Hart v Commissioner of Taxation [2018] FCAFC 61 | Case summary

PART IVA 72 In relation to the Practice Amount, the Commissioner relied upon Pt IVA of the 1936 Act as an alternative to his primary case. In relation to the IET Amount, the Commissioner relied exclusively upon an application of Pt IVA. 73 At [52] and [53] of his third amended appeal statement the Commissioner identified the scheme for the purposes of s 177A of the 1936 Act in relation to the Practice Amount as being the steps comprising the Practice Amount NVI arrangement particularised above (hereinafter the "Practice Amount Scheme"). At [102] of that same appeal statement the Commissioner identified the IET Amount scheme as being, broadly, the steps comprising the IET Amount NVI arrangement also set out above (hereinafter the "IET Amount Scheme"). 74 The appellant did not dispute that each scheme so particularised is a scheme for the purposes of s 177A. In each case, the scheme comprises each step of each NVI Scheme, including the receipt of monies as the ultimate step by the appellant. 75 At the hearing of the appeal, the appellant: (a) did not formally abandon his contention, for the purposes of s 177D of the 1936 Act, that each scheme was not entered into by the appellant for the dominant purpose of obtaining a tax benefit, although the appellant did not press this point and made no oral submissions about it; and (b) contended that the real issue was whether the appellant had in fact obtained a tax benefit under either scheme pursuant to s 177C as it was in the 1997 year of income. In that respect, he submitted that his case was essentially the same for both the Practice Amount and the IET Amount. 76 It is convenient to deal with what the appellant describes as the "real issue" first. In the 1997 income year, s 177C(1) provided as follows: (1) Subject to this section, a reference in this Part to the obtaining by a taxpayer of a tax benefit in connection with a scheme shall be read as a reference to: (a) an amount not being included in the assessable income of the taxpayer of a year of income where that amount would have been included, or might reasonably be expected to have been included, in the assessable income of the taxpayer of that year of income if the scheme had not been entered into or carried out; or (b) a deduction being allowable to the taxpayer in relation to a year of income where the whole or a part of that deduction would not have been allowable, or might reasonably be expected not to have been allowable, to the taxpayer in relation to that year of income if the scheme had not been entered into or carried out; and, for the purposes of this Part, the amount of the tax benefit shall be taken to be: (c) in a case to which paragraph (a) applies - the amount referred to in that paragraph; and (d) in a case to which paragraph (b) applies - the amount of the whole of the deduction or of the part of the deduction, as the case may be, referred to in that paragraph. 77 At trial, the Commissioner submitted that but for the entering into of the Practice Amount Scheme, assessable income might reasonably have been expected to have been derived by the appellant in the following way (as per the judgment below at [200]): The Commissioner contends that the relevant tax benefit for the purposes of s 177C(1) is the amount of $220,398 (or some lesser amount), which would or might reasonably be expected to have been included in Mr Hart's assessable income for the 1997 income year had the Practice Trust NVI Scheme not been carried out. The Commissioner contended that had the scheme not been carried out, the trustees of the Practice Trust would still have distributed Mr Hart's share of the net income of the Practice Trust for the 1997 income year to the Outlook Trust. The issue was whether Outlook Crescent Pty Ltd (OCPL), as trustee for the Outlook Trust, would have on-distributed the same or some lesser amount to Mr Hart or to his benefit. The Commissioner contended that on all the evidence, it was a reasonable prediction that this would have taken place because of the following facts established by the evidence: (1) Mr Hart, as a principal solicitor at Cleary Hoare, provided legal advice and services to clients and thereby generated income in the form of legal fees. (2) Mr Hart generated fees by doing solicitor's work, and managed others who did the same. (3) Employed solicitors of the firm were mainly remunerated by way of salary. (4) Mr Hart was remunerated in that way when he was a salaried partner, or alternatively a principal, then an employed solicitor in the 1991 and 1992 income years (as demonstrated by his tax returns). (5) Cleary Hoare was structured so that the legal practice was owned and conducted by the trustees of the Practice Trust, which was a unit trust. (6) The net income of the Practice Trust was distributed to the unitholders, which apart from the holders of special units comprised four discretionary trusts representing the interests of the four natural person principals of the firm, with Mr Hart's interest being represented by the