Howard v Commissioner of Taxation

Counsel for the Applicant: Mr G Beaumont QC with Mr E Power and Mr H Carmichael

Solicitor for the Applicant: Oakley Thompson & Co

Counsel for the Respondent: Mr P Sest with Dr P Bender

IN THE FEDERAL COURT OF AUSTRALIA VICTORIA DISTRICT REGISTRY GENERAL DIVISION VID 80 of 2010

JUDGE: JESSUP J DATE OF ORDER: 14 DECEMBER 2011 WHERE MADE: MELBOURNE

1. The amended assessment of the applicant's income tax for the year ended 30 June 2005, made on 5 August 2009, be set aside.
2. The assessment of the applicant's income tax for the year ending 30 June 2005, made on 24 October 2005, be reinstated.
3. The assessment of administrative penalty payable by the applicant in respect of the year ending 30 June 2005, made on 5 August 2009, be set aside.
4. The assessment of administrative penalty payable by the applicant in respect of the year ending 30 June 2006, in consequence of his omission to return as income the sum of $5,528,817 paid to him by way of a cash distribution by the Esparto Trust, be varied such that the base penalty amount under s 284-90(1) of the Taxation Administration Act 1953 (Cth) is 25% of the shortfall amount.
5. The application otherwise be dismissed.
6. The parties file written submissions as to costs as follows: (a) the applicant, on or before 10 February 2012; (b) the respondent, on or before 24 February 2012; (c) the applicant in reply, if necessary, on or before 2 March 2012. Note: Entry of orders is dealt with in Rule 39.32 of the Federal Court Rules 2011

IN THE FEDERAL COURT OF AUSTRALIA VICTORIA DISTRICT REGISTRY GENERAL DIVISION VID 28 of 2011

JUDGE: JESSUP J DATE OF ORDER: 14 December 2011 WHERE MADE: MELBOURNE

1. The assessment of administrative penalty payable by the applicant in respect of the year ending 30 June 2006, in consequence of his omission to return as income the sum of $810,916 paid to him by way of a non-cash distribution by the Esparto Trust, be varied such that the base penalty amount under s 284-90(1) of the Taxation Administration Act 1953 (Cth) is 25% of the shortfall amount.
2. The application otherwise be dismissed.
3. The parties file written submissions as to costs as follows: (a) the applicant, on or before 10 February 2012; (b) the respondent, on or before 24 February 2012; (c) the applicant in reply, if necessary, on or before 2 March 2012. Note: Entry of orders is dealt with in Rule 39.32 of the Federal Court Rules 2011

IN THE FEDERAL COURT OF AUSTRALIA VICTORIA DISTRICT REGISTRY GENERAL DIVISION VID 80 of 2010

JUDGE: JESSUP J DATE: 14 DECEMBER 2011 PLACE: MELBOURNE

REASONS FOR JUDGMENT 1 The first of two proceedings presently before the court is an appeal by the applicant, Stephen James Howard, pursuant to s 14ZZ of the Taxation Administration Act 1953 (Cth) ("the Administration Act"), against decisions made on 28 January 2010 by the respondent, the Commissioner of Taxation ("the Commissioner") disallowing objections by the applicant to amended assessments of income tax made by the Commissioner on 5 August 2009 in relation to the 2005 and 2006 taxation years, and imposing a penalty in each case. The second proceeding is a like appeal against a decision made on 17 December 2010 by the Commissioner disallowing an objection by the applicant to a further amended assessment of income tax made by the Commissioner on 21 October 2010 in relation to the 2006 year, and imposing a penalty. 2 The controversy relating to the 2005 year involves the question whether the sum of $861,853.35, received by the applicant in that year as his share of an award of equitable damages made by the Supreme Court of Victoria (Warren J) in consequence of the determination in Disctronics Ltd v Edmonds [2002] VSC 454 and [2002] VSC 534, and confirmed on appeal in Edmonds v Donovan (2005) 2 VR 513, was assessable income for him. He accepts that the award had the character of income and was made in his favour, but he says that he received the money awarded to him in the capacity of a director, and therefore of a fiduciary, of Disctronics Ltd ("Disctronics"). In point of fact, the money was paid by the solicitors for the successful plaintiffs (including the applicant) in the Supreme Court case to Disctronics, which returned it as income in its own return. The Commissioner issued his amended assessment of 5 August 2009 on the basis that the award of damages was received by the applicant beneficially, and not as a fiduciary. 3 The controversy relating to the 2006 year has two, closely aligned, aspects. The first aspect concerns the sum of $5,528,817.00 received by the applicant in that year by way of a distribution by a Jersey trust of which the applicant was a discretionary beneficiary. The second aspect concerns the sum of $810,916.00 which the Commissioner, by his further amended assessment of 21 October 2010, included in the assessable income of the applicant because of a non-cash distribution made in the 2006 year by that trust. The applicant says that both were distributions of capital by a non-resident trust and were not income for the purposes of the Income Tax Assessment Act 1936 (Cth) ("the 1936 Act") and the Income Tax Assessment Act 1997 (Cth) ("the 1997 Act"). The Commissioner says that the distributions were properly assessed as income because they represented a share of the income of the trust to which the applicant was presently entitled within the meaning of s 97(1)(a)(i) of the 1936 Act and/or because they represented property of the trust that was paid to the applicant during the year of income for the purposes of s 99B(1) of the 1936 Act, and were not excluded under subs (2) of that section.

