29 As to Pt IVA of the ITAA 1936 and for the purposes of the alternative income tax assessments issued to Mr Springer, the steps identified in paragraph 26(a) above were said by the Commissioner to constitute a scheme within the meaning of s 177A(1) of the ITAA 1936 (the Primary Scheme).
30 In the alternative to the Primary Scheme, the Commissioner posited a separate but not unrelated scheme within the meaning of s 177A in respect of each of the income years in question:
(a) the steps enumerated in paragraphs 7, 9, 10, 11 and 12(a) above constitute a scheme within the meaning of s 177A(1) of the ITAA 1936 (the 2012 related Scheme);
(b) the steps enumerated in paragraphs 12(b), 13, 14 and 15(a) above constitute a scheme within the meaning of s 177A(1) of the ITAA 1936 (the 2013 related Scheme); and
(c) the steps enumerated in paragraphs 15(b) and 17 constitute a scheme within the meaning of s 177A(1) of the ITAA 1936 (the 2014 related Scheme).
31 In relation to the alternative income tax assessments issued to Mr Springer, the Commissioner's position was that, if the Primary Scheme had not been entered into or carried out, Mr Springer would, or might reasonably be expected to have had included in his assessable income the amounts of AITCS's assessable income identified in paragraph 20 in the income years concerned, pursuant to s 98A(1) of the ITAA 1936.
32 In the alternative in relation to Mr Springer, the Commissioner's position was that:
(a) if the 2012 related Scheme had not been entered into or carried out, Mr Springer would, or might reasonably be expected to have had included in his assessable income the amount of AITCS's assessable income identified in paragraph 20(a) in the 2012 income year, pursuant to s 98A(1) of the ITAA 1936;
(b) if the 2013 related Scheme had not been entered into or carried out, Mr Springer would, or might reasonably be expected to have had included in his assessable income the amount of AITCS's assessable income identified in paragraph 20(b) in the 2013 income year, pursuant to s 98A(1) of the ITAA 1936; and
(c) if the 2014 related Scheme had not been entered into or carried out, Mr Springer would, or might reasonably be expected to have had included in his assessable income the amount of AITCS's assessable income identified in paragraph 20(c) in the 2014 income year, pursuant to s 98A(1) of the ITAA 1936.
33 In relation to the alternative income tax assessments issued to Mr Springer, the Commissioner's position was also that, but for the operation of Pt IVA, the assessable income of AITCS in the relevant income years would be as identified in paragraph 20 pursuant to s 97(1) of the ITAA 1936. From this it was said by the Commissioner to follow that, in each of the relevant income years, Mr Springer obtained a tax benefit within the meaning of s 177C(1) of the ITAA 1936 in connection with the Scheme, being the amount of assessable income identified in paragraph 20 not being included in his assessable income.
34 Having regard to the matters set out in s 177D(2), the Commissioner's position was that it would be concluded that one or more persons entered into or carried out the Scheme or part of it for the dominant purpose of enabling Mr Springer to obtain this tax benefit. The Commissioner's position was that the persons and entities which entered into and carried out the Scheme or part of it included each of the Mr Springer, AITCS and Guardian (as trustee).
35 On this basis, the Commissioner's position was that Pt IVA applied to negate the tax benefit obtained by Mr Springer by including the amount of assessable income identified in paragraph 20 in Mr Springer's assessable income. His alternative assessments reflect this position.
36 The basis of the related administrative penalty assessments issued to Mr Springer by the Commissioner was that the position adopted by him was not reasonably arguable within the meaning of s 284-160(1) of Sch 1 to the TAA.
37 The foregoing then are the particular events which appeared to the Commissioner to be meaningfully related and attended, if not for the AIT then for Mr Springer, with the adverse fiscal consequences mentioned.
38 It is now necessary to add to this recitation of uncontested events, and occasion for assessed consequences, more detailed findings of fact based on the evidence.
39 Affidavit and oral evidence in the case was given by Mr Springer, one of his sons, Mr Eric Springer (Eric), Mr Daniel Shaffermann, a longstanding and trusted business associate of Mr Springer, and Mr Nigel Fischer, a chartered accountant of the firm Pitcher Partners, a longstanding accounting and taxation adviser to Mr Springer and companies and trusts controlled by him. Included in the exhibits to their affidavits or within court books tendered and also part of the evidence was contemporaneous email correspondence relating to the events described above. I thought each of these witnesses offered honest, candid, consistent evidence, which also sat well with this correspondence.
40 It is impossible to understand or objectively to characterise the events already related without placing them in the context of the then stage of Mr Springer's business and family life and his decision to transition to retirement.
41 The following account of these subjects is based on my acceptance of Mr Springer's evidence, supplemented by corroboration offered by Eric, Mr Shaffermann or, as the case may be, Mr Fischer.