Outlook Trust of which Mr Hart was a beneficiary, and at all material times a director of OCPL as trustee of the Outlook Trust. (7) Mr Hart was bound by the terms of the approval given by the Law Society limiting the sharing of receipts to Mr Hart's spouse, parents, children, grandchildren and any other person approved by the Law Society and any company or trust in which the only persons entitled to receive dividends or benefits were such family members or approved persons. (8) A properly available inference from all of the evidence was that Mr Hart had been the sole recipient of funds sourced from the Outlook Trust because: (a) the only recorded so-called "loan account" in the balance sheet for the Outlook Trust records Mr Hart's name, not any other beneficiary - thus even when the loan characterisation for the receipt of moneys was not accepted, that entry still reflects the sole actual beneficiary for the year in question; (b) Mr Hart did not in his evidence (statement or oral evidence) refer to any distributions made by the Outlook Trust to any other beneficiary of that trust; (c) in his letter to the Australian Taxation Office dated 1 July 2002, Mr Hart advised that his wife had never been involved in the conduct of the business of Cleary Hoare and that there was nothing in her records which was relevant to the income derived by him or any of the entities of which she was a director including entities associated with Comlaw Consultants, Cleary Hoare Corporate or Cleary Hoare; and (d) in his letter to the Australian Taxation Office dated 11 October 2004, Mr Hart advised that flows of money took place in accordance with Law Society approval, including from Cleary Hoare to the Outlook Finance Trust and Outlook Finance No. 2 Trust and that the balance sheets of those two trusts show that the money went from there to Mr Hart, the holder of a full practising certificate. (9) Mr Hart was solely responsible for directing payments from the Outlook Trust bank account to joint bank accounts with his wife and to the Oak Arrow bank account, with letters dated 24 December 1996, 2 January 1997, 21 January 1997, 3 February 1997, 13 February 1997, 5 March 1997 and 24 April 1997 from Mr Hart to Metway Bank Ltd and associated deposit slips being relied upon to demonstrate this; (10) A credit approval request, dated 4 August 1998, records (supported by other bank records): (a) significant expenditure on mortgage repayments, living and other expenses, including the lease of a motor vehicle; and (b) in the 1998 and 1999 years, by reference to Mr Hart's sharing in the net profits of the Cleary Hoare legal practice, he undertook to pay for the purchase of an investment property and a holiday house albeit in his wife's name or that of an associated trust entity. (11) Mr Hart signed a statutory declaration dated 22 June 1996 to the effect that all payments made and to be made by him to joint bank accounts with his wife and in the name of Oak Arrow Pty Ltd were intended to be gifts made by him. (12) All of the above supported the only reasonable inference that Mr Hart was presently entitled to the income of the Outlook Trust and distributed the moneys from that trust accordingly. (13) Accordingly, it was reasonable to expect that in the absence of the scheme, or some other scheme to which Part IVA would apply, Mr Hart's participation in the financial benefit of the profits generated by the Cleary Hoare legal practice would still have taken place, but in the form of the receipt of income and that was the only available reasonable prediction on the evidence. 78 In relation to the IET Amount Scheme, the Commissioner submitted below that, but for the entry into of that scheme, assessable income might reasonably be expected to have been derived by the appellant in the following way (below at [263]): The Commissioner contends that the relevant tax benefit for the purposes of s 177C(1) of the ITAA 1936 is the amount of $275,481 (or some lesser amount), which would or might reasonably be expected to have been included in Mr Hart's assessable income for the 1997 income year had the Income Earning Trusts NVI Scheme not been carried out. The Commissioner asserted that, in the absence of the scheme, the following events would or might reasonably have been expected to take place: (1) The Annesley Trust would still have derived income of at least $305,000 and would still have distributed part of that income to the Outlook Trust, from where the income would have been distributed to Mr Hart as a beneficiary of the Outlook Trust. (2) The CHC Discretionary Trust would still have derived net income of at least $700,410 and would have distributed part of that income to the Outlook Trust, from where the income would have been distributed to Mr Hart as a beneficiary of the Outlook Trust. (3) In place of the LM Income Trust (which was established as part of the scheme and was precluded by its trust deed from distributing to Mr Hart), the income derived from the work done through that trust, being the provision of tax planning services and the promotion of tax minimisation schemes to accountants and small businesses by Mr Hart and his colleagues at Cleary Hoare (described by the Commissioner as NVI promotional activities) would have been attributed to, and accordingly derived by, a discretionary trust controlled by Mr Hart and/or the other principals of Cleary Hoare (such as the Annesley Trust, CHC Discretionary Trust or a similarly-constituted new trust). That trust would then have distributed part of that income to Mr Hart or alternatively the Outlook Trust or another trust controlled by Mr Hart. From there, the income would have been distributed to Mr Hart as a beneficiary of the Outlook Trust or such other trust that he controlled. 