidence of such discussions in his affidavits. This, however, does not alter the fact that Mr Townsing's evidence in response to questions from the Commissioner's senior counsel was irreconcilable with the alternative case. 151 Moreover, the matter did not rest there. The primary judge intervened, testing Mr Townsing's evidence by reference to certain incontrovertible facts which seemed at odds with his evidence. This culminated in the primary judge putting to Mr Townsing that at least certain provisions of the written loan agreements involved a "sort of pretence". Mr Townsing again denied this. The primary judge then expressly put to Mr Townsing, as set out above, that a lot of the provisions in the loan agreements were a pretence to give the (false) impression that the lenders and the taxpayers were independent and at arm's length from one another. Mr Townsing disagreed with this suggestion. Following this, counsel for Mr Townsing, albeit gently, remonstrated with the primary judge on the basis that Mr Townsing's evidence was that the written loan agreements may be sloppy but did not involve any kind of pretence. In other words, the taxpayers did not embrace the alternative case and, indeed, objected to it being put to Mr Townsing by the primary judge. 152 In these appeals the taxpayers pointed out that senior counsel for the Commissioner did not object to the interventions by the primary judge and, indeed, chimed in to support the primary judge's right to question the witness. This is true, but it does not assist the taxpayers. It is not surprising that the Commissioner had no problem with what occurred between the primary judge and Mr Townsing because Mr Townsing's evidence was inconsistent with the alternative case the primary judge had raised. Mr Townsing's answers effectively closed off any possibility that the whole or any part of the written loan agreements were shams intended to fool third parties into believing that the lenders and borrowers were at arm's length. From the Commissioner's point of view no possibility that certain provisions of the agreement might be shams for a limited purpose could be explored in cross-examination (or, by inference, could found the primary judge's decision) because Mr Townsing had denied that any parts of the agreements involved a pretence and that there was any associated explanation for the pretence. 153 Thereafter, the Commissioner continued to put to Mr Townsing that the written loan agreements were each a pretence, not intended to have operative effect, which Mr Townsing consistently denied. Mr Townsing also consistently denied that the lenders were effectively under his control. It may be accepted that Mr Townsing also denied that he never had any intention to repay the advances. In context, however, this must be understood as evidence that Mr Townsing rejected the notion that he never intended to repay the advances under and in accordance with the written loan agreements because, on Mr Townsing's evidence, the loan agreements were genuine and operative. As the Commissioner said to the primary judge in closing submissions, given Mr Townsing's evidence, it was not possible to consider any obligation of repayment separately from the loan agreements, yet this was essential to the primary judge's acceptance of the alternative case. 154 It is also apparent that, until closing submissions, counsel for the taxpayers resisted the alternative case. This is demonstrated by the re-examination of Mr Townsing in which, as noted, he was asked why he said that Pilmora (the borrower) and Normandy Asia (the lender) were at arm's length from one another. Mr Townsing explained, consistently with his earlier rejection of what the primary judge had put to him, that the lenders were experienced, wanted commercial terms, they "arrived at" interest of 10%, and the lenders wanted a fair return. This is evidence that the lenders were independent from the borrowers and the written loan agreements were genuine. Had counsel for the taxpayers tried to do more to undermine the alternative case, he would have been cross-examining his own witness. 155 In other words, Mr Townsing, the directing mind and will of the taxpayers, repeatedly rejected any invitation, whether from the Commissioner or the primary judge, to embrace the possibility of the alternative case. As such, the evidence of Mr Townsing admitted of one case only - that the advances were by way of loans made by lenders who were independent from him and did not act under his direction pursuant to written loan agreements which were wholly genuine, albeit if sloppily drafted and including some conditions which were waived and/or redundant. This case cannot be reconciled with the alternative case because the alternative case depended on the proposition that the written loan agreements involved at least some pretence for a particular purpose. Mr Townsing denied both any pretence and the existence of the purported purpose for any pretence. 156 Counsel for Mr Townsing maintained a case consistent with the evidence of Mr Townsing at all times before the closing submissions and, it should be noted, in the face of expressions of incredulity from the primary judge - incredulity which is entirely understandable because, as the primary judge rightly recognised, Mr Townsing's evidence that the advances were by way of loans negotiated between independent and arm's lengths borrowers and lenders was incredible. The primary judge also correctly recognised that his interventions involved, as he put it, throwing "a few lifelines" to Mr Townsing, but the material point is that Mr Townsing refused to catch any of these lifelines. The question is, given this, was it open to the primary judge to accept the alternative case? As will be apparent from the discussion above, we think the answer to this question must be "no". 