Was each of the 2009, 2010, 2011 and 2012 schemes a tax exploitation scheme?
301 In Federal Commissioner of Taxation v Spotless Services Ltd (1996) 186 CLR 404 at 416, Brennan CJ, Dawson, Toohey, Gaudron, Gummow and Kirby JJ said of Pt IVA of the ITAA 1936 in terms equally applicable to the question under ss 290-65(1)(a) and 284-150(1)(a) in Sch 1 of the TAA:
In its ordinary meaning, dominant indicates that purpose which was the ruling, prevailing, or most influential purpose. In the present case, if the taxpayers took steps which maximised their after-tax return and they did so in a manner indicating the presence of the "dominant purpose" to obtain a "tax benefit", then the criteria which were to be met before the Commissioner might make determinations under s 177F were satisfied. That is, those criteria would be met if the dominant purpose was to achieve a result whereby there was not included in the assessable income an amount that might reasonably be expected to have been included if the scheme was not entered into or carried out.
(emphasis added)
302 In Ludekens 214 FCR at 192 [231] Allsop CJ, Gilmour and Gordon JJ held that in evaluating whether "it is reasonable to conclude" that an entity had the sole or dominant purpose of that, or another, entity getting a scheme benefit from the scheme "the focus is on what the entity was proposing to do and why". They held that this is an evaluation of what actually was in the mind of the entity (or the individual who was its controlling mind and will) as the sole or dominant purpose of its relevant conduct. This evaluation did not call for any consideration of a hypothetical or counterfactual course of, or other possible, conduct were the entity not to have acted as it, in fact, did: Ludekens 214 FCR at 192-193 [232]-[236].
303 Thus, the question is whether it is reasonable to conclude that the entity acted as it did with the sole or dominant proscribed purpose, namely so that that entity or another entity would get a scheme benefit from the scheme: Ludekens 214 FCR at 194 [243]. As the Full Court noted, persons engaged in trade or commerce do so for the purpose of personal gain, profit or minimising any adverse financial position to which their prior activities may have actually or potentially exposed them. Often a fiscal or tax benefit will result from the decision of a person carrying on a business to expend money, and that benefit may make the decision more desirable or profitable. Thus, the mere existence of a better financial or fiscal outcome because the expenditure can be deducted from the business' assessable income does not, of itself, fall within the purpose with which s 290-65(1)(a)(i) is concerned. Rather, the enquiry is whether the purpose of entering into the transaction was solely, or predominantly, to obtain that fiscal or tax benefit.
304 In today's society most businesses need a computer and, because of the phenomenon that technological advances tend to result in significant improvements in the speed and functionality of computers (eg Moore's Law), it is also common for businesses to replace older computers with the newer, more efficient ones, sometimes as often as every second or third year. The expenditure on the computer is deductible under s 8-1 of the ITAA 1997 under ordinary circumstances. A business person can decide the timing of when to replace existing with new computers on or before 30 June in a tax year because the business is profitable and he or she can deduct the expense, so reducing the profit, or can do so in the next financial year on 1 July when the expense is equally deductible but the profitability in the forthcoming year is unknown or uncertain. No doubt, a purpose of causing the purchase of the computers on 30 June is to reduce the business' taxable income in that financial year, but, ordinarily, the dominant purpose will be to have a more up to date computer to benefit the conduct of the business. After all, almost all expenditure decisions in carrying on business involve a balancing of all of the benefits (including any in respect of taxation liabilities) against the capacity of, and impact on, among others, cashflow of the business by incurring that outgoing.
305 It was open to Dr Rowntree, who was present in Court during the hearing, to give evidence about those matters. His failure to give evidence has the consequences that, first, I can infer that his evidence would not have assisted his case: Jones v Dunkel (1959) 101 CLR 298; Kuhl v Zurich Financial Services Australia Ltd (2011) 243 CLR 361 at 384-385 [63] per Heydon, Crennan and Bell JJ, and, secondly, any inference favourable to the Commissioner (as the opposing party) for which there is ground in the evidence "might more confidently be drawn when a person presumably able to put the true complexion on the facts relied on as the ground for the inference has not been called as a witness by [Dr Rowntree] and the evidence provides no sufficient explanation of his absence": Jones v Dunkel 101 CLR at 308; applied in Australian Securities and Investments Commission v Hellicar (2012) 247 CLR 345 at 412-413 [167], per French CJ, Gummow, Hayne, Crennan, Kiefel and Bell JJ.