42 Mr Springer hails from Canada. He migrated to Australia in 1991. He is, by original calling, an arborist. That occupation provided the springboard for a business career in Australia. That business career came to extend, via various corporate actors controlled by Mr Springer, described below, beyond forestry to olive farming, finance and property development and property investment. In that career, Mr Springer enjoyed considerable, although not invariable, success.
43 By the time of trial, Mr Springer had long been retired. Mr Springer's transition to retirement commenced before, and was largely completed by, the end of the income years in question in the present proceedings. In these income years (and to this day) Mr Springer had two adult sons, Eric and his brother, Mr Richard Springer (Richard). Apart from his transition to retirement, Mr Springer's care and concern for each of his sons is also a relevant consideration in the occurrence of the events already recited. The latter is not to say that Mr Springer's relationship with his sons has been without its tensions, only that his care and concern has been enduring. Also part of the evidence, although but briefly mentioned, was that Mr Springer had been married but was divorced and had deliberately chosen to resolve matrimonial property settlement issues privately, rather than pursuant to litigation in the Family Court.
44 The corporate actors via which Mr Springer's wider business career in Australia was conducted included:
(a) Springer Property Developments Pty Ltd (SPD);
(b) Paulownia Holdings Pty Ltd (Paulownia);
(c) Australian Agricultural Finance Pty Ltd (AAF);
(d) Queensland Forestry Holdings Pty Ltd (QFH); and
(e) Guardian as trustee of the AIT.
Where it is necessary to refer to these entities collectively, I term them the Springer Group (the Springer Group). Prior to the income years in question, Mr Springer also controlled other companies engaged in business activities, notably in relation to olive oil, but it is presently necessary only to make detailed reference to those in the Springer Group.
45 By the time of the income years in question:
(a) Guardian as trustee for the AIT held:
(i) 100% of the issued shares in QFH;
(ii) 99.9% of the issued shares in Paulownia; and
(iii) 67% of the issued shares in AAF.
(b) Mr Springer held:
(i) 100% of the issued shares in Guardian;
(ii) 100% of the issued shares in SPD;
(iii) 33% of the issued shares in AAF; and
(iv) 0.1% of the issued shares in Paulownia.
46 By the time of the income years in question, Guardian's role was that of passive investment, including in the entities mentioned above. On the other hand, SPD, Paulownia, AAF and QFH were, in their time, operating, business venture companies. The distinction is an important one in the context of advice tendered to Mr Springer and decisions taken by him in relation to his transition to retirement. Further, while the businesses operated by these companies within the Springer Group had generally enjoyed success, AAF was an exception. The business operated by AAF had lost money.
47 The businesses conducted by the companies within the Springer Group were as follows.
48 Paulownia was incorporated on 2 August 1994 on Mr Springer's initiative. Paulownia was a land holding company which owned approximately 5,000 acres of rural land which was rehabilitated to support plantation timber. The corporate name "Paulownia" is not coincidental. It refers to a very fast growing hardwood, which was Mr Springer's particular specialty as an arborist.
49 AAF was incorporated on 21 November 1997 on Mr Springer's initiative. AAF operated a finance business that loaned money to persons who invested in the Springer Group's agricultural projects.
50 QFH was incorporated on 4 June 1998 on Mr Springer's initiative. QFH was a land holding company. It owned approximately 3,000 acres of rural land which was rehabilitated to support plantation timber.
51 SPD conducted the business of property development following its incorporation on 2 August 1994. The property development activities conducted by SPD were wound down shortly before the establishment of the AIT (although SPD itself was not de-registered until 2011).
52 The establishment of the AIT has already been detailed. The AIT was established on the advice of Mr Springer's then accountant (not Mr Fischer). The advice which Mr Springer received, and on which he acted, was to the effect that "operating a business through a trust structure would make your assets less vulnerable to legal action from creditors given that the businesses are high risk. A discretionary trust is also a useful estate planning tool."
53 Following its establishment, the AIT, initially with Mr Springer as trustee and thereafter with Guardian assuming that role, conducted the business of industrial property investment. The AIT currently receives income in the form of passive rental income from properties it owns. For this purpose, the AIT currently owns properties at Eagle Farm and Hemmant in Brisbane, at Yatala in Gold Coast City, at Crestmead in Logan City, all in Queensland and at Sandy Bay in Tasmania. With respect to the operations of the AIT, Mr Shafferman was and remains a trusted source of advice for Mr Springer in relation to investment property management and the selection of suitable tenants.
54 By 2007, Mr Springer had made a decision to transition to retirement.
55 Mr Springer's retirement decision was not precipitous. As far back as 2003, after another company controlled and which he recalled to be Australian Olive Holdings Pty Ltd sold shares which had entitlements to water rights, he started to reduce the scale of his involvement in business activities. Hitherto, he had undertaken active managerial involvement in the various companies he controlled, including those in the Springer Group.