157 The fact that the primary judge continued thereafter to raise the alternative case (thereby giving notice that, despite Mr Townsing's evidence, the alternative case remained alive in his Honour's mind) may be accepted. Equally, it may be accepted that when this became apparent it would have been desirable for the Commissioner to put to the primary judge clearly and unequivocally that, given Mr Townsing's evidence, it was not open to the primary judge to make any finding in accordance with the alternative case and to do so would involve error of the Suvaal kind - because Mr Townsing's evidence had effectively precluded any exploration of the issue in cross-examination. In fairness, however, to senior counsel for the Commissioner, and as explained below, he attempted to do so, albeit perhaps not with the clarity and force that less pressured circumstances than a lengthy and complex hearing might have permitted. 158 It was only in written closing submissions filed the day before closing oral submissions were to be made that counsel for the taxpayers sought to embrace the alternative case. It may be accepted that, in the written submissions for the Commissioner, no objection was made to this attempt and opposition to it was put on the basis of inadequate evidence "at this late stage". Again, however, in fairness to the Commissioner, the written submissions of both parties were of extraordinary length and complexity, no doubt prepared under pressure of time, and the taxpayers' embrace of the alternative case appeared in only a few paragraphs. 159 In Coulton v Holcombe [1986] HCA 33; (1986) 162 CLR 1 at 19, albeit in a different context (the raising of a new issue on appeal), it was said that some oversights in the conduct of a hearing are not "beyond understanding" and should not be taken to prevent a party from subsequent complaint. Any lack of clarity and force in the Commissioner's attempts to dissuade the primary judge from making a finding based on the alternative case which Mr Townsing had rejected could not reasonably be characterised as involving some form of disentitling fault, waiver or acquiescence on the part of the Commissioner. 160 In any event, the matter did not rest with the written submissions. For one thing counsel for the taxpayers put oral submissions contrary to the notion that the taxpayers had any reason to engage in pretence. Indeed, counsel for the taxpayers sought to undermine any suggestion that the written loan documents involved a pretence to fool third parties into believing that the parties were at arm's length on the basis that the attempt to do so, if it had been an attempt, was "incompetent" because nobody could believe the parties were unrelated and only a "complete fool" would believe otherwise. This submission, it must be understood, was not embracing the alternative case at all. It was a submission rejecting the alternative case on the basis that there could be no finding of sham or limited sham because no-one would have made such a doomed attempt. That said, counsel for the taxpayers, unsurprisingly, sought to have his cake and eat it too, by also putting the alternative case in his oral closing submissions. 161 As the above extracts from the transcript disclose, senior counsel for the Commissioner made the essential points in oral closing submissions - that the taxpayers could not depart from the reliance they had placed on the written loan agreements and, importantly, that the taxpayers could not have it "both ways". Senior counsel also made the point (and it is worth repeating) that: In a case where the claim is made on the basis of these people being at arm's length and ..... negotiating parties and, by inference, engaged in a process of hard bargaining which is manifest in writing - in written agreements; if all of that collapses one then has the fact that there are transfers of funds which, in the circumstances, are analogous to an asset betterment in the sense that there's an amount of money which is otherwise unexplained. 162 It is true senior counsel did not isolate these propositions - (i) of the inconsistency between Mr Townsing's evidence and the alternative case and (ii) the logical impossibility of finding the alternative case in the face of Mr Townsing's evidence given that he was accepted to be the directing mind and will of the taxpayers - before moving on to substantive arguments against acceptance of that alternative case (for example, lack of evidence of offer and acceptance and recent invention by Mr Townsing of antecedent discussions to support the advances made before execution of the agreements being loans, as well as the onus of proof on the taxpayers, and evidentiary deficiencies). Nor did senior counsel state in terms, that a finding in accordance with the alternative case would involve a denial of procedural fairness because Mr Townsing's evidence precluded the issue from being explored. But he did make the point the taxpayer could not run both cases (which must be right), that the cases were inconsistent, and that if the written agreements involved a sham, nothing was left of the taxpayers' case given the way it had been put (which, in our view, must also be right). It cannot be said that the Commissioner acquiesced in the acceptance of, or waived any right to object to, the alternative case, even assuming that the concepts of acquiescence and waiver have any work to do when then the problem is the acceptance by a judge of a case irreconcilable with the evidence. 