2005 Year - The Kingston Links joint Venture 4 The award of equitable damages mentioned above was made to compensate the applicant and his co-plaintiffs for the loss of a valuable business opportunity which, the Supreme Court held, had been misappropriated by the defendants in the case in breach of fiduciary duty. As described by Phillips JA in the Court of Appeal (12 VR at 517 [6]): [The] idea being pursued by the plaintiffs [was] to purchase a golf course, to arrange for a long term lease over it with a sound tenant and then to sell it all to another at a profit. The driving force behind the proposed was Kevin Donovan ("Donovan"), who was a director of, and ultimately in control of, Disctronics. He was based in the United Kingdom. In his evidence in this case, he described the features of the proposal in the following terms: By early 1999 this had evolved into a concept of packaging up an existing golf course operation with a long term tenant for acquisition by a third party investor/equity provider. Revenues would flow from the operations of the course itself, where green fees are payable, as well as from the pro shop, driving range, cafes, bars etc. These income streams would assist in negotiating favourable lease terms with the long term tenant/golf course operator and the rental stream generated from the long term lease, if made with a tenant with a quality balance sheet, would underwrite the financing of the transaction. The total cost of the project, comprising the purchase price plus acquisition costs of the golf course plus a profit for the party packaging the deal, would be funded by a combination of bank debt plus equity funding from an investor. The quantum of the equity funding required to compete [sic] the transaction was the total cost of the project (as referred to above) less the amount of bank finance able to be obtained. 5 An aspect of the proposal was that those involved - Donovan and the others to be mentioned presently - would chance their arm to an extent, but would need neither capital nor debt on their own account. If everything went according to plan, three separate business entities would be brought into alignment: the present owner of the golf course, the intending purchaser to whom the course would be on-sold and the long-term tenant to whom the course would be let. To save stamp duty, at some point it was contemplated that the property would be transferred directly from the vendor to the ultimate purchaser, but there would be two contracts of sale: one by which the property was sold by the vendor to the Donovan interests, and the other by which the Donovan interests would on-sell the property to the purchaser. The proposal included the facilitation of finance for the purchaser, on the security of the lease of the course to the long-term tenant. As Donovan pointed out in the passage set out above, there would be a need for the purchaser to contribute some of its own equity, and it was thought that, if the numbers came out the right way, this would be an attractive investment for the right organisation. And, if all went according to plan, the Donovan interests would, on the day that the various transactions were settled, come away with the difference between the price paid to them by the intending purchaser and the price paid by them to the existing owner. In the Supreme Court case, and in this proceeding, this was described as the "day-one profit" yielded by the transactions. 6 It was also an important aspect of Donovan's proposal that his group should contain within it people with the appropriate skills and attributes. Ultimately, there came to be six men who formed the group. In addition to Donovan himself, there were the applicant and Michael Quinert ("Quinert"), both of whom were, at the time, practising as solicitors in Melbourne as partners in the firm Oakley Thompson & Co, and were, along with Donovan, Directors of Disctronics (the applicant was the chairman); Richard Bucknall ("Bucknall") a project manager and consultant to the golf and leisure industries who had, for some time, been seeking golf course investment opportunities on behalf of Donovan and a company with which he (Donovan) was associated, Solette Pty Ltd ("Solette"); Chris Edmonds ("Edmonds"), someone with financial expertise and experience; and a property consultant called Peter Cahill ("Cahill"). The group had, therefore, the legal, financial, property and golfing bases covered; and Donovan himself - also a solicitor by qualification and background - was a kind of team leader (and was referred to as such in some of the communications). 7 According to the findings of the Supreme Court, these six men formed a joint venture for the undertaking outlined above at a meeting by teleconference on 20 July 1999. It was not long, however, before differences arose between them. I shall refer to the events in question below, but the result of them was that the joint venture disintegrated. Cahill, as the property consultant in the group, had been leading their negotiations with the existing owner of the golf course which they had in mind. He and Edmonds, knowing what the owner was prepared to accept for the course, and knowing the rental to which the prospective long-term tenant was prepared to agree, made their own offer for the course. That offer was accepted, and the course was thereafter conducted under the ownership of a company associated with Edmonds, Cahill and other investors; and subject to the long-term lease which was executed with the company whose negotiations had hitherto been with the Donovan group. 8 In the Supreme court proceeding, Donovan, Quinert, Bucknall and the applicant sued Edmonds and Cahill for breach of fiduciary duty constituted by the events and circumstances referred to above. Disctronics was also a plaintiff, it being alleged that it too was a member of the joint venture. That allegation was rejected by Warren J, in terms to which I shall refer in due course, and was not pursued on appeal. Her Honour did, however, uphold the claims of the individual plaintiffs. She awarded them equitable damages. The appeal by Edmonds and Cahill to the Court of Appeal was dismissed. The award of damages was satisfied, and it is the appropriate share of that award that, according to the Commissioner, formed part of the assessable income of the applicant for the year ending on 30 June 2005. 9 The applicant resists that conclusion. He accepts that he was, in name at least, one of the persons in whose favour the award was made. He accepts that the award, as received, had the character of income. But he contends that his share of the award was, in his hands, impressed with a trust arising from his position as director of Disctronics and from certain decisions which had been made by him and his fellow directors during the short period when the joint venture with Edmonds and Cahill subsisted. As I have mentioned above, in point of fact the applicant never saw any of this money: subject to the necessary adjustments for costs and disbursements, the proceeds of the award were paid by the solicitors representing the plaintiffs in the Supreme Court case to Disctronics. The Commissioner says that that is neither here nor there: the receipt of the money by Disctronics was the result of an actual or notional direction by the applicant which operated after he had become absolutely entitled under the award of the court, and had no effect on the conclusion otherwise proper to be drawn, namely, that the proceeds of the award were income in his hands. 10 To resolve the controversy about the character of the applicant's interest in his share of the award made by the Supreme Court requires an examination of the events which led to the disintegration of the joint venture, and of the place of Disctronics in those events. Disctronics was, according to its annual report for year ended 30 June 1999, the parent entity of a group of corporations - referred to therein as the "economic entity" - whose principal activity was the manufacture and distribution of optical discs. It is apparent from that report that the business was then confronted with a number of challenges, including "global over-capacity in the CD manufacturing industry" and the increasingly common practice of "digital downloading from the Internet". In that year, the consolidated group recorded a pre-tax operating profit, before abnormal items, of about $3m. Disctronics itself recorded a loss of about $0.5m. The accumulated losses of the group were in the region of $122m, while those of Disctronics itself were $136m. 11 Initially, the proposal to acquire and to on-sell a golf course had nothing to do with Disctronics. It was an idea of Donovan himself, and/or of his company, Solette. For a time, prior to 1999, Bucknall had been engaged by Solette to find a suitable investment in the golf industry. He had put a number of investment possibilities before Donovan, but was frustrated by the difficulty in obtaining finance. Then, in about January 1999 it seems, Bucknall learnt of a particular financing model as a result of a discussion with a property developer during a round of golf. The idea was that, for a major project which required finance, such as a golf course (or, in the example given by the property developer, a shopping centre), one would first obtain a credible "anchor tenant", and use the projected returns from the tenancy to show prospective financiers that the project would be viable. Bucknall knew that Spotless Services Australia Limited ("Spotless") operated a number of public golf courses owned by municipal councils. He made contact with Stuart Rose ("Rose") of Spotless in February 1999, and asked whether Spotless would be interested in leasing and operating a golf course to be constructed by a group of investors with whom he (Bucknall) was associated. Rose appeared, to Bucknall, to be very enthusiastic about the idea, saying that, every time he had been approached in the past, the developer had asked Spotless to invest in a project, which was not its policy. Donovan too was very keen on the idea. 12 On 8 April 1999, Rose informed Bucknall that Spotless might be in a position to pay an annual rental of $900,000 for the tenancy of such a golf course as Bucknall had proposed. Up to this point, the proposal would have involved the acquisition of a "green fields" site at Keysborough and the construction of a golf course from scratch. However, on 12 April 1999, Donovan suggested to Bucknall the alternative of purchasing an existing course such as Kingston Links, which had previously been mentioned as an example of a successful public access, pay-as-you-play, course. According to Donovan, the advantages would be that the existing operators would have an established trading pattern, and Spotless would be able to operate the course from day one with the existing cash flows. He considered that it would probably be cheaper to buy an existing course than to build a new one, and that the existing owners of Kingston Links might be keen to sell. Although the original concept (construction of a new course) was retained as an alternative for consideration, from this point the focus of Donovan seems to have been on the Kingston Links proposal. 