56 The implementation of his transition to retirement was also not precipitous. Mr Springer decided that he should cause the various entities in the Springer Group gradually to wind down their respective business activities. In effect, what occurred was an informal winding up of the Springer Group at the initiative of its controller, Mr Springer, culminating in the de-registration of the companies concerned.
57 Also for the purpose of his transition to retirement, Mr Springer decided to take up residence in Vanuatu. This he did in late 2007. Mr Springer's resultant understanding was that, on and from 1 July 2008, he ceased to be a resident of Australia for tax purposes. This understanding was not gainsaid by the Commissioner. Although he has since resumed Australian residence, Mr Springer was, on the evidence, a resident of Vanuatu in each of the income years in question in the present appeal. It was no part of the Commissioner's case that either Mr Springer's assumption of residence in that country or his maintenance of it in these income years was part of any reimbursement agreement or any scheme.
58 Some two years before Mr Springer made his decision to transition to retirement, he retained Mr Nigel Fischer, a chartered accountant and now managing partner of the firm now known as Pitcher Partners (formerly known as Johnston Rorke) to provide accounting and taxation services to the Springer Group and to him personally. In the provision of those services, Mr Fischer was assisted by a number of others within that firm, notably, in relation to the income years in question, another accountant, Ms Majella Burke. Ms Burke left the employ of Pitcher Partners in January 2015. Mr Fischer has not had any contact with her since then. However, Ms Burke worked to and under the supervision of Mr Fischer. Her involvement in that capacity is revealed in contemporaneous email correspondence in evidence.
59 It emerged in his cross-examination that a feature of Mr Springer's operation of the Springer Group (and I infer earlier other companies controlled by him) was that no formal, forward operating budgets regarding cash flow needs were prepared. Rather, as Mr Springer agreed in his evidence, he engaged in a form of reactive management, meeting expenses as and when required or identified from funds available within the Springer Group (or, earlier, other companies controlled by him) at a given time. The retainer of Mr Fischer's firm to provide advisory and accounting services to the Springer Group did not extend to a forward budgeting task. At most what occurred, as Mr Fischer confirmed in evidence, was an annual review, prior to the close of an income year, by his firm of the overall position of Mr Springer and of the companies and trusts controlled by him and of transactions which had occurred in the year to date. This review did not identify future cash flow needs as such, as opposed to identifying from transfers where those needs had occurred and what distributions should be made and to which entity.
60 This absence of budgetary formality is hardly unusual in a relatively small, closely controlled group of companies. Neither is an apparent practice, also revealed in Mr Springer's cross-examination, of cross-subsidising operating debts within the Springer Group from those which had positive cash flows at a given time.
61 Mr Fischer to my observation was a careful, astute, prudent accountant. Like Mr Springer, he was an impressive witness. It was quite obvious that Mr Fischer well understood Mr Springer's retirement aspirations, although wider aspects of Mr Springer's personal and family life were only gradually revealed to him by Mr Springer. As they each confirmed, Mr Springer generally acted on Mr Fischer's advice. It is necessary to say "generally" because, on the evidence, Mr Springer was no mere, uncritical cypher. On one notable occasion, Mr Springer expressly differed from the advice tendered. This was the result of a very particular care and concern which Mr Springer had arising from the circumstances of his son, Richard. I detail the reason for this below.
62 It was obvious, to my observation of Mr Springer, that he was sensitive to the respective circumstances of Eric and Richard. This, along with Mr Springer's transition to retirement, his decision to relocate to Vanuatu and his experience from his career in business that not all are successful, are important determinatives in the occurrence of the events related above. Also important to understand in relation to those events is length and depth of Mr Springer's knowledge and experience as an arborist. A concern which he voiced in cross-examination in relation to the disposal of particular businesses in the Springer Group was that they might be bought by persons who did not have that same depth of knowledge and experience. I accept, unreservedly, this evidence, as I do his evidence that this concern informed his thinking in relation to risk assessment when assessing advice about proposals for his transition to retirement.
63 An early sequel to Mr Springer's acting in late 2007 on his decision to relocate to Vanuatu was that, on 27 June 2008, he resigned as director of each of the companies in the Springer Group of companies, except for AAF, with Mr Springer resigning on 1 April 2009. His son Eric was appointed the director of these companies in his place.
64 At the time, Eric had not long attained the age of majority (born in 1989). Eric continued in that role until 15 November 2012 when he relocated to the United States of America. He remained located overseas at the time of trial, giving his oral evidence via video-link from Whistler, British Columbia in Canada.