163 In the result, we consider that the primary judge's conclusion - that the written agreements were shams or largely shams but the sham was for the limited purpose of making third parties believe that the borrowers were at arm's length from the lenders and the advance and repayment obligations, whether in the loan agreements or from some oral agreement, were genuine - was not open in the circumstances of this case. It was a conclusion not only inconsistent with the evidence of the directing mind and will of the borrowers, but was incapable of any form of rational reconciliation with that evidence. It was a conclusion made in circumstances where all of the lenders had been cross-examined on the basis of a different case before the alternative case was first raised by the primary judge (which may not be fatal of itself, given that their evidence was of marginal significance), but also where the evidence of the key witness, Mr Townsing, precluded any possibility of the credibility of the alternative case being explored in cross-examination (which is fatal in and of itself, given that Mr Townsing was the directing mind and will of the taxpayers). 164 Contrary to the submissions for the taxpayers, this aspect of the appeals does not turn on the primary judge's apparent acceptance of Mr Townsing as a credible witness insofar as he gave evidence that the loans were genuine. No doubt the primary judge made findings to that effect in respect of the loans said to be the subject of the written loan agreements at [104], [110], [141] and [142]). If the appeals turned on an attempt to interfere with a credit finding then, we accept, there would be difficulty. But the appeals do not depend on any interference with a finding of credit. The problem, as we have identified, is that the basis of the conclusion was findings about facts inconsistent and irreconcilable with the case which the taxpayers had put, in circumstances where the case as put made it impossible to explore the facts on which the findings depended. It follows that it is not to the point that the Commissioner does not (assuming the Commissioner does not) allege the kind of error generally necessary for an appellate court to interfere with the fact finding function of a trial judge (affirmed most recently in Robinson Helicopter Company Inc v McDermott [2016] HCA 22; (2016) 331 ALR 550 at [43] that "a court of appeal should not interfere with a judge's findings of fact unless they are demonstrated to be wrong by "incontrovertible facts or uncontested testimony", or they are "glaringly improbable" or "contrary to compelling inferences"). In any event, properly understood another way of looking at the Commissioner's case is that the key findings based on the alternative case were not open because there was uncontested testimony from Mr Townsing to the contrary. 165 The consequences of the error we consider has occurred are apparent elsewhere in his Honour's reasoning. The characterisation of advances as a loan or something else depends on consideration of all of the relevant circumstances (see, for example, Albion Hotel at 91 and Allsene Pty Ltd v Commissioner of Taxation [1989] FCA 785; (1989) 89 ATC 5333 at 5345-5346). The Commissioner identified a number of matters as weighing against any characterisation of the advances as a loan. That these matters were rationally capable of weighing against such a characterisation is not (or ought not to be) in issue. Yet the primary judge dismissed these matters as "irrelevant" (at [108] and [114]). The taxpayers' explanation for this is that the primary judge accepted Mr Townsing as credible when he said the loans were genuine. As discussed above, it is not possible to separate this conclusion from the alternative case upon which his Honour relied. There was no part of Mr Townsing's evidence about the genuineness of the loans which stood apart from and unaffected by his evidence that the written loan agreements were not shams to any extent or for any purpose. 166 It seems to us that the primary judge rejected a number of the factual circumstances on which the Commissioner relied as "irrelevant" because they were inconsistent with the alternative case. But such inconsistency did not make those matters irrelevant. They were relevant and had to be weighed in the balance, yet were not. Similarly, the primary judge rejected other factors on which the Commissioner relied as immaterial given his conclusion that the parties were not at arm's length and the written loan agreements were shams. The problem is that the characterisation of those circumstances (such as the lack of evidence of any negotiations) as immaterial or not unexpected assumes the correctness of the alternative case which Mr Townsing had repeatedly rejected in evidence. But for the acceptance of the alternative case, which was not open for the reasons we have given, these matters could not have been said to be immaterial or not unexpected. The primary judge's adherence to the alternative case, in our view, explains the form and substance of [108] and [114] of his Honour's reasons. 167 It explains also the primary judge's description of the accounts of Normandy UK, which do not show a loan to Advant, as merely "current working accounts", confined to current assets and liabilities, when the loan to Advant was not a current asset of Normandy UK (at [114(17)]). As the Commissioner submitted, no such suggestion was apparent from the face of the document, despite the accounts being in an "abbreviated" form. Nor was it suggested by the taxpayers. It did not fit the alternative case, however.