13 Spurred on, I infer, by the positive indication received by Spotless, Donovan lost little time in putting together the team of people required for the investment he had in mind. By at least about mid-May 1999, he had invited Quinert and the applicant to participate. In his affidavit in this case, the applicant said that, "[b]y June 1999, the members of the syndicate or consortium … were Mr Donovan, and at his invitation, Mr Quinert and me". In her reasons of 23 October 2002, Warren J referred to a letter of 19 May 1999 from Cahill to Wood (not in evidence in the present proceeding) in which the involvement of the applicant as well as of Donovan and Bucknall was referred to. The letter said that Solette would be the "investment vehicle", and that the consortium would include partners of Oakley Thompson & Co. This seems clearly to have been a reference to Quinert and the applicant. In April 1999, Edmonds and Cahill were engaged, at that stage as consultants to be remunerated by fees. Edmonds gave consideration to the financing of the investment. Cahill was in charge of negotiating the acquisition of a suitable property. By about the third week of April, he had spoken to a representative of the owner of Kingston Links, Kevin Wood ("Wood"), who had told him that anything was for sale at a price. 14 The price that Wood might be prepared to accept was mentioned by him at a meeting with Donovan, Cahill and Bucknall on 22 June 1999. It was $10m. It was resolved that discussions would continue between Cahill and Wood. No doubt prompted by this development, on the same day the applicant wrote to Bucknall (who had the carriage of the negotiations with Rose) stating that, in order to advance discussions with Edmonds' possible financier, it was necessary to have "an indicative letter from Spotless". He set out the subjects that ought to be covered by such a letter, including the term of the lease to which Spotless would be prepared to commit, the commencement rent and any increases in rent which Spotless would offer for each successive year of the contemplated lease. On the following day Bucknall passed that request on to Rose. On about 30 June 1999, Spotless forwarded its initial offer for the lease of Kingston Links. The offer proposed a rental of $960,000 per annum. Bucknall, who received that offer, sent a copy of it to Edmonds. 15 From about the time that Spotless' interest was confirmed in April 1999, Donovan had it in mind that an alternative to on-selling the golf course to a willing third-party investor might be for Disctronics itself to purchase the course. At the time, Donovan was not happy with the performance of some insurance bonds which were the company's only Australian investment (other than cash). If the amount of equity required of an investor in the golf course, after taking account of the debt funding that could be raised on the security of the Spotless lease, were within the capacity of Disctronics, Donovan's view was that this might well be a more productive investment than the bonds. He shared that view with Quinert and the applicant, who seemed to see the sense in it. 16 The receipt of Spotless' offer of 30 June 1999 appears to have had a significant impact on the thinking of Edmonds and Cahill as to the nature of their involvement in the proposal. According to Warren J, in early July 1999 Edmonds and Cahill "came to the view that they wanted to share in the profit of the proposed transaction" ([2002] VSC 454 at [25]). In the then perception of Edmonds and Cahill, of course, that was the "day-one profit" which the Donovan group stood to gain from the on-sale of the golf course to a third party investor. They had no inkling of Donovan's idea that the investor might be Disctronics. Their interest was expressed in a facsimile sent by Edmonds to Donovan on 2 July 1999, in which the participants were named as Donovan, Edmonds, Cahill and the applicant. Quinert and Bucknall were not included. In a conversation with Edmonds on 6 July 1999, Donovan made it clear that he would not accept the exclusion of Quinert and Bucknall. According to Warren J, this facsimile "may have caused Edmonds some embarrassment." 17 So Edmonds prepared a revised proposal, and forwarded it to Donovan on 6 July 1999. In it, Quinert and Bucknall were included, making six participants in all. They would share equally the "development profit" that was anticipated to arise from the acquisition and on-sale of the Kingston Links golf course. On the indicative figures by reference to which Edmonds was then working, this would be $427,750, or $71,292 each. The proposal also seemed to retain the payment of fees to Edmonds and Cahill, to which Donovan objected, and told Edmonds so in a telephone conversation of the same day (6 July). Donovan also then informed Edmonds that, if the amount of equity which a prospective purchaser would be required to inject fell within the range of about $1m - $1.5m, Disctronics may provide the equity. As to that indication, Warren J found ([2002] VSC 454 at [28]): This was the first time that the involvement of Disctronics was disclosed by Donovan or by any of the plaintiffs to Edmonds but even then only in passing. Donovan asked Edmonds to provide him with some further financial scenarios. 18 Still on 6 July 1999, Edmonds did provide those further scenarios to Donovan. One of them had it that equity of $1.44m would need to be injected by the purchaser. In a telephone conversation the following day with Edmonds, Donovan confirmed that Disctronics would be likely to acquire the course under that scenario, since the amount of equity required would be less than $1.5m. Edmonds' comment was that it was unlikely that the transaction could be effected with that amount of equity. 19 During the course of that week (ie 5-9 July 1999), Edmonds told Quinert that he (Edmonds) was glad that he (Quinert) was now directly involved in the Kingston Links matter. Edmonds said that he had found it difficult to communicate with Donovan, as the latter was invariably travelling and difficult to contact. He said that the applicant was not overly interested in the project and that it was himself, Edmonds, who was the only person responsible for keeping the project moving. He said that until he himself became involved in the project, it was going nowhere, "like a car whose wheels were spinning in the dirt". Edmonds told Quinert that he would put together a package of documents regarding the project, which Quinert could read on his flight to London, whither Quinert was travelling on the Sunday (11 July) for purposes which included a Board meeting of Disctronics. Quinert invited Edmonds to leave the documents under his office door, so that he might pick them up on his way to the airport. 20 On 10 July 1999 Edmonds prepared a memorandum which was expressed as though Donovan had been the author. It read as follows: This circular aims to provide each team member an overview of the project. Whilst I would prefer such communication to be via a face to face meeting, this is not possible for obvious reasons. 1. STATUS • Peter, with the assistance of Rick, has commenced dialogue with the owner of the subject property regarding possible acquisition. At this stage, these discussions are of an on-going nature and it is expected to be at least two weeks before we know whether or not they are serious about selling the property. • Peter and Rick will meet with Spotless, the prospective tenant, next week to progress discussions on possible lease arrangements. • In due course, Peter will revert to the team with his estimate of current market value and his feel for the vendor's minimum price. He will also provide his thoughts on the prospective tenant's position and his estimate of the effect that such lease arrangements will have on the perceived market value of the property. • Chris and Peter will make approaches to potential equity participants as the numbers begin to firm. 2. FINANCIAL ANALYSIS It is too early in the process to predict outcomes. Notwithstanding this, the target/desired numbers are as follows: 2.1 Funding Table: Application of Funds Land Purchase Price $ 8,400,000 Stamp duty and other acquisition costs $ 500,000 Professional / Arrangement fees & disbursements* $ 306,250 Development Profit to Consortium ** $ 893,750 Total Application of Funds $ 10,100,000