65 Eric was assisted in the day to day managerial decision-making in respect of the Springer Group and the gradual winding down of their businesses by Mr Shafferman. When one recalls Eric's then age, this is unremarkable and exemplifies the trust and regard which Mr Springer had for Mr Shafferman. Upon Eric's relocation overseas, Mr Shafferman came to take on the role of director.
66 None of this is to say, and no witness put forward, that Mr Springer became a disinterested recluse in Vanuatu in relation to the Springer Group. To the contrary, while he left the day to day management of the companies to Eric, assisted by Mr Shafferman, and then to Mr Shafferman alone, Mr Springer kept up to date with the affairs of the Springer Group and regularly discussed (via Skype) the group's affairs (and investments) with each of them. Hardly surprisingly, Eric in particular, as he confirmed in evidence, gave considerable weight to his father's views. After all, Mr Springer, either directly or indirectly, owned all of the shares in the companies in that group or effectively controlled those which did and had vast experience to offer. Further, in relation to the orderly winding down of the operations of the Springe Group, Mr Springer made a number of trips back to Australia to oversee some of the sales of land and other assets that he considered required his personal knowledge.
67 Mr Springer's relocation to Vanuatu and his resignation from directorships in the Springer Group was the first phase of his transition to retirement. The second phase was the gradual winding down and then ultimate deregistration of SPD, Paulownia, QFH and AAF.
68 Mr Springer initiated this second phase in the 2011 income year. His evidence, which I accept, was that his aim was to "simplify his life". On Mr Springer's evidence, much lies behind that description, not just in terms of reduction of overall operating costs but also minimisation in retirement of business risks. Mr Springer's aim is completely congruous with a transition to retirement. This aim was to be achieved by reducing the number of companies within the Springer Group of companies and, related to that, reducing overall accounting and other compliance costs. On the evidence, Mr Springer's principal purpose, and the result of, this transition was the realisation of corporate assets and the continued operation of AIT as a passive investor.
69 The winding down of the operations of, culminating in the de-registration of, SPD, Paulownia, QFH and AAF occurred gradually over the period from 2010 to 2014. The firm Pitcher Partners and Mr Fischer and his subordinate Ms Burke in particular took or caused to be taken the necessary steps to secure the de-registration of these companies after their operations ceased.
70 SPD was the first to be de-registered. Inferentially, that it was the first does not look to have been coincidental, given that its property development activities had been wound down shortly before the establishment of the AIT. After that, it had been dormant. Upon Mr Springer's initiation of the winding down, he had no further need to retain SPD. SPD was de-registered on 17 June 2011.
71 Paulownia was a different proposition in terms of ease of de-registration. By the 2011 income year, Paulownia owned timber plantations on five different properties situated near Bundaberg and Kingaroy:
(a) Island Creek (near Bundaberg);
(b) Palm Range (near Bundaberg);
(c) Mitchells Road (near Bundaberg);
(d) Kumbia (near Kingaroy); and
(e) Wooroolin (near Kingaroy).
These plantations had been developed by Paulownia but by the 2011 income year they were all leased to third parties.
72 The process of realising Paulownia's assets began in 2010.
73 In the year ended 30 June 2011, Paulownia sold Kumbia and Wooroolin.
74 In the year ended 30 June 2012, Paulownia sold Palm Range, Island Creek and plant and equipment.
75 Paulownia was deregistered on 24 December 2014.
76 QFH owned a property, "River Bend", situated near Bundaberg, on which it conducted a timber plantation business. River Bend was sold during the year ended 30 June 2011.
77 In 2012, Mr Springer received advice from Pitcher Partners via Ms Burke (a copy of the relevant correspondence is in evidence but it is unnecessary to set it out in detail) that the tax cost of winding up QFH would be significant. Despite this, Mr Springer's evidence, which I accept, was that he considered that winding up this company was the most sensible thing to do, as QFH had previously traded in an active business and was no longer needed (and therefore unnecessary) for the generation of a future passive income. At the time, Mr Springer's main concern was minimising the risk from past trading activities rather than the tax consequences of winding up the company. He recalled telling either Ms Burke or Mr Fischer words to the effect of "don't worry about the tax, go ahead with liquidating QFH". Mr Springer's concern about risk from past trading activities was, as will be seen, by no means confined to QFH. That concern was, I find, an abiding consideration in his transition to retirement. It is, as I have already observed, congruent with his overall aim to "simplify his life".
78 QFH was deregistered on 12 November 2014.
79 By the 2011 income year, AAF's lending business had been dormant for some years. However, it retained a loan book in which there were number of bad debts - $1,056,430 in total in the 2009 income year and - $982,691.22 in total in the 2010 income year. AAF had no real property assets.
80 As Mr Springer related, and I accept, once the decision was made to wind up Paulownia and QFH it made sense also to wind up AAF. AAF was deregistered on 24 December 2014.