79 On appeal, the appellant submitted that the foregoing outcomes were the "least likely" to have occurred. For that purpose, he referred the Court to the decisions of Peabody, Federal Commissioner of Taxation v Ashwick (Qld) No 127 Pty Ltd (2011) 192 FCR 325 and RCI Pty Ltd v Federal Commissioner of Taxation [2011] FCAFC 104. The appellant's proposition was based upon the following factors: (a) the historical pattern of distributions in the 1994, 1995, in 1996 years of income in which the Outlook Trust had made distributions to CHOUT, because that trust had, at that time, sufficient tax losses to absorb the income distributed to it. (b) the use within the NVI scheme of brand-new trusts which had never made any previous distributions to any beneficiaries; and (c) the desirability of not distributing to the appellant for predominantly fiscal reasons, but also for the purpose of obtaining the benefit of asset protection from current or future creditors. 80 In the appellant's submission these factors were the only objective evidence before the Court concerning the likely counterfactual. In particular, the appellant emphasised the past conduct of making distributions between 1994 and 1997. When regard was had to past conduct, so the appellant contended, it was reasonable to conclude that there was no possibility that the appellant would ever have received beneficially any distribution of income. The income would always have gone elsewhere. 81 The appellant did not identify with any precision who else would, or might reasonably be expected to, have derived the income generated by the Practice Trust, or alternatively the Outlook Trust, or, if there was to be more than one such recipient, how much each might reasonably be expected to have received and why. He contended that he did not need to be so particular and it was sufficient, based upon the factors he relied upon, for the Court to be confident that any of the tax preferred beneficiaries of the Outlook Trust, such as CHOUT or any of the appellant's children, might reasonably be expected to have received distributions. No evidence in support of these contentions was identified, other than the fact that CHOUT had losses in the 1997 year of income in the sum of $186,033, and had previously received distributions when it had sufficient tax losses. In any event, evidence of past conduct demonstrated, it was said, that the Commissioner's counterfactuals were not reasonable. 82 In Ashwick, Edmonds J said at 153 to (11), about the relevance of evidence from a taxpayer in relation to the application of s 177C: (7) How the taxpayer establishes that there is no tax benefit is a matter for it: Trail Bros [(2009) 113 ALD 254] at [36]. (8) It is conceivable that a taxpayer may not lead positive evidence of an alternative postulate because, for example, the result of any objective enquiry of the alternative postulate is inevitable: AXA Asia Pacific Holdings [(2010) 189 FCR 204] at [139]. Futuris Corporation Limited v Federal Commissioner of Taxation [2010] FCA 935; 2010 ATC 20-206 provides an example of a case where the taxpayer did not lead any direct evidence, but established the alternative postulate through expert evidence. (9) It is relevant to have regard to the evidence of the taxpayer as to the steps it says it would have undertaken or would have been likely to undertake in the absence of the scheme: Federal Commissioner of Taxation v Spotless Services Limited (1996) 186 CLR 404 at 423-424. (10) The taxpayer may lead evidence that it would have undertaken a particular activity, or adopted a particular course in lieu of the scheme. If a taxpayer has given evidence of what he or she would have done but for entering the scheme, that evidence will be relevant and useful to the extent to which it reveals facts or matters that bear upon the objective determination of the alternative postulate: Trail Bros at [36]; AXA Asia Pacific Holdings at [139]; Federal Commissioner of Taxation v Mochkin [2003] FCAFC 15; (2003) 127 FCR 185 at 209 - 210. (11) The taxpayer can give evidence as to what it would have done in the absence of the scheme, provided foundation facts are given to support what would otherwise be a bald speculative statement: McCutcheon v Federal Commissioner of Taxation [2008] FCA 318; (2008) 168 FCR 149 at 163 - 164; AXA Asia Pacific Holdings at [140]. 