Source of Funds Debt $ 7,700,000 Equity $ 2,400,000 Total Source of Funds $ 10,100,000

• Professional / arrangement fees are estimated as follows: Item Anticipated Fee Cost of Funds - SH /KD $ 15,000 Disbursements incurred to date $ 24,000 Disbursements (legal, valuation) $ 10,000 Property (Acquisitions & Lease) - PJC $ 71,250 Debt arrangement - CTE $ 76,000 Equity arrangement fee # $ 90,000 Introduction Fee - RB $ 20,000 Professional / Arrangement Fees $306,250

(# It is likely that the equity arrangement fee will be payable to a party external our team.) ** Development Profit payable to consortium members is to be divided in six equal parts to SH, KD, MQ, RB, PJC & CTE. Based on a development profit to the team of $893,750, this will equate to $148,958 each. 2.2 Equity: This opportunity should have appeal to an investor who likes the idea of owning his own golf course and has the financial capacity to invest up to $3m on a long term basis with not necessarily receiving dividend streams. This opportunity offers an investor: • 100% ownership of the course; • Arrangement of loan facilities; • An inherently low risk investment with strong cash flows. 3.0 VALUATION On the basis that a favourable 15 year lease starting at $1m p.a. can be negotiated, a capitalisation rate of 9% (at best) on the rental stream may be achievable. This would produce a market value of the property in excess of $11.1m. 4.0 ALLOCATION OF RESPONSIBILITIES As discussed, the necessary tasks are divided along the following lines: Task Responsible Person Team Leader KD Assistant to Team Assistant CTE Cash for disbursements and holding deposit SH / KD Acquisition of Property PJC Debt Raising CTE Equity Raising CTE / PJC Arrangement of Lease PJC Assistant on Property Issues RB Legals MQ Accounting CTE