306 There was no evidence that any of the projects that BR Redd / Voluntary Credits had arrangements for with Carbon Strategic or others in Vietnam or elsewhere were or were likely to be, in a position to deliver any REDD or carbon credits to Voluntary Credits within three years of the entry into any of the ERPAs, or at any later time. Until that position occurred and the resulting REDD or carbon credits were capable of being registered in a trading scheme, Voluntary Credits could not provide a delivery notice. There was no evidence that Voluntary Credits took any substantive steps to ensure that any project would be in a position to deliver a product that Voluntary Credits could use to provide a delivery notice to any investor. I am satisfied that there was no realistic possibility that it ever would.
307 In the context of each of the 2009, 2010, 2011 and 2012 scheme years, the dominant purpose of each of Dr Rowntree, Mr Donkin (except for 2009) and Mr Manietta was to market the sale of contract lots through investors entering into an ERPA in the relevant tax year so that the investor who paid the 15% deposit would get a tax deduction of the full purchase price in that year. And that was the dominant intention of each of Dr Robson, Mr Haralambidis and Mr Whitney when each accepted and acted on the advice he had received. On the whole of the evidence the obtaining of the tax benefit was the dominant purpose of each investor in each of the 2009, 2010, 2011 and 2012 tax years.
308 Each of the 2009, 2010, 2011 and 2012 ERPAs was structured to deliver what the marketing material suggested, based on the assumption of the correctness of the "barrister's opinion", namely that the investor could and would claim a tax deduction of the whole of the purchase price in the year in which the investor entered into the relevant ERPA and paid the 15% deposit. Moreover, the form of those ERPAs depended on the investor agreeing to buy the yet to be created REDD credits in contract lots which were in a fixed amount unrelated to any investors' needs of an unusual measure (namely "tonnes of sequestered carbon") that was not used commercially in June 2009 to measure carbon credits ([61]). The prices in the ERPAs were well above any market price and the ERPAs did not give the investors any right to compel delivery to them of what, supposedly, they were buying, namely REDD credits.
309 So far as the evidence revealed, none of the investors who invested in the 2009, 2010, 2011 and 2012 ERPAs had any business or commercial requirements to obtain REDD, or other forms of carbon, credits to offset any carbon profile or otherwise use in their businesses.
310 I am of opinion that the dominant purpose for which each respondent and investor entered into and carried out each scheme in the 2009, 2010, 2011 and 2012 tax years (except for Mr Donkin in the 2009 tax year) was so that each investor would get a scheme benefit from the scheme, within the meaning of s 284-150(1) of Sch 1 of the TAA. The scheme benefit was, of course, the use of the full purchase price as a deduction from the investor's taxable income for the relevant tax year in which the investor entered into the ERPA that, if allowed, would result in its tax-related liability being less than it would have been apart from the scheme. If the full purchase price were so deductible on payment of only the 15% non-refundable deposit, the economic benefit to the investor was so attractive and obvious that, in Mr Manietta's words to Mr Haralambidis and Mr Ceh, "it's a no brainer". And, based on the way in which the respondents and their associates promoted and marketed each scheme, the decision to enter the ERPA was a "no brainer". The investors had no commercial need or interest to do so apart from its overwhelming fiscal attraction. They never sought, or had any need, to obtain any REDD or carbon credits, the supposed object of their entry into the ERPA.
311 The purpose of each promoter, being relevantly here, Dr Rowntree, Mr Donkin (except in the 2009 tax year) and Mr Manietta was to make money for himself or his associates from sales of contract lots through inducing investors to enter into the relevant 2009, 2010, 2011 or 2012 ERPA and with the dominant purpose that each investor would pay only the 15% deposit and get the scheme benefit of an immediate deduction of the full purchase price of each contract lot in the tax year, worth about twice the expenditure on the deposit.
312 The ERPAs were not drafted to give the investors an enforceable right in any present property or to require delivery of the contract lot(s) for which they had paid a non-refundable 15% deposit. The commercial reality of the drafting of the ERPAs was that Voluntary Credits received the 15% non-refundable deposit without any obligation to issue a delivery notice to trigger the provision of the contract lot(s) in exchange for the balance of the purchase price. Rather, each ERPA entitled each investor to terminate it if no delivery notice were received within 3 years. And, if a delivery notice were received, an investor who had entered into an option could exercise the option without incurring any extra expense. That is how Mr Donkin explained the position to Mr Yu, the accountant to the CALM group, in his email of 24 May 2011 ([152]).