The second (the consequential orders) issue 168 The discussion above is relevant to the second (the consequential orders) issue. Having rejected the taxpayers' case as advanced in the evidence of Mr Townsing, that the five written loan agreements were genuine and the advances had been made in accordance with those agreements, it appears that there was only one conclusion open to the primary judge, which was that the taxpayers had not discharged the burden of proving that the assessments were excessive. We say this because the existence and genuineness of the written loan agreements, and the absence of any sham, were basal facts for the taxpayers' case as put in Mr Townsing's evidence. 169 For the purposes of both supporting the primary judge's decision and a submission that, if the primary judge erred, the proper order was remittal of the matters, the taxpayers presented lists of other evidence said to support the same conclusion in their written submissions on the appeals. The problem with these factors is that the taxpayers' case and Mr Townsing's evidence did not permit of the possibility that the written loan agreements were shams, and the advances and obligations of repayment arose otherwise than under those agreements. 170 That said, does anything remain in the taxpayers' case which could have discharged the burden of proof? Contrary to the submissions for the taxpayers, it is not the evidence of Mr Yunus and Ms Beach which, as the Commissioner put it, could rise no higher than the existence of the loan documents given the primary judge's unchallenged findings that the lenders were acting under Mr Townsing's direction. It is not the evidence of entries into the accounts which the primary judge properly limited to evidence of the mere fact of entries having been made in the accounts. It is not the evidence of the loan agreements themselves, which the primary judge had found to be a sham either in whole or large part, because either way this is inconsistent with the taxpayers' case. It is not the evidence of Mr Townsing that he intended the moneys advanced to be repaid because, as discussed, this evidence was inextricably tied up with his evidence that the moneys were advanced under and in pursuit of the written loan agreements. 171 Nor does the so-called antecedent oral agreement issue assist the taxpayers. Read as a whole, it is clear that in his evidence Mr Townsing was not asserting the existence of any kind of free standing oral agreement pre-dating the written loan agreements pursuant to which advances were made. His evidence was that there had been discussions with Mr Yunus (at least) but that the written agreements embodied the loan agreements and the obligations of repayment, despite the fact that the moneys had been advanced in anticipation of the written agreements. This was the point of Mr Townsing's evidence that certain conditions of the written agreements had been waived or were redundant, but (according to his evidence) the moneys advanced before execution were nevertheless loans under and in accordance with the agreements. The same conclusion applies to his evidence about the other written loan agreements. 172 It seems to us that all that is left is the evidence on which the taxpayers relied to support the conclusion that they had "repaid" some of the moneys advanced. There is a separate procedural fairness complaint about the repayments issue but, for present purposes, what is relevant is whether the evidence, such as it was, was capable, in and of itself, of making open a finding that the advances were by way of loan. The problem, as we see it, is that without a legal context in which moneys were being advanced subject to an obligation of repayment, the mere movement of money is a neutral fact. It says nothing about the legal character of the movement. This concern is not answered by the proposition, which we accept, that a contract for a loan might arise from conduct. As Allsop J (as he was) put it in Branir Pty Ltd v Owston Nominees (No 2) Pty Ltd [2001] FCA 1833; (2001) 117 FCR 424 at [369]: The contract arose from the prior conduct and communications of the parties, in particular around mid December. Mr Campbell QC called this a "springing contract" and something not known to the law. On the contrary, a number of authorities discuss the need not to constrict one's thinking in the formation of contract to mechanical notions of offer and acceptance. Contracts often, and perhaps generally do, arise in that way. They can also arise when business people speak and act and order their affairs in a way without necessarily stopping for the formalities of dotting "I"s and crossing "t"s or where they think they have done so. Here, the "i"s were not dotted and the "t"s were not crossed because of Mr Graham's conduct. Sometimes this failure occurs because, having discussed the commercial essentials and having put in place necessary structural matters, the parties go about their commercial business on the clear basis of some manifested mutual assent, without ensuring the exhaustive completeness of documentation. In such circumstances, even in the absence of clear offer and acceptance, and even without being able (as one can here) to