81 As is apparent from the foregoing, by the 2012 income year, the informal winding up of the Springer Group was well-progressed. Mr Springer related in evidence, and I accept, that, by the 2012 income year, he had formed the view that the companies in the Springer Group that had previously operated trading businesses (AAF, QFH, Paulownia and SPD) were no longer necessary.
82 On 27 June 2012, and on his own initiative, Mr Springer caused AITCS to be incorporated with Guardian as trustee for the AIT holding 100% of the issued shares. He did not seek express prior advice from, or the assistance of, Pitcher Partners in relation to this. Rather, he undertook the necessary incorporation processes online to incorporate AITCS himself. He had prior experience once before of so incorporating a company. Having so done and later on 27 June 2012, Mr Springer notified by email Ms Burke and Eric of the incorporation of AITCS.
83 While Mr Springer did not take express advice about incorporating AITCS or seek assistance for that purpose, his taking the initiative to do this was not completely coincidental or unheralded by more general advice. His thinking and acting were informed by a series of prior discussions with Ms Burke in which she had advised him about the process of re-organising the group and winding up the various companies. Mr Springer recalled, and I find, that, during one discussion with Ms Burke, she advised him with words to the effect of "you need to have a clean skin corporate beneficiary now that the existing corporate entities will be wound up" and "a new company would insulate the future wealth accumulated in a separate legal entity by providing protection from any litigation that might be commenced against the former operating entities involving the businesses they carried on". This recollection is consistent with, and, as I find to be inherently likely, preceded, an email of 26 June 2012 which Ms Burke sent to Mr Springer.
84 Also included in evidence was a document headed "2012 Tax Planning Alex Springer". This was an internal, Pitcher Partners document. There was no evidence that it was ever sent to, or adopted by, Mr Springer. At most, it may perhaps have provided an aide-memoir for Ms Burke in discussions but the effect of those discussions is as recalled by Mr Springer and, I find, as taken up in the email of 26 June 2012.
85 In the email of 26 June 2012, Ms Burke furnished Mr Springer with her view as to the 2012 income year tax liabilities of each of the Springer Group companies (the reference in the email to "PH" is, inferentially, a reference to Paulownia). She also stated:
This tax would be payable May 2013. However, if you wanted to deregister the companies before May 2013, you would need to pay the tax before doing so.
We are still working on GAIT Pty Ltd and the consequences of winding up this entity. However, your decision to wind-up this entity does not have to be made prior to 30 June 2012.
Our questions to you are:
1. What entity would you like the 2012 AIT distribution to go to? If you don't particularly need a 'clean skin' corporate entity, you can distribute to QFH (this would defer having to pay the $145k tax on windup of this entity).
2. If you wanted a clean skin corporate entity, we will need to discuss the shareholders and company name, directors etc and organise set-up this week.
3. It is worthwhile winding up PH on the basis that you only have tax of $461K to pay out nearly $6.5m of retained earnings.
4. The tax payable for AAF is as a consequence of the Myers debt forgiveness.
Once you have decided which companies to wind-up, we will issue instructions on step by step to windup.
After you have had a chance to digest this information, please give me a call to discuss.
[Emphasis in original]
86 The reference in this excerpt to "GAIT Pty Ltd" is, inferentially, a reference to Guardian. At that stage, it appears that the transitional planning for Mr Springer's retirement extended even to the prospect of de-registering Guardian.
87 It seems inherently likely, having regard to Mr Springer's evidence, and I find, that his recollection of Ms Burke's use of the term "clean skin" in oral advice about the use of such a company was a sentiment subsequently taken up by Ms Burke in her email of 26 June 2012.
88 Clearly enough, Mr Springer understood the term "clean skin" to mean what one might naturally infer it meant, a company with no prior trading history. What is also clear enough from this email, and I find, is that, as at the time of its sending, no decision had been taken by Mr Springer to cause AITCS, or any other "clean skin" company for that matter, to be incorporated. Neither, at that stage, so I find, had any final decision been taken by him as to the recipient of a distribution from the AIT for the 2012 income year.
89 This then absence of any definitive decision by Mr Springer on these subjects is consistent with the evidence given by Ms Burke's supervising partner in the firm, Mr Fischer, when shown the email of 26 June 2012 in the course of his cross-examination. At that stage, he did not know what decision Mr Springer would make on these subjects.
90 As it happened, Mr Springer agreed with Ms Burke's reference to the option of a "clean skin" company, although he had no need for her firm's assistance in the incorporation of such a company. That agreement was completely congruent with his averseness to the risk of using a company which had a trading history. It was, Mr Springer stated, and I find, his intention at the time AITCS was incorporated that this new company would replace the function of all the other operating companies which he had resolved informally to wind up. Mr Springer stated, and I find, that he also wanted the ability to use the new company as an investment vehicle in which he could accumulate income producing assets. These were, I find, the considerations which led him to opt, on either 26 or 27 June 2012, for a "clean skin" company.