313 Moreover, as the NAA agency recorded in its proposal of 13 September 2010, "the marketing challenge is that there is little that BR can say when advertising to its target audience" (see [120] above). A bona fide vendor of REDD or carbon credits could say a great deal about the contractual proposal, including, as Mr Fowler noted, giving details of how and when the carbon credits would be created and delivered, if that was what the vendor intended. Mr Bonnell, with his tax expertise, saw an immediate red flag in Ms Reid's ingenuous question about why, if a bank could advertise a home loan that "will promise tax benefits", "we can't say something like 'why not offset carbon emissions with possible tax benefits?'" ([90]). The answer, which Mr Bonnell was not prepared to put in writing is not far to seek, being that to do so, as each of the 2009, 2010, 2011 and 2012 schemes was structured would fall foul of Div 290. The marketing material emphasised that a barrister's opinion supported the full deductibility of the price even though only a 15% deposit would be paid in the tax year in which the investor claimed on the basis of that deduction and the balance might never be payable.
314 Each of Dr Rowntree, as a solicitor and tax expert, Mr Donkin as an accountant (except in the 2009 tax year) and Mr Manietta as a financial planner, and their respective associates, in recommending that a potential investor acquire one or more contract lots and, in Dr Rowntree's case publishing the marketing material to other professional advisers, was intending to suggest the suitability and soundness of such on investment based on its obvious fiscal attractiveness. The marketing letter contained the usual cautionary words that any person entering into the proposed ERPA should seek is his, her or its own legal, taxation and commercial advice on the consequences of doing so. But as the marketing letters went on to say, "this could be an opportunity for you to promote your business" or made a similar suggestion ([24], [174]).
315 Nor is it reasonable to conclude, as Dr Rowntree and Mr Donkin argued, that his or his associates' dominant purpose was to offer relatively small scale investors an opportunity to acquire carbon credits, and to portray to the outside world, including customers or patients, that the investor was "green" or environmentally responsible. The respondents' target market consisted of small businesses, medical and dental professionals that fitted the criterion of having a taxable income of at least $140,000 (140K+), as, for example, Dr Rowntree enunciated on 21 June 2010 when responding to Mr Curran's question of "what sort of tax prospects do they really need for this to work" (emphasis added) ([93]).
316 As Mr Fowler's evidence established, all of the ERPAs' prices were uncommercially high, there were readily available alternative contracts for sources of carbon credits that were at market prices and for the quantities that an investor or business actually needed and that would provide those credits immediately (albeit that no REDD credits were available in the commercial market until late 2010). However, none of the investors came to the respondents or their associates seeking REDD or other carbon credits. Rather, the respondents and their associates marketed and promoted the ERPAs to the investors on the basis of the promised tax deductibility of the full purchase price on payment of only the 15% non-refundable deposit.
317 Accordingly, I am satisfied that the dominant purpose of each of Dr Rowntree, Mr Donkin (except in the 2009 tax year) and Mr Manietta as the controlling mind and will of each their respective associates in entering into the respective scheme in each of 2009, 2010, 2011 and 2012 was so that persons who invested in the purchase of an ERPA in that year would, or would believe that they would, get a scheme benefit from the scheme. That scheme benefit was that the investor's tax-related liability in the relevant tax year would be, or could reasonably be expected to be, less than it would be apart from the scheme, because the investor would follow the scheme by deducting the full purchase price from its assessable income even though it had only paid the 15% deposit in that tax year.
318 Neither Dr Rowntree nor Mr Donkin submitted that the analysis of the 2009 ERPA and 2009 option or the law that I made in Academy 106 ATR 184 was incorrect. Of course, the decision in that case in 2017 could not have been known in any of the earlier periods when the schemes were implemented.
319 In Academy 106 ATR 184 I found that both the full purchase price and the deposit were not deductible under s 8-1(a) of the ITAA 1997 and that the challenged assessment was not excessive based on the Commissioner's decision to disallow the investor any deduction in respect of the 2009 ERPA and 2009 option pursuant to Pt IVA of the ITAA 1936. I applied a settled course of binding authorities on the questions in issue that I will summarise below. I am satisfied that the same analysis applies to the characterisation of what a person in the position of each of Dr Rowntree, Mr Donkin and Mr Manietta, at all times while they promoted or marketed the schemes between 2009 and 2012, would have understood about the payments and claims for deduction that the schemes envisaged that the investors would make to achieve the scheme benefits.
