Commissioner of Taxation v Rawson Finances Pty Ltd [2012] FCA 753 | Case summary

The Tribunal's Decision 11 Despite a number of fundamental deficiencies in the evidence, the Tribunal, principally by recourse to drawing inferences, erroneously in a number of instances, from such evidence as was led, found that the amounts received by Rawson in [8] above were loans made to it by MDB; that the remittances made by Rawson in [9] above were repayments of principal in respect of the MDB loans; and that the remittances made by Rawson in [10] above were payments of interest on the MDB loans. 12 It concluded, therefore, that Rawson had discharged its onus of showing that the assessments or amended assessments were excessive in terms of s 14ZZK(b)(i) of the Taxation Administration Act 1953 (Cth) ("the TA Act"). This conclusion was articulated in two ways: (1) At [231] the Tribunal said: "I am satisfied that [Rawson's] evidence does discharge the onus of proving that the contentious loans were real and that its asserted liabilities for repayment and interest reflect the intended and enforceable reality of the transactions with MDB." (2) Immediately following at [232] the Tribunal said: "The conclusion I have reached on the proper characterisation of the 1997 fund transfers by MDB is that they were loan funds [Rawson] received subject to a repayment obligation. That conclusion tends to carry with it the further conclusion that the payments [Rawson] subsequently made were deductible expenses. They represented [Rawson's] cost of funds and were expenses it necessarily incurred in deriving the income it received from the [Erwin Binetter] related entities to which it on lent the funds." 13 Earlier, the Tribunal had observed at [208]: "There is in my view simply no factual basis for the Commissioner's assessment in relation to the characterisation of the 1997 fund transfers as [Rawson's] assessable income. [Rawson's] evidence demonstrates convincingly that it conducted no business other than the onlending of funds to other entities related to [Erwin Binetter]. It did not conduct any income producing activities before it received the funds from MDB. There is no factual circumstance that would permit [Rawson's] receipt of those funds, even in the unlikely event that MDB held some kind of realisable security on which it had relied in making the transfers, to be characterised as income." 14 These observations of the Tribunal were assailed by the Commissioner on the hearing of the appeal as being infected with error on a number of counts. First and foremost, that they amounted to a reversal of the onus borne by Rawson under s 14ZZK(b)(i) of the TA Act and effectively, but erroneously, required the Commissioner to show that the assessments were factually correct. If that is what these observations amount to, then they are infected with error as there can be no doubt that Rawson carried the onus of showing that the assessments were excessive: The Commissioner of Taxation v Dalco (1990) 168 CLR 614; Richard Walter Pty Ltd v Commissioner of Taxation (1996) 67 FCR 243. 15 Second, that Rawson had not discharged the onus it carried. In this regard, the Commissioner contended that Rawson had not proved, on the balance of probabilities, that the assessments or amended assessments were excessive. Specifically, the Commissioner contended that the evidence adduced by Rawson did not establish that Rawson's receipts of the funds in [8] above were loans from MDB and, if that were correct, there was no other explanation as to the source of the funds nor that the receipts did not have the character of income. 16 Third, insofar as the Tribunal was saying that faced with a finding that Rawson's receipts of the funds were to be properly characterised as loans from MDB, there were no factual circumstances that would permit the funds to be characterised as income, this too, according to the Commissioner, involved error on the Tribunal's part. A good deal of time was taken up during the hearing of the appeal with discourse on whether this proposition was infected with error. The Commissioner pressed that it was, but was unable to point to any circumstances which might attract a relevant provision of either the Income Tax Assessment Act 1936 (Cth) or the Income Tax Assessment Act 1997 (Cth) ("the Assessment Acts") that would give rise to such a consequence. His counsel initially made reference to Div 7A of Pt III of the 1936 Assessment Act; however, for obvious reasons, those provisions could not apply in the factual circumstances of the present case: see s 109K. No reliance was placed on s 47A of that Act. At the end of the day, the Commissioner's counsel had to concede that there was no obvious provision; none had been relied on before the Tribunal and none was made good during the course of the hearing