5.0 PROGRESS MEETING Please let me know if you have any comments on the above structure. It is proposed that a telephone conference be arranged for late next week, say 22nd July. By this time it is envisaged that: • PJC will have progressed the purchase negotiations; • PJC / RB will have firmed up the lease arrangements; • MQ will have arranged bank accounts for the incorporated vehicle to be used; and • CTE / PJC will have commenced discussions with a prospective equity provider. 21 Of this memorandum, Warren J said ([2002] VSC 454 at [30]): Donovan was annoyed by this latest scenario for three reasons. First, he realised that Edmonds wanted to be paid both a share of the purchase profit plus a debt arrangement fee of one per cent being $76,000. Secondly, the scenario and the facsimile of 10 July 1999 proposed an equity beyond the capacity of Disctronics. Thirdly, the high equity figure was derived from the allowance of a notional profit to be paid to the consortium by the equity provider. It is, in my view, not difficult to see why Donovan would have baulked at the scheme of things proposed by Edmonds in his memorandum of 10 July 1999. Edmonds and Cahill had originally been engaged to provide services within their respective areas of expertise, and were to be paid therefor by way of fees. When the potential for the transaction to turn a tidy profit became clear to Edmonds, he and Cahill pressed to become co-venturers, in effect, and to share in that profit. Donovan did not resist that idea as such, but had it in mind that ownership of the golf course, with the benefit of the anticipated income stream from the Spotless rental payments, would be a good investment for Disctronics. It would not be such a good investment, however, if the amount of the equity required was to be set at such a level as would yield a handsome day-one profit for the individual participants in the transaction. By 10 July, therefore, the seed which would later grow into a tree of dissension had been sowed. If the transaction were to be considered as a speculation for six individuals, the higher the purchase price, the better. But, if the transaction were to be considered as an investment for Disctronics, the lower the purchase price, the better. Donovan, Quinert and the applicant, as directors of Disctronics, had reached the point of favouring the latter. But that would be to the detriment of Edmonds and Cahill, assuming - as Donovan appeared to be doing as at 10 July - that they would be likely to participate as co-venturers in their own right. 22 On Sunday 11 July 1999, Quinert attended his office to collect the documents which Edmonds had undertaken to leave for him, and other files. To his surprise, Edmonds was there when he arrived. Edmonds gave Quinert the documents, and spent 10-15 minutes also giving Quinert his views on what the latter, in his evidence in the Supreme Court, described as "the project". According to Quinert, Edmonds' manner was "quite intense", and he said that he was "the best person to run the project". He told Quinert that he (Quinert) should know that "Donovan was trying to make the project available as an investment for Disctronics". Edmonds said that it would be better just to sell the course and get out. Quinert did not enter into this controversy with Edmonds, but said that he would read the documents on the plane and discuss the matter with Donovan in London. The documents given to Quinert by Edmonds on 11 July included his memorandum of 10 July over Donovan's name. 23 Quinert arrived in London on 12 July 1999, and met with Donovan and the applicant. Donovan had already received copies of the documents which Edmonds had given to Quinert. Donovan told Quinert and Howard that one of his objectives was to make the project available as an investment opportunity for Disctronics, provided that the equity investment requirement could be handled by the company. He said that, in his view, Disctronics could afford up to $1.5m, most of which could be obtained through the redemption of the insurance bonds. According to Quinert's evidence in the Supreme Court, "Donovan made out a compelling argument as to why the investment would be beneficial for Disctronics and both Howard and I said that we agreed with his views." After that discussion, Donovan and the applicant suggested that Quinert should ring Edmonds, and raise certain matters with him. 24 The Disctronics Board meeting took place on 13, 14 and 15 July 1999, the third day of which was held not in London but at the company's manufacturing facility at Southwater. On the morning of either 13 or 14 July (it was not entirely clear on the evidence which), before the commencement of the meeting that day, the directors met informally in the hotel room of David Mackie ("Mackie"), the UK-based CEO of the Disctronics group who was the only member of the Board other than Donovan, Quinert and the applicant. What transpired was set out by Quinert in his affidavit in this case as follows: We informed Mr Mackie that we had been pursuing the Project, and believed that if the equity investment requirement was around or less than $1.5 million, it would represent a suitable investment for Disctronics which could be funded through the redemption of the insurance bonds held in Australia. Mr Mackie did not take great interest in the discussion, as he was primarily focussed on substantial funding and cash flow issues facing the operational businesses of Disctronics. However, since the proposal would not require provision of capital from any of the operational businesses, as it would be funded through encashment of the insurance bonds, Mr Mackie had no objection to us pursuing the Project as a possible investment opportunity for Disctronics. Both Donovan and the applicant gave evidence to substantially the same effect. 25 As requested by Donovan and the applicant on 12 July, Quinert did ring Edmonds on the morning of 13 July 1999 (London time). He commenced by expressing a concern about certain fees which, in Edmonds' proposal, would be received by Edmonds himself. Edmonds thereupon became aggressive and rude, and "shouted a lot of the time". After what appears to have been a lengthy and difficult discussion on the subject of financing, and of possible third party investors, Edmonds got to the subject of Disctronics. He said that Donovan was pursuing the deal for Disctronics which, according to Quinert's evidence, "would result in him [Edmonds] being screwed". Quinert said that Disctronics had the right to take the equity position, given that it had always been "Donovan's deal". He said that if Disctronics took up the project, then no equity fee would be payable and that Donovan, the applicant and himself, as directors of Disctronics "would rebate our entitlements to Disctronics so as to enhance Disctronics' position". Edmonds said that Donovan wanted Disctronics to "get the deal" so that Donovan could squeeze Edmonds and his friend Cahill on fees and entitlements. He accused Quinert of supporting the Disctronics investment "because Donovan, Howard and I [Quinert] would be able to retain the profits in Disctronics, a company we controlled, and relegate [Edmonds] and Cahill to minor fees". Quinert told Edmonds that he was paranoid. He told him that Donovan, the applicant and himself "would make more money individually if we did the deal externally". He said that, if the deal was done by Disctronics, "there were many issues and barriers including dilution factors which would stand between any ultimate profit and a realisation on the part of Donovan, [the applicant] and myself." He said that the sheer size, volume and volatility of Disctronics' CD businesses meant that "any profit obtained through the project could literally be wiped out overnight". He told Edmonds that there were good reasons for Disctronics to be focusing on "tangible investments in Australia". He said that he (Edmonds) was not privy to all the issues at stake, and that he should not make judgments in matters in which he did not have all the facts. He said that Edmonds was naïve to think that an external equity provider "would not squeeze him and Cahill right down to the minimal position on fees". Quinert said that he had seen this occur in the past, and that at least with Disctronics' involvement the uncertainties and difficulties with an external equity provider would be avoided. 26 On the following morning, 14 July 1999, Edmonds telephoned Quinert. He was calm. He said that he had discussed the project further with Cahill. He proposed that he and Cahill should leave the project, and take the Kingston Links property opportunity with them, but that the Donovan group should retain the relationship with Spotless. Quinert said that this was ridiculous, and that there was no logic to "disbanding and thereby separating the two key elements of the Project". As Quinert was on his way to (the second day of the) Board meeting for Disctronics, he said that he would ring Edmonds later. 27 After the Board meeting (I infer on 14 July 1999), Donovan, Quinert and the applicant met at a hotel in London to discuss the project, and in particular Edmonds' latest position. They discussed it for over two hours, although the applicant left after about half an hour once the "key points" had been discussed. They formulated what Quinert described as a "compromise proposal" to put to Edmonds. As set out in Quinert's evidence in the Supreme Court, the elements of that proposal were as follows: (a) fees be fixed and agreed at $140,000.00 to Peter Cahill and Edmonds and $140,000.00 to Bucknall, Howard, Donovan and me, provided that $70,000.00 from our side of the fees would go to Rick Bucknall and $70,000.00 was to be retained between Howard, Donovan and me, except if Disctronics completed the transaction in which circumstances that last $70,000.00 would be rebated; (b) the external disbursements of $140,000.00 would be paid before any profit share was calculated, and the internal disbursements (i.e. $210,000.00 to $280,000.00) would come out of consortium profit; (c) if external equity was provided, we should try to cap the provider at 22% return on equity, but if internal equity was provided (i.e. by Disctronics) then there would be no profit cap to restrict Disctronics; and (d) if the equity requirement for the Project was $1.5 million or less then Disctronics had the right to take over the deal, but that if it was more then Edmonds would have the mandate to procure external equity. Either on that day or the following day, Quinert telephoned Edmonds and went through the compromise proposal that had been formulated. Edmonds said that he liked it, and that he would discuss the matter with Cahill. 