320 The full purchase price of a contract lot was not a loss or outgoing "incurred in gaining or producing" the investor's assessable income within the meaning of s 8-1(a) of the ITAA 1997 because the investor had not completely subjected itself to its payment: Federal Commissioner of Taxation v James Flood Pty Ltd (1953) 88 CLR 492 at 507 per Dixon CJ, Webb, Fullagar, Kitto and Taylor JJ applying New Zealand Flax Investments Ltd v Federal Commissioner of Taxation (1938) 61 CLR 179 at 207 per Dixon J: cf: Academy 106 ATR at 199-201 [77]-[85]. That was because each ERPA contemplated that the 15% deposit was non-refundable but that the investor would not complete the purchase, or become liable to pay the balance of the purchase price, unless and until the receipt of a delivery notice at an unspecified future date, which might never occur.
321 The subject matter of any delivery notice that might be served was, at the time of entry into the relevant ERPA, future property that was not then, and might never, be in existence, namely REDD credits that, in 2009, Carbon Strategic might supply to BR Redd for use in a delivery notice that BR Redd or, in the following years, Voluntary Credits, might be in a position to deliver.
322 Accordingly, the source of any obligation of an investor to pay the 85% second instalment was necessarily contingent upon the coming into existence, at an uncertain future date, of future property, the fulfilment of which was uncertain. At the time of entry into each ERPA and at the end of the tax year, the investor had no right to any present property and at best an inchoate liability that may have been in the process of accrual (if by then Carbon Strategic (for the 2009 tax year) or Voluntary Credits (in the subsequent years) had commenced work under any project, of which there was no evidence) but which was subject to a variety of contingencies: James Flood 88 CLR at 507-508; Academy 106 ATR at 201 [83]-[84].
323 No reasonable business person in the position of either an investor in any of the 2009, 2010, 2011 or 2012 ERPAs, or each of Dr Rowntree, Mr Donkin (except in 2009) and Mr Manietta or his associates, would have understood that at the time of the investor's entry into the relevant ERPA, or at the end of the tax year in which that occurred, the investor had completely subjected itself to pay the, or any part of the, second instalment: James Flood 88 CLR 506, 507-508: Academy 106 ATR at 201 [84].
324 In addition, neither the whole nor any part of the purchase price of an ERPA was necessarily incurred in carrying on a business of any of the investors for the purpose of gaining or producing assessable income, so far as their businesses were disclosed in the evidence or the overall class of investors the target of the schemes, within the meaning of s 8-1(b) of the 1997 ITAA.
325 The test for ascertaining the business purpose of a claimed deduction is to enquire whether the relevant expenditure was "appropriate and adapted for the ends of the business carried on for the purpose of earning assessable income". While the taxpayer's purpose is subjective as to how he, she or it, judges the need to incur the expenditure, within the limits of reasonable human conduct, the outgoing in question must be, in character, objectively capable, in the circumstances, as being seen as desirable or appropriate from the point of view of the pursuit of the business being carried on for the purpose of earning assessable income: Magna Alloys and Research Pty Ltd v Federal Commissioner of Taxation (1980) 49 FLR 183 at 205, 208; Spriggs v Federal Commissioner of Taxation (2009) 239 CLR 1 at 24 [75] per French CJ, Gummow, Heydon, Crennan, Kiefel and Bell JJ; Academy 106 ATR at 203-204 [95]-[98].
326 None of Dr Robson, Mr Whitney or Mr Haralambidis saw any need to use the frog logo or other indicia the subject of the licence agreement. The acquisition of REDD credits had nothing to do with the business of a professional anaesthetist or a real estate agency such as Bresic Whitney. While a freight forwarder, such as each of the three CALM companies, may have had a carbon profile, Mr Haralambidis did not cause the CALM companies to enter into the 2011 and 2012 ERPAs for the purpose of gaining or producing their assessable income. His dominant purpose was to reduce their assessable income and achieve for the companies the scheme benefits that Mr Donkin and Mr Manietta had explained to him and Mr Ceh would result (see [136]-[138], [151]-[156]). Likewise, the evidence as to the circumstances of the investment decisions of Mr Williment (an orthodontist), Dr Robson and Liquid Ideas and Hardy Bros all focused on the scheme benefits that each would achieve and made no mention of any other purpose of the respective business entering into the relevant ERPA(s).