of the appeal. In reply, the Commissioner's counsel said (T137, ln 5): "The error of law in [208] is the Tribunal excluding, on the information before it, the possibility that the funds transferred could have been assessed … as assessable income." And then said: "That's as high as the submission is put." 17 The difficulty I have with that submission is that the Tribunal at [208] did not generally exclude the possibility of the funds transferred being assessed as assessable income. It only did so on the factual predication that they were properly characterised as, and found to be, loans from MDB. What the Tribunal said at [208] of its Reasons was not intended to travel beyond that factual predication and, for that reason, involves no error of law on its part: see Richard Walter at 247 per Lockhart J; at 259 per Hill J and at 268-269 per Lehane J. 18 My difficulty with the Tribunal's approach lies at the anterior stage of finding that Rawson's receipt of the funds in 1997 was to be properly characterised as loans from MDB. In my view, that finding was not open on the evidence led and, in consequence, Rawson failed to discharge the onus it carried. My view in this regard, and the reasons for it, are amplified below. 19 The Tribunal's error seems to me to be a product of the way in which the Tribunal approached the issue. It seems to have reasoned from a position that Rawson's contention that the funds transferred to it in Australia in 1997 were by way of loans from MDB should be accepted unless the "unusual" features and circumstances of the loans "contradicted" or "cast doubt" on their "reality" in fact. It concluded that the "unusual" features and circumstances did not contradict or cast doubt on that characterisation, but it did not consider whether there was any other alternative explication consistent with those "unusual" features and circumstances; it should have.

Analysis 20 The essence of a loan of money from A to B is a corresponding contemporaneous obligation on the part of B to repay the money transferred from A to B: Commissioner of Taxation v Radilo Enterprises Pty Ltd (1997) 72 FCR 300 at 313 per Sackville and Lehane JJ; Commissioner of Taxation v Firth (2002) 120 FCR 450 at [73] per Sackville and Finn JJ. Absent that obligation, the transfer of the money from A to B is something else - a gift, a payment by direction, a payment or repayment of an anterior obligation - but it is not a loan. The obligation of repayment is not proved by subsequent payment of the same amount, let alone a different amount, from B to A; that may be explicable by reference to another obligation or circumstance having nothing to do with the original payment from A to B. Rather, the obligation of repayment is proved by the terms of the contract under which the money was transferred from A to B. 21 In the present case, there was no evidence before the Tribunal of any such contract nor, otherwise, of any obligation on the part of Rawson to repay the amounts it received through MDB in 1997. In certain circumstances this may not be fatal to proving that the funds transferred were subject to an obligation to repay and were therefore by way of loan; but that will not always be the case. For example, where, as here, the alleged lender refrains from giving evidence that the transfers of funds were by way of loans, or subject to an obligation on the part of the recipient of the funds to repay them, such a conclusion may not be open to be inferred if other objective features or circumstances suggest an alternative explanation. 22 The transfer of funds to Rawson in Australia in 1997 may be equally explicable as a transfer of funds from Rawson's bank account or accounts with MDB in Israel (through the instrumentality of MDB), to Rawson's bank account in Australia. Indeed, having regard to the "unusual" features of the transactions in question, and to the subsequent conduct of the parties with which I deal below, such an explanation, in my view, is far more likely to represent what the Tribunal called "the reality and substance" of the fact. 23 Where, it may be asked, did the funds in Rawson's accounts with MDB in Israel come from if they did not come from loans by MDB. That is a matter for Rawson to establish and unless it can show, by reference to that source or otherwise, that they did not have the character of income, it will not have discharged the onus it carries to show that the assessments are excessive. 