83 Subsequently, in RCI, the Full Court made it abundantly clear that a taxpayer does not discharge its onus for the purposes of s 177C by demonstrating that the Commissioner's counterfactual is not reasonable. More is required. At [129] and [130] their Honours said: It has been said in the past, and the learned primary judge at [88] of her Honour's reasons said below, that the taxpayer carries the onus of establishing that the Commissioner's counterfactual is unreasonable; and that if the taxpayer does not establish that the Commissioner's counterfactual is unreasonable, then the taxpayer fails to prove that the assessment is excessive on that ground. (Of course, the taxpayer may establish that the assessment is excessive on some other ground, such as that the conclusion required to be drawn as to the dominant purpose of a party to the scheme under s 177D(b) cannot be drawn, but that is another matter.) Such an articulation of the onus is erroneous, but if not, certainly unhelpful because it can lead one into error. Even if a taxpayer establishes that the Commissioner's counterfactual is unreasonable, it will not necessarily follow that he has established that the assessment is excessive. That is because the issue is not whether the Commissioner puts forward a reasonable counterfactual or not; it is a question of the Court determining objectively, and on all of the evidence, including inferences open on the evidence, as well as the apparent logic of events, what would have or might reasonably be expected to have occurred if the scheme had not been entered into. Thus, even if a taxpayer establishes that the Commissioner's counterfactual is unreasonable, that will not discharge the onus the taxpayer carries if the Court determines that the taxpayer would have or might reasonably be expected to have done something which gave rise to the same tax benefit. 84 In this case, the appellant has focused on trying to establish that the Commissioner's counterfactual was unreasonable, without himself sufficiently identifying and evidencing his own counterfactual. Showing that the Commissioner's counterfactual was unreasonable does not of itself operate as a discharge of the onus of proof imposed upon the taxpayer in relation to s 177C. 85 In his witness statement, the appellant asserted that he would not have taken any action which might have given rise to any entitlement on his part to a share of income produced by the Practice Trust. This was speculation and rightly ruled inadmissible by the primary judge. As the Full Court observed in RCI at [134]: [A taxpayer]…may, for example, lead evidence that the taxpayer would have undertaken a particular activity, or adopted a particular course, in lieu of the scheme; or it may lead evidence that the taxpayer would not have undertaken a particular activity, or adopted a particular course, in lieu of the scheme: see, for example, Commissioner of Taxation v News Australia Holdings Pty Ltd [2010] FCAFC 78. Generally, such evidence is unlikely to be sufficient to discharge the onus unless it is supported by objective indicia to be gleaned from the context and matrix of underlying or 'foundation' facts, as they have been called (see McCutcheon v Federal Commissioner of Taxation [2008] FCA 318; (2008) 168 FCR 149 at [37] - [39] per Greenwood J) as well as the logic of the taxpayer's counterfactual having regard to the commercial or financial aspirations and limitations of the parties to the scheme; without such support, such evidence is likely to be regarded as no more than purely speculative. 86 The task for the taxpayer under former s 177C is to adduce positive evidence of objective circumstances in existence in the year of income in dispute, or before that year, which ground a reasonable expectation of a counterfactual or alternative counterfactual, in which the taxpayer obtains no tax benefit. In the usual case, the production of contemporaneous documentation to evidence the objective circumstances will be far more probative than assertions made in a witness statement or affidavit, especially when regard is had to what was said by Fullagar J Pascoe v Federal Commissioner of Taxation (1956) 30 ALJR 402 at 404: Where a person's purpose or object or other state of mind in relation to a given transaction is in issue, the statements of that person in the witness box provide, in a sense, the "best" evidence, but, for obvious reasons, they must, as Cussen, J observed in Cox v Smail ((1912) VLR 274, at p 283), "be tested most closely, and received with the greatest caution". 87 In our view, the appellant's case fell far short of the required standard. No evidence was led of a counterfactual involving the distribution of income sourced from the Practice Trust to a particular person. The speculation, for it was no more than that, that it might reasonably have gone to anyone within a particular group of beneficiaries did not show that, but for each scheme entered into, it might reasonably have been expected that the appellant would not have received any income. After all, he was a beneficiary himself. The onus of proof imposed on a taxpayer is not discharged by expressing a desire to pay no tax as an eligible beneficiary of a trust estate, and then observing objectively from the terms of a trust deed that there are other beneficiaries, some of whom might have a capacity to pay less tax. More is needed. 