91 Mr Springer stated, and I find, that, at the time he caused AITCS to be incorporated, he gave no consideration to, and had no discussions with anybody about, any future dividend or other payments from AITCS. The email of 26 June 2012 is noteworthy for the omission of any reference to such subjects. Mr Springer's general practice was to look to his retained accountants for advice, often after prior discussions with him about what his requirements were at a particular time. At that time, as Mr Fisher related in evidence, and I accept, he had no expectation that a newly formed company, AITCS as it came to be, would "declare a franked dividend in relation to the income that it had received from the trust back to the trust". This absence of expectation is also consistent with Mr Springer's recollection of discussions with Ms Burke and with the contents of the email of 26 June 2012.
92 A good deal of time was spent cross-examining Mr Fischer in relation to his particular expectations in and in relation to particular income years. This was doubtless inspired by Federal Commissioner of Taxation v Consolidated Press Holdings Ltd (2001) 207 CLR 235, a Pt IVA case, in which, at [95], it was stated that "[a]ttributing the purpose of a professional advisor to one or more of the corporate parties in the case is both possible and appropriate". The questions raised in cross-examination seemed to have been informed by viewing events in hindsight, rather than by reference to a position revealed by contemporaneous communications as between Pitcher Partners and Mr Springer and contemporaneous circumstances. The absence of reference in the email of 26 June 2012 to any proposal for the declaration of a franked dividend is an example of this. Another is that the thought that a dividend might possibly be declared in the 2013 income year stemmed not from Pitcher Partners but from Mr Springer himself.
93 On its incorporation, and in keeping with a role he had assumed in respect of other companies upon his father's taking up residence in Vanuatu, Eric became the sole director of AITCS. On 15 November 2012, as, I find, a consequence of Eric's then impending relocation to the USA, Mr Shafferman was appointed as co-director.
94 Prior to the financial year ended 30 June 2012, the companies in the Springer Group received trust distributions, depending upon their cash requirements, from the AIT. Mr Springer stated, and I find, that the decision regarding distributions was predominantly made on an "as needs" basis, depending upon which operating entity was expected to require funds for commercial or investment activities. Mr Springer stated, and I find, that he never had any pre-determined plans for distributions and no such plan was ever raised in the many discussions he had over the years with his accounts in Pitcher Partners or Eric and Mr Shafferman (or anyone else). This, I find, is completely consistent with the absence of forward budgets earlier mentioned.
95 Instead what occurred, following Mr Springer's departure to take up residence in Vanuatu (and resignation as a director of Guardian), was that he was kept informed, by Ms Burke of Pitcher Partners, of and proffered his opinion about, the basis of the annual allocation of AIT's income for the given year. He was also kept informed by her of the accumulation of what would be his entitlement as a beneficiary of AIT.
96 Eric, as was his practice, acted in accordance with the draft resolutions and other formal documents which came to be drafted by Pitcher Partners after consultation with Mr Springer. After he became a director, Mr Shafferman adopted a like approach.
97 In relation to the distribution of AIT's income for the year ended 30 June 2012, Mr Springer received on 29 June 2012 an email of that date from Ms Burke attaching a draft of the proposed trustee resolution for the distribution of AIT's income for that year. She requested that Mr Springer arrange for Eric to sign this by 30 June 2012 and return it to her.
98 Mr Springer was happy with the proposed distribution although he could no longer recall whether or not he told Eric this. In any event, the resolution was signed by Eric, as the sole director of Guardian at the time.
99 In relation to the 2012 income year, there was no suggestion that, independently of Mr Springer or anyone in Pitcher Partners, Eric had an expectation that AITCS would "declare a franked dividend in relation to the income that it had received from the trust back to the trust".
100 This then is the background to the 2012 distributions made by the AIT.
101 On 15 November 2012, Mr Springer received a letter from Pitcher Partners which, apart from enclosing various finalised 2012 income year returns for review and signature, contained advice of options as to how the AIT distribution in favour of AITCS could be dealt with. In that letter, a number of options were canvassed:
(a) The AIT paying out the as yet unpaid present entitlement of AITCS by transferring the amount thereof in cash to a bank account of AITCS; or
(b) AIT entering into a 7-year investment agreement with AITCS so that AIT could retain as a loan the amount of the unpaid present entitlement but be required to pay interest accruing annually on the loan.
Advice was also given that the payment by the AIT of the tax liabilities of AITCS would to that extent be considered payments of the AITCS's unpaid present entitlement and of interest amounts owed by the AIT to AITCS.