identify precisely when a contract arose, if it can be stated with confidence that by a certain point the parties mutually assented to a sufficiently clear regime which must, in the circumstances, have been intended to be binding, the court will recognise the existence of a contract. Sometimes this is said to be a process of inference or implication. For my part, I would see it as the inferring of a real intention expressed through, or to be found in, a body of conduct, including, sometimes, communications, even if it be the case that the parties did not consciously advert to, or discuss, some aspect of the relationship and say: 'and we hereby agree to be bound' in this or that respect. The essential question in such cases is whether the parties' conduct, including what was said and not said and including the evident commercial aims and expectations of the parties, reveals an understanding or agreement or, as sometimes expressed, a manifestation of mutual assent, which bespeaks an intention to be legally bound to the essential elements of a contract. The authority for the above can be found in, at least, the following: Meates v A-G [1983] NZLR 308, 377 per Cooke J (as his Lordship then was); Integrated Computer Services Pty Ltd v Digital Equipment Corp (Aust) Pty Ltd (1988) 5 BPR [97,326] at 11,117-118 per McHugh JA (Hope and Mahoney JJA concurring); Vroon BV v Fosters Brewing Group [1994] 2 VR 32, 81-83 per Ormiston J (as his Honour then was); Empirnall Holdings Pty Ltd v Machon Paull Partners Pty Ltd (1988) 14 NSWLR 523,555 per McHugh JA (with whom Samuels JA concurred); Pagnan SpA v Feed Products [1987] 2 Lloyd's Rep 601, 611 per Bingham J (as his Lordship then was) affirmed on appeal at p615; Pobjie Agencies v Vinidex Tubemakers [2000] NSWCA 105 [22-24] per Mason P (with whom Meagher and Handley JJA concurred); Brambles Holdings Ltd v Bathurst City Council [2001] NSWCA 61 at [74] to [80] per Heydon JA; though see Toyota Motor Corp Australia Ltd v Ken Morgan [1994] 2 VR 106, 178 per Tadgell J (as his Honour then was); and in this context see also Electrical Enterprises Retail Pty Ltd v Rodgers (1989) 5 NSWLR 473, 489 per Kearney J and Manzi v Smith (1975) 132 CLR 671, 674. 173 True, but that was not the case the taxpayers ran. Mr Townsing did not say that there was a loan agreement arising by way of conduct. He said that there were written loan agreements and the parties acted consistently with and in pursuit of the written loan agreements. The distinction is critical. Conduct, insofar as the taxpayers relied upon it, was conduct said to demonstrate that the written loan agreements were genuine. But it was the written loan agreements which were said to give rise to the legal relationship, not the conduct. The only true alternative case that the taxpayers put was that set out in their appeal statements (that the moneys were not received beneficially, were not connected to income earning activity or were received on capital account). 174 Given this, the movements of money between the taxpayers and lenders said to amount to repayments of loans could not amount to anything more than evidence of the movement of money. The movements could not be said to be part of a course of conduct by which it should be inferred that the taxpayer borrowers and the lenders were acting consistently with a mutual assent in respect of an obligation of repayment arising contemporaneously with the agreement to or fact of advancement of the money. As a result, we consider that the primary judge's rejection of the taxpayers' case that the written loan agreements were genuine and that all of the moneys had been advanced under and in accordance with those loan agreements (including the moneys advanced before the agreements were executed because conditions precedent had been waived or were redundant or the drafting was sloppy), necessarily meant that only one outcome was open - the taxpayers had not discharged their onus of proof that the assessments were excessive because they had not proved the moneys advanced were loans: Millar v Commissioner of Taxation [2016] FCAFC 94; (2016) 2016 ATC 20-578. The only outcome open was for those appeals to be dismissed. 175 In respect of the remaining submissions made for the taxpayers relevant to the first and second issues, we do not agree that it is material that the Commissioner did not cross-examine Mr Townsing about his motivations for disguising non-arm's length transactions as arm's length transactions in respect of any loans. This submission misses the point. Mr Townsing's evidence was he had no such motivation and did not disguise anything. It is this evidence which precluded the issue from being explored. Yet the primary judge found that Mr Townsing did have such an intent. It is this which gives rise to a kind of unfairness which requires appellate intervention. 176 We also do not agree that the Tribunal's decision can stand. Although it is true that the notice of appeal from the Tribunal does not articulate a question of law, it does cross-refer to the notices of appeal in the other proceedings and they raise questions of law. While not a desirable way to proceed, there cannot be any real issue that, if the principal judgment falls, the Tribunal's decision which manifestly depends on the principal judgment, must also be set aside. 