88 Nor did the introduction of new trusts with no prior patterns of distribution assist the appellant. It is true that the absence of a prior pattern of distributions makes it more difficult to identify which beneficiary might reasonably be expected to have received distributions, but for the scheme. But that is a difficulty for the taxpayer, not the Commissioner. If anything, it makes the discharge of the burden of proof all the more difficult: cf Federal Commissioner of Taxation v Spotless Services Ltd (1996) 186 CLR 404, 423-4. 89 The same observations and conclusions apply equally to the IET Amount Scheme. 90 In any event, we are not satisfied that the Commissioner's counterfactuals were unreasonable, given the paucity of evidence led by the appellant on this issue. Commencing with the Practice Amount, it is well to be remembered that, in the 1997 year of income, the appellant was a partner of Cleary Hoare as nominee of the Outlook Trust, where he worked as a solicitor earning fees for the Practice Trust. No evidence was led that he had other sources of wealth and, as we have already mentioned, his income tax return for that year disclosed only $100 of assessable income. It was not disputed that the Practice Amount was sourced from the earnings of the Practice Trust. Nor was it disputed in the case of the IET Amount that it was sourced from the earnings of the three IETs. The evidence was that the appellant was the originator of the NVI Scheme, perhaps developed with others, and, that this was a product sold by the three IETs with the active assistance of the appellant. 91 For reasons we have already given, it can readily be inferred that the appellant relied upon the Practice Trust amount for his day-to-day living expenses and for investment. In other words, he had the use and enjoyment of the Practice Amount. If the Practice Amount, contrary to our earlier finding, had been lent to the appellant, it is reasonable to expect that, but for that scheme, the appellant would, or might reasonably be expected to, have beneficially derived that amount, that being the only other obvious way for him to have secured the use and enjoyment of that sum. As already mentioned, no other specific way to so use and enjoy the money was identified by the appellant. 92 In relation to the IET Amount, it will be recalled that the Commissioner's counterfactual was, in part, similar to his Practice Amount counterfactual. He submitted that income earned by the Annesley Trust and by the CHC Discretionary Trust would, or might reasonably be expected to, have been distributed to the Outlook Trust and thence to the appellant. In relation to the earnings of the LM Income Trust, the Commissioner's counterfactual was more conjectural. This was because that trust was prohibited by its deed from making distributions to the settlor of the trust, being the appellant. The Commissioner's counterfactual had the LM Income Trust making distributions to "a discretionary trust controlled by [the appellant] and/or the other principals of Cleary Hoare", and that trust either making distributions directly to the appellant or to the Outlook Trust, or a further trust controlled by the appellant, and from there to the appellant. 93 For these purposes, the Commissioner relied upon the expert report of Mr Van Homrigh which found that a total of $289,431 had been deposited into bank accounts operated by, or controlled by, the appellant out of the earnings of the three IETs: below at [261]. With less confidence, based on the evidence adduced, we find that this counterfactual was also reasonable. It may be inferred that the appellant had the use and enjoyment of the amounts deposited into bank accounts operated or controlled by him, or intended to have that use and enjoyment. But for personal derivation, no other way for him to secure that use and enjoyment was identified by the appellant. The Commissioner's counterfactual was accordingly reasonable. 94 Of course, it may be accepted that receiving monies in a taxable way diminishes the amount the appellant might otherwise have enjoyed. Does his professed intention not to pay tax change the outcome here? Can a taxpayer avoid the reach of s 177C by contending that but for the scheme, implementation of another arrangement of equal ingenuity would have been pursued to avoid the payment of any tax? In Futuris Corporation Ltd v Federal Commissioner of Taxation [2010] FCA 935, Besanko J observed, at [113]: The counterfactual must not itself be a scheme with a dominant tax purpose: Commissioner of Taxation v Trail Bros Steel & Plastics Pty Ltd [2009] FCA 1210 at [52]. 