28 On 16 July 1999, by which time Quinert was in Rome, he received a facsimile from Edmonds, sent on that day, but dated 12 July 1999. In the facsimile and the attached tables, Edmonds set out three alternative scenarios, broadly based upon the compromise proposal which Quinert had put to him by telephone on 14 July 1999. Although the numbers and assumptions differed as between these alternatives, the principles by reference to which they had been prepared were stated, in the cover sheet to Edmonds' facsimile, as follows: 1. 'Expert disbursements' are paid as required. 2. 'Internal Disbursements' of approximately $280k are split between KD, SH, MQ & RB on the one hand and PC & CE on the other. 3. If an external equity provider is used, the 'profit' is split six ways. 4. If Disctronics decides to participant [sic] as the owner (scenarios 2a & 2b), 'profit share' does not apply. Quinert sent this facsimile on to Donovan, and later spoke to him. Donovan said that he had not intended that there would be "no profit share" if Disctronics were the purchaser of the golf course. Based on his discussions with Donovan, Quinert telephoned Edmonds on 16 July 1999 and accepted what had been set out in the latter's facsimile, subject to two matters: first, that Disctronics should not have been referred to specifically in the document, "because the matter at this stage was still confidential", and secondly, that the "external parties" - Edmonds, Cahill and Bucknall - should get some profit if Disctronics negotiated as purchaser, although the quantum would have to be based on "arms-length negotiations". According to Quinert, Edmonds said that he was happy with this, and thanked Quinert for reintroducing the prospect of there being some profit share for Cahill and himself, over and above their fees. At this stage, Quinert thought that the issue was resolved. 29 While these interchanges involving Quinert and Edmonds were taking place, Bucknall was continuing his negotiations with Rose. According to the evidence which he gave in the Supreme Court, by 13 July 1999, Bucknall had asked Rose for an annual rental of $1.2m and was confident that at least this rental would be achieved, so long as the Kingston Links audited revenue figures were substantiated, and the corporate packages lifted the number of rounds to approximately 60,000 annually. 30 On 19 July 1999, Edmonds sent Quinert a further facsimile which, although not in evidence in the present case, appears to have been by way of variation of that sent on 16 July. In her judgment, Warren J said that it contained "four core proposals" as follows ([2002] VSC 454 at [42]): (1) External disbursements for the acquisition of the golf course were estimated at $140,000 if an external equity provider was involved. (2) Moneys for internal disbursements of $200,000 were to be split, that is, $140,000 between Donovan, Howard, Quinert and Bucknall, and $140,000 between Edmonds and Cahill. (3) Approximately 50 per cent of the notional profit of the transaction, excluding disbursements payable to Donovan, Howard, Quinert, Bucknall, Edmonds and Cahill, accrued to the equity provider. (4) The remaining notional profit would be applied to pay external disbursements, then internal disbursements and the balance called "a profit share" was to be split six ways between Donovan, Howard, Quinert, Bucknall, Edmonds and Cahill equating to the sum of $30,000 each. Quinert considered, and Warren J found, that the scenarios set out in this facsimile departed from the telephone conversation which the two men had had on 16 July. The scenarios were, according to Quinert, "largely dependent upon assumptions which were unknown at that time, being the cost of the land and the rental return to be obtained", and he did not respond to Edmonds' request to confirm the acceptability of them. 31 Edmonds' memorandum was considered at a teleconference on 20 July 1999 attended by Donovan, Quinert, Bucknall, Cahill and Edmonds. The applicant was unable to attend, but he later saw, and agreed with, the minutes of the meeting, and both the case in the Supreme Court and the present case have been conducted by reference to an assumption that he was a notional participant. Those minutes, prepared by Edmonds and subsequently accepted by all concerned, identified the topic of discussion as: "Property Venture to Acquire Kingston Links Golf Course and Arrange Spotless Services Limited to become Long Term as Operator/Tenant". The substantive parts of the minutes provided as follows: 5. PROPOSED FUNDING TABLE Whilst it is too premature in the timeline of this transaction to accurately predict final numbers, the broad approach is to be as follows: 'Acquisition Costs' are to include cost of the legal work to be undertaken Oakley Thompson & Co which are roughly estimated at $20k. 'Disbursements - External' are to be paid as required. Such items are to include cost of funds, disbursements incurred to date (?), equity arrangement fee (if applicable) and valuation fee. 'Disbursement - Internal' are to be fixed at $140k for consulting, legal and introduction (KD, SH, MQ & RB) and $140k for property, administration and funding (PC & CE) 'Profit Share' / Initial Investor Return' are to be determined as the transaction unfolds. Profit share to the team is to be split 6 ways. It is anticipated that the day-one return on equity to the investor, net of costs, will be approximately 50% of the notional profit after Government duties and imposts (i.e. excluding disbursements to our team) accruing to the equity provider(s), up to a ROE of 22% for an external equity provider. The factors influencing the final approach will be the saleability of the project to an investor (what is the minimum return acceptable), the marketability of the project to the investor (does it appear as an attractive proposal) and whether or not the equity provider(s) form part of our team. 6. PROVISION OF EQUITY It was agreed that the matter of sourcing equity funding would be further addressed only after the purchase price of the property and details of the lease arrangements are known. 7. ACQUISITION OF SUBJECT PROPERTY Peter Cahill briefed the meeting on the progress to date of the negotiations with the vendor. Peter tabled a draft letter of offer addressed to Kingstons. After lengthy discussions regarding the requirements to avoid being assessed for double stamp duty and various amendments to the format of the letter, Peter was authorised to proceed to deliver the offer to Kingston. This is scheduled to occur tomorrow. The potential to immediately sell plant and equipment to the prospective tenant was also discussed. 8. NEGOTIATIONS WITH PROSPECTIVE TENANT Rick Bucknall discussed progress with Spotless. It was decided that Rick would reapproach Spotless and preposition our expectation that the initial rental would be in the order of $1.1 million per annum. Warren J held that it was at this teleconference that a joint venture to acquire the Kingston Links golf course came into existence, and that the members of the venture were Donovan, Quinert, Bucknall, Edmonds, Cahill and the applicant. 32 By letter to Wood dated 21 July 1999, Cahill made a formal offer to purchase the Kingston Links golf course for the price of $7.75m, plus stock at value. The purchaser was identified as Quinert, Edmonds and the applicant, as nominees for a special purpose entity or entities. The offer was subject to three conditions precedent, one of which was that the purchasers should reach formal agreement with a golf club operator as to the terms and conditions of an acceptable management agreement. It seems that the offer was not acceptable to Wood, but he and Cahill continued negotiating. On 3 August 1999, they reached a verbal agreement for the sale of the golf course for the sum of $8.68m. According to a file note of that date made by Quinert, after a conversation with Cahill, that sum included "machinery". 33 During the same period, Bucknall's negotiations with Rose were also proceeding well. By letter dated 29 July 1999 to Donovan, Rose indicated that an annual rental of $1.165m was "achievable", subject to various matters set out in the letter. The letter also suggested that a minimum ten-year lease would be required, with a further ten-year option, and that the parties would need to agree upon a "measure of rental increase" as to which Rose added "usually CPI". 34 By early August, therefore, the members of the joint venture which had been formed on 20 July were in possession of the two key parameters by reference to which they could plot their future: the price at which Kingston Links was available for purchase, $8.68m, and the annual rental which was likely to be paid by Spotless, $1.165m. It was in this environment that what Warren J described as "the disintegration of the joint venture" took place. 35 On 3 August 1999, Quinert (by then back in Australia) had a conversation with Edmonds. Edmonds asked how much money Quinert had; and he also asked whether Donovan and the applicant had access to cash. Quinert responded that he himself, Donovan and the applicant all had access to funds. Edmonds asked a similar question about Bucknall. When asked by Quinert why these inquiries were being made, Edmonds said that, if Quinert, Donovan, Bucknall and the applicant could "come up with a few hundred thousand dollars between [them]" (Quinert's words in his evidence in the Supreme Court), he (Edmonds) had an idea about a new way that the project could be structured "so as to do it ourselves". Quinert told Edmonds to set out his proposal in writing. 