327 Even if the investor (or the individual who was its controlling mind and will) considered that an investment in carbon credits could enhance the environmental credentials of the business or its marketing, for it to be claimable under s 8-1(b), it had to be reasonably capable of being seen as objectively desirable or appropriate, as a means to pursue the business ends of the business being carried on for the purpose of earning assessable income: Magna Alloys 49 FLR at 208: Academy 106 ATR at 204 [103]-[104].
328 Here, the investment in each ERPA was not reasonably capable of being seen as desirable or appropriate as a means for each investor to pursue the business ends of the business it was carrying on for the purpose of earning assessable income, having regard to the nature of the businesses of the investors about whom there was evidence and the target market that Dr Rowntree and his associates identified to both IMPACT and the NAA agency (see [79], [120]) and the way in which Mr Donkin and Mr Manietta interacted with existing and potential clients such as Mr Whitney and Mr Haralambidis; Hillier 228 CLR at 638 [48].
329 The scale of the investment in each ERPA (if carried through with the investor paying for the delivery of its contract lots) appeared to be out of all proportion to the nature and character of any investor's business about which there was evidence or that of the target market. That is a further reason to support the inference that I have drawn that the dominant purpose of the investor was to get the scheme benefits.
330 I characterised the relationship between the nature of the 2009 ERPA and the decision of the investor to invest in the 2009 ERPA in Academy 106 ATR at 205-206 [106]-[110]. Adapting that analysis to the four scheme years, I find that in 2009 each ERPA was in reality an investment in speculative and unspecific projects that BR Redd was pursuing in the 2009 tax year through its own asserted dealing with Carbon Strategic, in three foreign countries. In the three later tax years each ERPA was an even more speculative investment because in each of 2010, 2011 and 2012 the ERPAs did not even specify any project source and appeared to be based on a hope of generating, at an uncertain time in the future, something that might be able to be realised on the primary market as, or in, REDD or carbon credits and then converted into property that could be sold on one or more secondary markets. This commercially speculative venture had no real or sufficient connection to any investor's business as revealed in the evidence.
331 Moreover, a business person who considered that acquisition of REDD or carbon credits was desirable or appropriate in pursuing his, her or its business ends for the purpose of earning assessable income would be highly unlikely to enter into any of the 2009, 2010, 2011 and 2012 ERPAs having regard to its uncommercial terms. They lacked any enforceable obligation for BR Redd / Voluntary Credits to provide any REDD or carbon credits or even a delivery notice. Those ERPAs were at a very high price. There was ready availability of alternative sources of carbon credits (except for REDD credits until late 2010) on commercial terms, in adjustable quantities to fit the investor's needs, that could be delivered immediately at market prices as Mr Fowler's evidence demonstrated. It is hard to conceive of a businessman, seeking to earn assessable income having any intelligible or commercial requirement to invest in any of the ERPAs given that that would involve paying the immediate non-refundable 15% deposit in order to obtain a possibility that the vendor, within the next three years, might, but had no obligation to, provide a delivery notice and only in that event would the investor be able to acquire REDD or carbon credits.
332 Each investor obtained a reduction of its assessable income that generated a deduction worth about twice the amount that it paid for the 15% deposit for what, at best, was a speculative investment in which it might never be required to pay the balance of 85% of the purchase price (a circumstance that actually occurred) or receive any REDD or carbon credits despite the fact that those credits were supposed to be the reason for entering into the ERPA. It follows that the payment of the outgoing for the deposit appeared to have the dominant, if not sole, purpose of obtaining a tax advantage for the investor and was not clearly appropriate or adapted for the carrying on of its business: Spriggs 239 CLR at 24 [75]; Glenfield Estates Pty Ltd v Federal Commissioner of Taxation (1988) 80 ALR 671 at 684 per Lockhart J with whom Wilcox and French JJ agreed.
333 None of the communications with investors in evidence reveals that any investor had any interest in or had investigated what BR Redd or Voluntary Credits was to do in order to deliver contract lots to it under the ERPAs.
334 Objectively, the entry into each ERPA was the sole involvement that each investor had in relation to the purchase and sale of REDD or carbon credits. And, the entry into the ERPA did not give the investor any legal or equitable interest in any existing or future carbon credits.
335 Accordingly, I am satisfied that none of the investors had a basis to claim that the full purchase price or the non-refundable deposit, for any of the 2009, 2010, 2011 or 2012 ERPAs was a loss or outgoing that was deductible from his, her or its assessable income under s 8-1(1)(a) or (b) of the ITAA 1997.