102 On or about 16 November 2012, Mr Springer informed Ms Burke in words to the effect that he would "like to enter into a 7 year investment agreement". As Mr Springer explained in evidence, at the time he was residing in Vanuatu and "whilst my son Eric was then a director of the trustee Guardian I was the only signatory on AIT's bank account and I thought that having cheques signed by me while overseas might be logistically difficult. In addition, at the time I wasn't comfortable with transferring such a large sum to a new bank account over which I would have no control (at least initially). At this time I gave no consideration to the possibility of AITCS declaring a dividend". Based on my assessment of Mr Springer as an honest witness and the absence of any reference to such a subject in the letter which he received from Pitcher Partners on 15 November 2012, I accept this explanation and find accordingly.
103 Mr Springer's "absence of comfort" in relation to the payment of funds into an account over which he would have no control was not a passing concern It is also evident in what, on the evidence, is the next relevant exchange between him and Pitcher Partners in relation to dealing with the ongoing consequences of his resolve to informally wind up the Springer Group. This exchange occurred between 25 and 28 March 2013. At that time, Mr Springer was, apparently, in Mexico. The exchange was initiated by Ms Burke on 25 March 2013. The occasion for that appears to have been the setting up by then of a bank account for AITCS. With that, at least on the face of her email, in Ms Burke's mind, was a concern on her part, arising from legislative changes, that a "cash transfer is required, [because] the trust has distributed profit to AIT Corporate Services PL, and the tax legislation now requires that the cash be 'physically paid across' to the company". The "trust" is, obviously, the AIT. Her further concern was that, "if the company then loans the money back to the trust, this creates a Division 7A problem". The "company" is, obviously, AITCS, while "Division 7A" cannot be understood other than as a reference to the provision of Div 7A of Pt III of the ITAA 1936. It is not necessary to pass upon whether such a concern was warranted, only to note that it resulted in Ms Burke putting to Mr Springer that an alternative to a cash transfer was to enter into "what is called an 'investment agreement' whereby the Trust has 7 or 10 years (depending on what option you choose) to pay across the profit entitlement and all that is required in the meantime, is a payment of interest each year at approximately 8%".
104 What is particularly noteworthy about Ms Burke's email of 25 March 2013 is the complete absence in it of any reference to the prospect of a later dividend being paid by AITCS.
105 That subject was raised, and, I find, raised for the first time, by Mr Springer of his own volition, in the response he made on 27 March 2013 (inferentially, Mexican time) to Ms Burke's email of 25 March 2013. Materially, he stated:
I am not comfortable transferring that much money into an account that I have no control over. I therefore would like to enter into a 10 loan agreement with AIT and AIT Corporate Services P/L. The other option which I would do is to transfer to money directly to myself as l00% shareholder of AIT Corporate Services. The books could show the funds going directly to AIT Corporate Services and from AIT Corporate Services to me via a dividend payment. Would this comply with ATO requirements. I could then pay the 10% non resident tax on any interest generated.
[sic]
Mr Springer offered in his evidence this explanation, which I accept to be his honest recollection, about his raising this dividend query, "I am not sure why I thought that as I now know that the shareholder of AITCS was the AIT. In any event this was the first time the thought of a dividend from AITCS might be paid had occurred to me." This explanation apart, what is at least one reason for his raising the subject is apparent on the face of his email to Ms Burke. Mr Springer had a concern about a large amount of money sitting in a bank account over which he had no control.
106 In response, Ms Burke emailed Mr Springer advising that an alternative (to the investment agreement option) was for a dividend to be declared by AITCS on 1 May 2013 equal to the amount of the retained earnings. Mr Springer stated, and I find, that this was the first time Pitcher Partners (or anyone else, his own suggestion just mentioned apart) had raised the option of AITCS paying a dividend. Mr Springer stated, and I find, that, at the time, this option "seemed to me to be the simplest means of dealing with the problem of the unpaid income entitlement from the AIT". Accordingly, on 28 March 2013, he responded to Ms Burke's email, confirming he was happy with that proposal. Having regard to other evidence which he gave, one reason why Mr Springer was happy with this and, indeed, why he raised the subject of his own volition may well have been an apprehension on his part of a personal need at that time for money.