177 These conclusions cover many of the Commissioner's appeal grounds and submissions and make others redundant. To the extent necessary to say so, it follows from the above that we would accept appeal grounds 1a, 1b, and 1c. Appeal grounds 1d (finding amounted to speculation), 1e (inadequate reasons), 1f (the parol evidence rule), 1g (another way of putting the "not open" to find argument, but less felicitous than 1a), and 1h (loan agreements were shams) add nothing and need not detain us. 178 Appeal ground 2 (impermissible placing of the onus on the Commissioner) also adds nothing. It seems to be yet another way of making the same complaint, albeit in the face of the primary judge's manifest understanding that the taxpayers bore the onus. 179 Appeal ground 4 is unsustainable. The taxpayers did not have to call Mr Gould to succeed. The primary judge's error did not relate to any failure to apply the principle in Jones v Dunkel [1959] HCA 8; (1959) 101 CLR 298. 180 The error of the primary judge did not turn on the distinction between fiscal and financial intention as discussed in Richard Walter Pty Ltd v Commissioner of Taxation [1996] FCA 454; (1996) 67 FCR 243 and Raftland Pty Ltd v Commissioner of Taxation [2008] HCA 21; (2008) 238 CLR 516. Appeal ground 5 is thus immaterial. 181 Nor was the primary judge's error one of giving too much weight to Mr Townsing's subjective intention, and thus appeal ground 6 is without merit. 182 Appeal ground 7, that the primary judge failed to have regard to the evidence as a whole, is persuasive, for the reasons we have given above. 183 Appeal grounds 8 and 9 are ways of trying to put the main point discussed above, but add nothing. 184 The complaint of inadequate reasons in appeal ground 10 is without substance. 185 Appeal ground 11 relates to the repayments issue dealt with below. 186 Appeal grounds 12 and 13 relate to the same issue, of failure to consider the evidence as a whole, as appeal ground 7 but for a different loan. The ground is persuasive for the reasons given. 187 Appeal ground 14 relates to the Cyclopharm shares dealt with below. 188 Appeal ground 15 is the same as appeal ground 7, that the primary judge failed to have regard to the evidence as a whole for yet another loan, and is persuasive, for the reasons we have given above. 189 Appeal ground 16 adds nothing. 190 Appeal ground 17 is the same as appeal ground 7, that the primary judge failed to have regard to the evidence as a whole for yet another loan, and is persuasive, for the reasons we have given above. 191 Appeal ground 18, which relates to the finding about the Normandy UK accounts not being current at [114(17)] has been addressed above. If that were all the appeal involved it would not succeed because the finding is an intermediate finding of fact which was not necessarily unreasonable. As discussed above, however, we consider it indicative of the error we have found. 192 Appeal ground 19, asserting inconsistency between [113] and [115] of the primary judge's reasons is unhelpful and adds nothing. 193 Appeal ground 20, that this Court should substitute its own opinion, has been dealt with above. As discussed, it seems to us that this is not a matter in which the appeal should be allowed and the case remitted for determination. This is because, on a rehearing, we do not see how a different result could be reached for the reasons given above. Nor do we see that further evidence can cure the problem. Rather, the only way in which the taxpayers might succeed is if the taxpayers, on the rehearing, ran an entirely different case from that which they advanced before his Honour (for example, that a loan agreement had been created by conduct). Such a course, however, is unattractive for obvious reasons. 194 Given, however, that we have not heard from the taxpayers in circumstances where they have had the benefit of our reasons, we propose to defer making orders for the dismissal of the appeals to the primary judge (and application to the Tribunal) so that the parties may be heard further about these issues. 195 Appeal ground 21, relating to costs if the appeal is dismissed, does not arise. 196 Before we move to the remaining issues, a further observation should be made. As we have noted, the primary judge was swamped with a welter of paper by both parties, yet the point that mattered most, that it was not open to the primary judge to find in accordance with the alternative case was not made as clearly, forcefully and cogently as might have been hoped despite the pressure of the circumstances. It should be apparent from the discussion above that in these appeals also the prolixity of the notices of appeal and the resulting submissions, particularly those of the Commissioner, does not assist an appellate court in discharging its functions. Serving up every possible appeal ground, overlapping, inconsistent and redundant, is not a helpful way to proceed and should be discouraged. 197 We turn now to the one loan agreement not said to have been created by entry into a written document, that from Normandy Asia to Normandy Australia.