95 The appellant accepted the correctness of the proposition set out above, but contended that the non-specific alternatives identified by him, such as a distribution to CHOUT, would not have been subject to Pt IVA, but would have constituted "legitimate ways in which income could and would have been distributed." In that respect, the appellant also conceded that some or all of that income would still need to be "lent" to him as a final step of his counterfactual. 96 Once again, we find that the appellant has not discharged the onus of demonstrating that the alternative transactions he has postulated would not have been subject to Pt IVA. It is true that, as a matter of logic flowing from the objective position of the Outlook Trust and the identity of its potential range of discretionary beneficiaries, one could speculate about the possibility of distributions being made, for example, to children, that might not, without more, be capable of being impugned by Pt IVA. But the appellant's case rose no higher than such speculation. 97 As already mentioned, the appellant was unable to identify with sufficient precision what distributions might reasonably have been expected to have been made and how much would have been distributed. Nor could he identify the particular manner in which such distributions might reasonably have been expected to have been made. One possibility suggested was an assertion that a distribution might have been made to CHOUT in 1997. Again, however, no evidence was adduced to support this assertion, and as a matter of inherent probability, we find it unlikely that a distribution might reasonably have been expected to have been made to CHOUT because it had only $186,033 of tax losses left in it by the 1997 year of income. 98 Of course, there may be cases where a taxpayer can discharge its onus of proof under former s 177C, by the drawing of inferences from a given transaction or transactions or from the structure of an organisation. In such cases, particular evidence of what might be reasonably be expected, but for the scheme, may not exist. As the Full Court said in RCI at [135]: On the other hand, in a given case, such evidence may not be necessary because, for example, the result of any objective enquiry as to the counterfactual is, at best, inevitable or, at worst, compelling. In such a case, the failure to lead evidence to say that the taxpayer would have undertaken a particular activity or adopted a particular course, in lieu of the scheme; or the failure to lead evidence that the taxpayer would not have undertaken a particular activity, or would not have adopted a particular course, in lieu of the scheme, will not lead to the taxpayer failing to discharge the onus. In RCI, without the production of specific evidence of what might reasonably be expected to have occurred, but for the scheme in fact entered into, the Full Court held that there was no tax benefit. That was because it was inherently improbable that the RCI group would have entered into a voluntary re-organisation, designed over time to save money and to secure synergistic benefits, if it had also been required to have paid tax of $172 million. But for the scheme in that case, it would instead have done nothing. 99 This case is not like RCI. The objective circumstances do not throw up any obvious or inevitable counterfactual which leads to the conclusion that the appellant obtained no tax benefit. The existence of trusts, including the discretionary Outlook Trust with numerous potential beneficiaries, does not objectively support an inference that a particular distribution away from the appellant might reasonably have been expected to have occurred. 100 In that respect, whilst the appellant relied on past conduct to demonstrate the soundness of his criticism of the respondent's counterfactual, he nonetheless wanted to exclude some of that conduct. In particular, he argued that the fact that the appellant was paid a salary by Cleary Hoare 1991 and 1992, as evidenced from his tax returns, was irrelevant because he was then a bankrupt and an employee. If it matters, we accept that there is a difference between what might happen as an employee and what might reasonably be expected to happen when one is establishing a business structure as an owner. The circumstances of Federal Commissioner of Taxation v Mochkin (2003) 127 FCR 185 bear that out. In that case, the taxpayer was a stockbroker. He had been personally sued as a result of defaults made by his clients. He thereafter chose to run his business via a family discretionary trust. It was accepted that he did this for the dominant purpose of avoiding personal exposure to the liabilities and debts of the business. 101 At first instance here, the primary judge found as well that any counterfactual transaction would also need to be one that would have complied with the rules of the Queensland Law Society. In general terms, these precluded the making of distributions to non-family members of the earnings of a law firm which was owned by the trustee of a trust. It will be recalled that many of the entities within the NVI structure did not comply with this requirement, especially RTH. It is strictly unnecessary for us to comment upon the correctness of the primary judge's conclusion because on appeal it was not contended by the appellant that any particular counterfactual contended for by him would have involved a particular distribution to an unrelated non-family member. Having said that, there is no reason to doubt the primary judge's observation that, for the purposes of assessing the probability of any suggested counterfactual, one should assume that the taxpayer will behave lawfully: see [213]. 