24 There are a number of reasons why the conclusion in [22] above more likely represents "the reality and substance" of the fact than the conclusion reached by the Tribunal. The more obvious are: (1) There was no evidence that the transfer of funds to Rawson's Australian account aggregating in total AUD 4.75 million, a substantial sum of money, carried with it any obligation of repayment to MDB; no agreement, either in writing or oral, imposing an obligation of repayment of Rawson was adduced in evidence. (2) The alleged lender, MDB, was not prepared to have any of its officers give evidence in those terms, apart from furnishing representatives of Rawson with documents which went into evidence through such representatives but did not establish any obligation of repayment on Rawson's part. It is odd that a bank which was willing to allegedly lend Rawson a substantial sum of money, unsecured and in circumstances where Rawson did not have any resources to meet its obligations on the alleged borrowing, was not prepared to have one or more of its officers corroborate the alleged character of the transactions. That oddity evaporates under the alternative explication. (3) There was no evidence that Rawson or any other entity, affiliated or not, gave security for the transfer of funds to Rawson's Australian bank account, whether by way of charge, lien, set-off or surety. That is entirely consistent with the alternative explication of the funds being Rawson's funds, and not MDB's funds, before they arrived in Australia. (4) Rawson had no assets in Australia nor any apparent capacity to repay the alleged loans, but that is irrelevant under the alternative explication. (5) No withholding tax was withheld from the alleged interest payments, at least until the transactions fell under the scrutiny of the Commissioner, and even then there was no evidence of such withholding. But there is no liability to withhold under the alternative explication. (6) That the alternative explication is more likely "the reality and substance" of the fact is a view to which one is impelled by the irregular making of such payments without any protest or action on the part of MDB for such delay or non-payment. Non-payment of alleged interest over the twelve year period of the loans for separate periods of four years and three and a half years respectively without any protest or action on the part of MDB is explicable if the remittances are no more than transfers from one Rawson bank account to other Rawson bank accounts. 25 On the basis of my conclusion that Rawson has not established that the transfer of funds to its Australian bank account in 1997 were loans made to it by MDB, Rawson has not discharged the onus of showing the assessments to be excessive and the Commissioner's appeal must succeed. First, the alleged interest payments will not be an allowable deduction in calculating Rawson's taxable income for the 1997 to 2008 income years, not because they are not interest on loans, but because they do not represent a cost of borrowing funds for use in Rawson's business of lending money to affiliated companies; they are not a working expense. Second, if Rawson's receipt of funds into an Australian bank account in 1997 are not loans from MDB then, in the absence of Rawson showing that they are something else which does not have the character of income, the assessments for the 1997 and 1998 years of income will not be shown to be excessive. As Hill J said in Richard Walter at 259 (reading "MDB" for "Morlea" and "Rawson" for "Richard Walter"): "These principles work out in the present case in the following way. The Commissioner alleges that the payments from Morlea to Richard Walter are income. In order to show that the assessment is excessive Richard Walter must thus show on the balance of probabilities that the payments are not income. It seeks to do that in the present case by making a case that the payments were loans. If this case is accepted, Richard Walter will, but subject to the s 260 issue, be entitled to succeed. In the present case it sought to show the amounts in question were loans through the evidence of Mr Holden who swore that they were and that the accounts reflecting them were correct. His Honour did not believe Mr Holden, finding that there was no intention that the loans would be repaid. This being the case, the payments in question were not loans. Whether they had some other character may have relevance to the question of sham, but that can for the moment be put to one side. It can not be correct to say that the onus lay upon the Commissioner to establish what the payments in question were. If they were not loans it will be for the taxpayer then to show that they are something else which does not have the character of income. If the taxpayer does not do this it will not have satisfied the onus of showing that the assessment is excessive." 26 The Commissioner's appeal must be allowed with costs. I certify that the preceding twenty-six (26) numbered paragraphs are a true copy of the Reasons for Judgment herein of the Honourable Justice Edmonds.

Commissioner of Taxation v Rawson Finances Pty Ltd

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