The third and fourth (Normandy Asia and Normandy Australia) issues 198 The primary judge dealt with the arrangements between Normandy Asia to Normandy Australia at [79]-[96]. 199 The first point we consider it necessary to make is that, although not put by the Commissioner, we find it impossible to conclude that the primary judge's findings about these arrangements were not influenced by his findings about the other arrangements which we have found involved error. If necessary, we would give the taxpayers an opportunity to be heard about this aspect of the appeal. 200 However, it is not necessary to rely on this consideration to find that the primary judge's conclusions about the dealings between Normandy Asia and Normandy Australia were affected by error. 201 First, the primary judge said that the Commissioner had conceded that Normandy Australia had repaid moneys advanced to it by Normandy Asia by way of loan in the sum of $500,000 (at [85]). The Commissioner made no such concession. The Commissioner also always contended that there were no loans and thus the primary judge's observation at [85] that: the Commissioner did not contend that any of these payments from Normandy Australia to Normandy Asia did not occur, nor that they were not repayments of payments by Normandy Asia to Normandy Australia by way of loan, but were something else… also is unsustainable. 202 Second, the primary judge said this at [86]: It was never put to Mr Townsing that Normandy Australia never intended, at the time each payment was made to it by Normandy Asia, to repay the payment. Having regard to the transcript of Mr Townsing's cross-examination at T 825/10 to T 826/5, I reject the Commissioner's submission to the contrary. The reference to "any of these loans" at T 826/5 is clearly limited to the loans to Pilmora and Advant. Normandy Australia is not mentioned in any part of the transcript that proximately precedes that reference. 203 We are unable to agree. Leaving aside the true meaning of the references preceding that identified part of the transcript, on a fair reading of the cross-examination of Mr Townsing, it is apparent that the Commissioner's case was there was no loan from Normandy Asia to Normandy Australia and thus, necessarily, that there was no obligation of repayment. It is true that Mr Townsing denied that there was no loan and insisted there was an obligation of repayment, but it was not open to the primary judge to resolve the case on the basis that it was not put to Mr Townsing at all. 204 Third, we are unable to agree that any of the twelve matters which the Commissioner put to the primary judge as supporting a finding that the advances were not loans was irrelevant. This is because all of the evidence must be weighed to determine whether the inference should be drawn that the advances were by way of loans. Yet the primary judge rejected a number of those matters at [91] as irrelevant to the issue to be resolved. While a factor may be rejected as such if it cannot rationally bear on the fact in issue, the matters on which the Commissioner relied may not have been weighty, but were not irrelevant. 205 To this extent, appeal grounds 11, 12 and 13 are persuasive insofar as they deal with the arrangements between Normandy Asia and Normandy Australia. 206 Otherwise, the primary judge dealt with the Cyclopharm shares at [82] and [92]-[95]. As explained at [82]: in the year ended 31 December 2007, Normandy Asia provided Normandy Australia with vendor finance, in the form of allowing the purchase price of shares in Cyclopharm Ltd, an Australian public company, purchased by Normandy Australia from Normandy Asia, to remain outstanding. The Commissioner has included the amount outstanding in the sum of $2,220,000 as assessable income of Normandy Australia for the year ended 31 December 2007. 207 At [95] the primary judge rejected the Commissioner's case that the shares were transferred for no consideration and not subject to any repayment obligation saying he did so: for reasons similar to those given in [86] above. I find that the obligation of Normandy Australia to pay the purchase price of the [Cyclopharm (CYC)] shares to Normandy Asia was a genuine obligation because both parties, through Mr Townsing as the directing mind and will of both companies, intended the transfer of the CYC shares to give rise to an obligation of payment by Normandy Australia to Normandy Asia and a right to payment in Normandy Asia from Normandy Australia. That was Mr Townsing's evidence, and it was never put to him that this was not the case. As to the second ground, additionally there is no evidence to support such a conclusion. For these reasons, the amount of $2,220,000 is not income of Normandy Australia for the year ended 31 December 2007. 