102 The appellant also renewed his attack, in the context of s 177C, on the expert report prepared by Mr Van Homrigh. For that purpose, he was content rely to on what had been said by him in his written submissions. Those submissions criticised Mr Van Homrigh for not undertaking a full tracing exercise. That failure was said - now correctly - to go to the level of weight to be attributed to the persuasiveness of the report. The problem for the appellant, however, is that he put nothing up to contradict Mr Van Homrigh. He did not produce a contrary expert report. And he did not lead evidence from himself about the correctness of the report. The latter factor is especially telling. If Mr Van Homrigh had erred in reaching his conclusions, it would have been an easy matter for the appellant to have adduced evidence to that effect. After all, the subject matter of the expert report was the very bank accounts the appellant controlled. 103 The primary judge was aware of the fact that Mr Van Homrigh had not undertaken an exhaustive tracing exercise, and well understood the limitations on the material that the expert had before him. But absent contradictory material, it was entirely proper for the primary judge to rely upon the conclusions of that report. The report was not inherently irrational, or devoid of reasoning, and did not lack a sufficiency of factual foundation: see below at [247]. In our view, the burden was on the appellant to contradict Mr Van Homrigh and that burden was not discharged by submitting that the report should have been given little weight. It follows that the appellant has failed to show that the primary judge erred by relying on the expert report produced by the Commissioner. 104 As already mentioned, the appellant did not abandon, but did not press, any argument concerning the application of s 177D and the primary judge's conclusion that the appellant had entered into and carried out each scheme for the dominant purpose of obtaining a tax benefit. In relation to the Practice Amount Scheme, the primary judge concluded, after carefully considering the eight matters in s 177D(b) as follows (at [237]): Senior counsel for the Commissioner characterised the utilisation of these arrangements as contrived and artificial, devoid of any commercial rationale. He submitted that the tax benefit that it achieved for Mr Hart, namely the avoidance of the payment of income tax on the Practice Amount, explained objectively the purpose of his participation in the scheme. I agree with that conclusion, especially as I have rejected the only alternative purpose advanced on behalf of Mr Hart, namely asset protection, as having any significant role to play. Senior counsel for Mr Hart submitted that even if Mr Hart obtained a tax benefit (which was denied), it could not be reasonably concluded that the objective of entering into the scheme was to obtain the tax benefit. I reject that submission. If a tax benefit was not in reality the sole purpose, it was so dominant that any other purpose, such as asset protection, pales into insignificance. 105 In relation to the IET Amount Scheme, the primary judge again carefully considered the eight matters required by s 177D(b) and concluded at [289]: Mr Hart did not appear to advance any additional arguments as to the dominant purpose for the Income Earning Trusts NVI Scheme than for the Practice Trust NVI Scheme. Dominant purpose was not really the centrepiece of his case. If, as he asserted, there was no tax benefit associated with a scheme, then dominant purpose did not arise. If there was such a tax benefit associated with the scheme, given the terms of the scheme and the way in which it was executed, a dominant purpose was, especially in light of all of the arguments set out above on behalf of the Commissioner, difficult, if not impossible, to resist. I therefore accept that the requisite dominant purpose has been established. The arguments advanced by the Commissioner are not overwhelming because of some of the gaps and uncertainties presented by the facts as proved. But they did not have to be either overwhelming or certain. On balance, I accept that the necessary dominant purpose has been established. 106 The appellant has not shown that the primary judge erred in relation to either conclusion. In his written submissions, the appellant asserted, without any apparent justification, the proposition that the dominant purpose of each scheme was asset protection as in Mochkin. However, that argument was no more than a bare assertion. It is accordingly rejected.

Hart v Commissioner of Taxation

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