107 There was, before the end of the 2013 income year, a refinement of this proposal.
108 On 11 April 2013, Mr Springer received an email from Ms Burke, to which was attached an unsigned investment agreement and in which she informed him that, in addition to the paying of a dividend to clear the distribution payable to AITCS, Mr Fischer thought a 10 year investment agreement should be put in place as a safety net. Mr Springer stated, and I find that he understood that this would ensure that he (which includes the AIT and AITCS) "didn't fall foul of the Australian tax authorities". Mr Springer recalled that he had been advised (inferentially in likelihood by Pitcher Partners, although he was not specific as to the source) at the time being advised that the Australian Taxation Office was undertaking "spot checks" on such loan agreements. In her email, Ms Burke asked Mr Springer whether he was happy for her to forward the investment agreement to Mr Shafferman for signing. There is no email response by Mr Springer to this but, in the result, Mr Shafferman, as director, signed the agreement. It is inherently unlikely that Ms Burke would have sent the document to Mr Shafferman without Mr Springer's approval being by some means to hand. It may be, although Mr Springer had no specific recollection of this that he discussed this in advance with Mr Shafferman. However, as already related, Mr Shafferman was accustomed to acting upon the advice and related drafts of documents sent to him by Pitcher Partners.
109 Mr Springer had no express recollection of his involvement in June 2013 in decisions as to the allocation of income for the 2013 income year, save in one very particular and, as became apparent in his evidence, personal family respect. On 21 June 2013, Ms Burke emailed Mr Springer (apparently either still then in, or returned to, Mexico) a copy of a draft trustee resolution for the allocation of the AIT's income for the 2013 income year. Notably, that draft resolution provided that the first $50,000 of "other income" would be allocated to Mr Springer's son, Richard. As the minute of resolution came to be signed by Mr Shafferman, it contained no such distribution. Whilst he could no longer recall the details, Mr Springer's evidence was, and I find (as it is so inherently inferentially likely, having regard to his account and the change that occurred) that he spoke to Mr Shafferman and Ms Burke and told them that Richard was not to receive a distribution that year.
110 What lay behind this was an explanation which Mr Springer related in evidence. Richard had been studying Medicine at Bond University and had suffered an injury to his back. One of the unfortunate effects of his treatment was that he became addicted to painkillers. Bond University discovered this and he was asked to leave the university. According to Mr Springer, Richard never recovered from this setback. He became unable to manage money and so Mr Springer supported Richard without giving him money directly- such as by paying directly his rent and other living expenses.
111 This change is, in my view, revealing, as is Mr Springer's raising of his own volition the possibility of the payment of a dividend to him. On the whole of the evidence, Mr Springer placed particular faith and trust in the advice which he received from Pitcher Partners but it bears repeating that he was never an uncritical cypher. This inquiry in relation to a dividend is one example, his rejection of a proposed trust distribution to his son, Richard, is another.
112 These then are background circumstances which occurred in the 2013 income year to the uncontested events related earlier in these reasons for judgement.
113 As to events in and in relation to the 2014 income year, Mr Springer had no particular recollection of his involvement in the distribution of the net income of the AIT for that income year, although he accepted he had received an email of 17 June 2014, authored by Ms Burke, which was addressed to him and to Mr Shafferman. Once again, that co-addressing was not coincidental inferentially reflecting Ms Burke's understanding of the formal directorship of Guardian as well as Mr Springer's control over both that company and the AIT.
114 Enclosed with that email were draft minutes in respect of a trust distribution decision. In the result, this recommended distribution was adopted by Mr Shafferman on behalf of Guardian with the result that it resolved to distribute the sum of $2,670,117 to AITCS for the 2014 income year. This sum was not physically paid to AITCS. Mr Springer was aware of this.
115 Mr Springer stated, and I find, that he was not informed by either by Ms Burke or Mr Fischer about the prospect of a dividend being declared during this year or that he would ultimately receive it. Neither, he stated, and I find, did he raise a suggestion that it be paid. One reason for this may well have been, based on Mr Springer's evidence, that, unlike in the previous income year, he did not then have any particular personal need for funds.
116 Sometime later but before the end of the 2014 income year, Mr Springer was informed by Mr Shafferman in word to the effect that, "based on advice received from Pitcher Partners, I am going to sign a loan agreement between AIT and AITCS converting the outstanding balance of the 2014 trust distribution into a loan.": Such a loan agreement was subsequently made.
117 Mr Springer was aware of the 2015 trust income distributions made by the AIT and that a dividend was not declared by AITCS in this and subsequent income years. Mr Springer has no expectation of any further dividends from AITCS. The funds AITCS currently holds have been invested on term deposit. On or about 28 June 2015, AITCS was also made presently entitled to the "other income" of the AIT. Mr Springer received a distribution from the AIT of any franked dividends which had been paid to the trust.
118 On 3 May 2016, to Mr Springer's knowledge, the AIT transferred $2,846,925 to the bank account of AITCS in full payment of the outstanding balances of the 2014 and 2015 trust distributions payable.
119 Against this background, and that of some further factual conclusions best identified when discussing the application, if any, of particular provisions of the ITAA 1936, I now consider whether the assessments have been proved to be excessive? Of the two appeals, it was common ground that Guardian's was the lead case. I shall therefore consider it first.