208 Again, however, we are unable to agree that it was not put to Mr Townsing that the loan was not genuine and involved no obligation of repayment. Further, because we consider the reasoning in [86] to involve the errors identified it is not possible to conclude that the primary judge's reasons with respect to this issue, which cross-refer to those reasons, are unaffected by error. 209 To this extent, appeal ground 14 is persuasive. 210 We accept, however, that it would have been open to the primary judge, on the case which the taxpayers ran, to conclude that the taxpayers had discharged their burden of proof with respect to the dealings between Normandy Asia and Normandy Australia involving loans. We consider that this aspect of the appeal must be remitted for further hearing and cannot be dealt with as part of the appeal. However, given that we have also decided that we should hear the taxpayers in respect of our view that there is nothing to remit in respect of the five written loan agreements, we propose also to hear from the parties about this aspect of the matter.

The fifth (the repayments) issue 211 Despite generating a mass of paper (91 pages which the Commissioner would have relied upon had he been given the opportunity to do so) and taking up considerable time at the hearing of the appeals, this complaint deserves little attention. 212 The circumstances are these. The fact that the primary judge said during closing submissions that he did not understand Ms Glover's evidence and asked for the information about alleged repayments to be presented clearly does not mean that, when the primary judge was given that information in a tabular form in submissions in reply by the taxpayers after the hearing and pursuant to leave, the Commissioner was thereby denied procedural fairness. Whether or not the primary judge understood Ms Glover's evidence, it cannot be gainsaid that all the submissions in reply did, insofar as relevant to this aspect of the appeals, was exclude some payments which Ms Glover had asserted to be repayments, provided cross-references to the material already in evidence in support, and made a short argumentative proposition that the payments should be inferred to be repayments of loans. This short argumentative proposition, however, was nothing new. The taxpayers had always asserted that all of the payments which Ms Glover identified in her affidavit were loan repayments. 213 This aspect of the appeals is one where the Commissioner is bound by the conduct of the case before the primary judge. If the primary judge did not understand Ms Glover's evidence, then senior counsel could have asked questions about it. Further, senior counsel could have informed the primary judge at the time his Honour was making directions for the parties to make further submissions (including the taxpayers' reply submissions as a whole because time allocated for the hearing had run out) that the Commissioner would need to see the information the primary judge was requesting about repayments and wished to reserve a right to deal with that information. The primary judge could then have dealt with the issue at the appropriate time. Instead, the Commissioner said nothing, the reply submissions were filed (as were further submissions for the Commissioner) and then, without leave, the Commissioner sought from the primary judge a further opportunity to make yet more submissions about the repayments. The reality, however, is that there was nothing new in the reply submissions about repayments. All that had been done was to represent Ms Glover's evidence, reduced in scope, to a tabular form with the short statement that it should be inferred that the movement of money was a repayment of a loan. 214 The primary judge did not deny the Commissioner procedural fairness by refusing to allow the Commissioner to file yet more submissions in this regard. Accordingly, appeal ground 11, to this extent at least, must be rejected. What ultimately happens to the 91 pages of further submissions about repayments on which the Commissioner wishes to rely, however, may depend on the outcome of our further consideration of the orders consequential on our findings to do with remittal, or not, of any part of the matter for further hearing.

Costs 215 We can see no reason why the Commissioner ought not to have the costs of the appeal, and consider the costs orders below must be set aside. However, we will also hear the parties further on costs in the circumstances. I certify that the preceding one hundred and fifty-two (152) numbered paragraphs are a true copy of the Reasons for Judgment herein of the Honourable Justices Jagot and Davies.

SCHEDULE OF PARTIES NSD 145 of 2016

NSD 146 of 2016 Respondents Fourth Respondent: HENRY GEORGE TOWNSING