36 Edmonds did set out his proposal in writing, on the same day. His memorandum included two scenarios, the first of which was based upon what he described as "external equity", in which event there would be "50% of initial paper profit to investor(s)". The second scenario was headed "equity participation by each team member". This involved an expedient which had not previously been mentioned at any stage, namely, "the six team members retaining ownership of the facility". In such a case, on Edmonds' calculations, each team member would be required to inject $126,666, making a total of $760,000. 37 Quinert discussed Edmonds' new proposal with the applicant, and the two of them later called Donovan in London. Donovan said that he would not agree to the proposal. He said that Disctronics was to be the equity investor. He told Quinert to tell Edmonds that Disctronics now intended to take up its entitlement in respect of the project, given that an equity injection of less than $800,000 was required. 38 On 4 August 1999, Quinert replied to Edmonds' memorandum of 3 August, and he did so effectively also on behalf of Donovan and the applicant. At the outset, Quinert confirmed that Disctronics "intends to exercise its entitlement to take on the acquisition". In the circumstances, the second scenario proposed by Edmonds was, according to Quinert, "not possible". The remainder of Quinert's memorandum was concerned with matters of detail, and of contention as between Edmonds and the Donovan group, and it is not necessary to set them out at length. The memorandum did, however, contain the following paragraphs: In an effort to perhaps allay your fears I assure you that I believe the transaction can procure a real and substantial profit. As such there will be an entitlement to non associated consortium members for a return significantly greater than the agreed professional fees. Given that as I understand it, yours and PC's engagement was originally to be as consultants only this outcome when viewed in that context probably represents the best deal you have ever done. It would be extremely disappointing if you were not happy in those circumstances. To be candid your approach always seems directed towards pushing the other consortium members to a position rather than simply discussing and resolving the matter in an open and co-operative serve. This is not my style and, frankly, I am personally not going to participate in such a process with people I consider associates. That is how I feel. 39 Also on 3 August 1999, Quinert activated a shelf company called Corwen Grange Pty Ltd ("Corwen Grange") and caused Disctronics to acquire one ordinary share in it. The purpose of this was so that Corwen Grange could be the nominee company to whom the golf course would be transferred on behalf of Disctronics. Quinert informed Cahill of that intention, and instructed him to name Corwen Grange as the offeror in the formal offer which he, Cahill, was then, as Quinert assumed, preparing to send to Wood. 40 The dispatch of Quinert's memorandum of 4 August 1999 led to some acrimonious discussions between the two contending sides, largely involving the applicant and Edmonds. According to Warren J ([2002] VSC 454 at [52]), "Edmonds, and also Cahill, asserted that the imposition by Donovan and the others of Disctronics into the role of equity provider in the transaction had an impact on the agreed profit share." Her Honour also said (at [56]): On 5 and 6 August 1999 various discussions ensued between Howard, Quinert and Edmonds as to the position of Edmonds and Cahill. By this time relations between Edmonds on the one side and Howard and Quinert on the other had become strained. Edmonds was concerned that Donovan was allowing Disctronics to take over the acquisition whilst he saw an opportunity for the six team members to provide the equity themselves. Donovan, Howard and Quinert on the other hand saw Edmonds as seeking to gain more than he was entitled to and at the expense of Disctronics. According to the evidence of the applicant in the Supreme Court, after he had read Edmonds' proposal of 3 August and Quinert's response of 4 August, he went to see Edmonds in his office (which was located conveniently to the offices of Oakley Thompson & Co where the applicant and Quinert were partners) on 4 August 1999. The applicant's evidence continued: I told Edmonds that I thought the Disctronics scenario was contrived by him to enable the individuals to usurp Disctronics' entitlement, that the fees for which he and Cahill were asking were excessive, and that his suggestion that they were based on a paper profit was absurd and illogical. I asked him to reconsider the sum being sought. My final words were to the effect that I would not allow him to torpedo Disctronics' corporate opportunity. By this stage, it seems, the discussions had become what was, in effect, a negotiation as to the size of the fees that would be paid to Edmonds and Cahill in total, given that they were clearly unhappy about their prospects of securing any significant profit on the transaction, now that Disctronics was to be the purchaser. 41 The applicant telephoned Donovan in London, who authorised him to negotiate a settlement of the dispute with Edmonds. The applicant and Quinert then went again to see Edmonds in the latter's office. After some bargaining, the position being taken by Edmonds was that he and Cahill would accept nothing less than $340,000 jointly, and the position being taken by the applicant on behalf of the Donovan group was that no more than $200,000 would be offered. That remained the position until late in the afternoon of 5 August 1999, when the applicant again went to see Edmonds. He told him that "Disctronics' final position was $300,000 (expressed on a joint all in basis)". Edmonds consulted Cahill, and returned to the applicant (now in his own office) with the advice that they would accept $300,000 jointly. 42 If Edmonds and Cahill were to be the beneficiaries of cash payments, it was necessary to define the conditions which would attach to that entitlement. The applicant's evidence in the Supreme Court continued: I had already started to write out possible terms of settlement in the interval between leaving his room and him responding to me. I asked him whether the equity figure of $760,000 he had set out in the scenario entitled "Equity participation by each Team member" was able to be achieved. He told me that it was a bankable deal given the Spotless lease. He told me that he couldn't wait for me to complete the document as he had a commitment at Preston. I therefore told him that the fee payable was based upon first, the offer of $8.68m being accepted; second, a gross rent return of $1.165 million being received from Spotless Group; third, the sum of equity to be made available by Disctronics being ballpark what the individuals would on his scenario be required to inject; and finally that the finance facility would be sought on a non-recourse basis. He emphatically responded "yes" to each part and then hurriedly left. 43 The applicant completed his handwritten draft of the terms of settlement and, because he was to be away from his office the following day, 6 August 1999, left it for his secretary to type and to hand to Quinert for review. The typed document, as provided by Quinert to Edmonds, was as follows: Our fee agreement is as follows: Subject to: l. a wholly-owned subsidiary of Disctronics Limited "D.L." or its/their nominee satisfactorily completing the acquisition of the Kingston Links Golf Course ("the Property") for an aggregate price not exceeding $8.688 m. ("the net purchase price") which said net purchase price includes all land, buildings, tradenames, goodwill, plant and equipment, machinery etc at on, upon or appurtenant to the enjoyment and use of the Property; and 2. C.E. and P.C. procuring bank finance ("the finance facility") for D.L. at not more than prevailing commercial rates of interest, fees and charges to a level which requires D.L. to contribute equity of not more than $750,000 to acquire the Property; and 3. the finance facility being provided on a non-recourse basis to the directors of D.L.; and 4. the finance facility being premised upon a net rental available to D.L, of $1.065m., being the gross rental payable by the intending Lessee (being a member of the Spotless Group of Companies who must unconditionally consent to entering into an Agreement for Lease of the Property for a term of not less than 5 x 5 x 5 x 5 years at a gross commencement rental of not less than $1.165 m. per annum plus rates, taxes, and outgoings within one month of D.L. entering into a conditional contract to purchase the Property) less the reasonable cost of engaging R.B. for a term of 1 x 1 x 1 years at a commencement salary package not to exceed $80,000 per annum to supervise the intending lessees use of the Property so as to preserve and enhance its value. Then, but not otherwise: 5. D.L. shall pay C.E. and/or nominee on completion of the purchase of the Property $150,000; and 6. D.L. shall pay P.C. and/or nominee on completion of the purchase of the Property $150,000; and 7. D.L. shall pay R.B. and/or nominee on completion of the purchase of the Property $100,000. These terms are confidential. 44 On 10 August 1999, Edmonds responded to Quinert in the following terms: I acknowledge receipt of your proposal on Friday evening 6 August 1999, which purports to be an agreement. I must emphasise that no such agreement is in place. Confirmation of your revised offer was sought so that I could discuss the matter with Peter Cahill. However, the offer is a dramatic variation from the profit sharing arrangements that were agreed and documented and it is therefore unacceptable. Whilst Peter acknowledges being invited into the consortium initially as a consultant, the deal very clearly and demonstrably evolved into a joint venture between yourself, Kevin Donovan, Stephen Howard, Rick Bucknall, Peter Cahill and myself. From my end, I always considered that my interests, through Home Link Mortgage Corporation Limited, were part of a partnership/joint venture. The basis of the agreement and the formula for equity/profit sharing was documented (and countersigned by Kevin Donovan without objection from any of the participants). Clearly, you believe the joint venture (for which Oakley Thompson & Co is the appointed legal firm) is now at an end because you have excluded Peter, Rick and myself from any involvement as principals and are seeking to appoint us merely as consultants to the transaction so as to maximise your own commercial returns. I am immensely disappointed that you have repudiated the joint venture arrangements, which were very clear cut. The present proposed terms for our on-going involvement is unacceptable. Peter and I are somewhat relieved that we are no longer involved because we believe your integrity and ethics are profoundly lacking. It may not have been entirely irrelevant to the content of this communication that Edmonds and Cahill were, by then, receiving their own legal advice. 45 On 11 August 1999, Quinert wrote to Cahill, noting that he had received Edmonds' memorandum of 10 August that day, and asking for Cahill to clarify his own position as soon as possible. Quinert's letter continued: As I confirmed to you in our telephone conversation of 4th August last the Disctronics group had then elected to proceed with this acquisition through a wholly owned subsidiary Corwen Grange Pty Ltd. This election was made pursuant to the prior agreement of all concerned, which fact has been acknowledged by Chris Edmonds in the presence of myself and Stephen Howard. As such, you as agent have had a fiduciary obligation to the Disctronics group to act on its behalf and in its best interests in your discussions with the vendor. Please advise me of what action you have taken as the responsible agent towards securing the acquisition on behalf of Corwen Grange Pty Ltd. Quinert added that, if the acquisition of the golf course had been successfully concluded, then Cahill's company would be entitled to the "success fee/estate agent's commission" provided for in its original letter of engagement to Donovan. If the acquisition had not been concluded, Quinert invited Cahill to submit his claim for hourly fees. He also asked Cahill for a report on the status of negotiations, so that the Donovan interests could "pick up the threads and proceed to the completion of the transaction". 46 On 12 August 1999, Quinert replied to Edmonds' memorandum dated 10 August 1999. In doing so, he said: I made my position clear to you in my memorandum dated 4 August last. The document of 6 August was prepared by [the applicant] to confirm terms of a resolution which had been reached by you and he. I approved of and endorsed that resolution as did Kevin, Rick and on your representation so did you and Peter Cahill. The Disctronics Group will be pursuing its right to acquire Kingston Links. This right has been acknowledged by all concerned including yourself. Any attempt on your part to undermine or frustrate that process will constitute a breach of your fiduciary obligations as a former consultant to the project. I will take legal action to prevent or remedy such a breach if required. I consider the contents of your letter to be nothing more than a concoction of self serving misrepresentation and falsehood. I do not wish to speculate on your motives for this or the unnecessary and personal attack on my character. Suffice to say you have deemed it appropriate to dispense with nine years of friendship and loyalty to satisfy your purpose. No one is the better off for such a decision. 47 On 12 August 1999, the applicant wrote a lengthy letter to Edmonds, in what Warren J described as "self-serving terms". It was, to say the least, a forceful rejection of Edmonds' letter of 10 August 1999, which the applicant described as covering "the gamut from the distasteful to the artfully distorted". The applicant said: 1. Indisputably, the chronology of this transaction commenced with you and Peter Cahill acting as consultants to Solette Pty Ltd and subsequently that relationship moved to a joint venture. The venturers were Messrs Bucknall, Cahill, Donovan, Edmonds, Howard and Quinert. At all material times it was agreed between the venturers that if equity of less than $1.5m was required to acquire the Kingston Links Golf Course ("the Course") then the Disctronics Group of Companies could elect to proceed to solely acquire the Course and the joint venture would cease to exist subject always to satisfactory arrangements being made with the non-Disctronics Directors which would reward them for their endeavour and participation; 2. On the 3 August 1999 Michael Quinert, for the Disctronics Group, exercised Disctronics' entitlement by appropriately advising you. The remainder of the applicant's letter was largely concerned to dispute the complexion placed upon things, particularly the discussions in which the applicant himself had been involved in the period leading to 6 August 1999, by Edmonds' memorandum of 10 August 1999. On 13 August 1999, Edmonds responded to the applicant, rejecting the latter's proposition that there had been an agreement that Disctronics could become the purchaser of the golf course if less than $1.5m by way of equity was required. According to Warren J, that rejection "contradicted the discussions between [Edmonds] and Donovan in July 1999 and between Edmonds and Quinert in July also". 48 Unbeknown to Donovan, Quinert or the applicant at the time, on 10 August 1999, Cahill wrote to Wood, advising him that the consortium was "dissolved". On the following day, 11 August, Wood replied to Cahill stating, according to Warren J ([2002] VSC 454 at [64]) "that he would be delighted if Cahill considered the acquisition in his own right or with another party". On 10 August 1999, Cahill contacted one Michael Buxton ("Buxton"), a business acquaintance of his. He proposed that Buxton should participate in a joint venture to acquire the Kingston Links golf course. As I shall mention presently, that proposal was put into effect, but not immediately. 49 On 19 August 1999, Quinert wrote to Wood enclosing a formal offer to purchase the Kingston Links golf course for the sum of $8.688m. The offer was made in the name of Corwen Grange. Giving Wood some background as to the nature of the joint venture which had then recently disintegrated, Quinert said: As you are aware Mr Peter Cahill of Domain Hill Property Services Pty Ltd was until recently engaged in negotiations with you regarding the proposed acquisition of Kingston Links Golf Course ("the facility"). In conducting those negotiations Mr Cahill was acting as an agent for, and was a member of, a consortium which, was formed to pursue the acquisition on behalf of an equity investor. Pursuant to certain financial parameters agreed to by the consortium members, the equity investor which took up the option to pursue the acquisition was an unlisted public company group which operates pre-dominantly in the United Kingdom and the United States of America. Certain members of the consortium including myself, Mr Stephen Howard and Mr Kevin Donovan are also Directors of the equity investor group. On the 3 August last, Peter advised me that following further discussions, you had informed him that you would be prepared to recommend an offer of $8,688,000.00 for the acquisition of the facility subject only to that offer being put in writing. On the basis of that advice arrangements were made to incorporate a local subsidiary of the equity investor group on behalf of which the formal acquisition offer could then be made. The company so incorporated was Corwen Grange Pty Ltd ACN 088 393 337. Mr Howard and I were appointed as Directors of Corwen Grange Pty Ltd. At that point in proceedings a negotiation was initiated by a member of the consortium regarding advisory fees and other entitlements arising out of the consortium. This individual had originally invited Peter to participate first as an advisor and ultimately as a member of the consortium. Although Peter neither initiated nor participated directly in this kerfuffle, we were not surprised that as a friend and invitee of the chief protagonist, he felt bound to hold the line. We presume this is why when that person withdrew from the consortium so did Peter; despite the fact that he had substantially succeeded in his specific task of securing an agreement to purchase the property. Certainly, we have sought to assure Peter that upon settlement it is our intention to remit his fees and entitlements in recognition of Domain Hill's work. Unfortunately the abovementioned events have delayed the communication of the formal offer you requested from Peter. We regret any inconvenience caused by that delay and hope this explanation at least enables you to appreciate our position. As indicated, the investor group has always and still intends to proceed with the formal offer which was the subject of your discussions with Peter. As such, we enclose herewith the written offer put by Corwen Grange Pty Ltd. Most likely because of the recent contact which he had received from Cahill, it seems that Wood did nothing in response to this offer from Quinert. 50 On 27 August 1999, Emanbee Pty Ltd ("Emanbee"), a Buxton company, made a written offer to Wood to purchase the Kingston Links Golf course for the sum of $8.7m. As noted by Warren J this was a mere $12,000 more than the offer which had been made by Corwen Grange. Although not informed by Cahill or Edmonds of the making of this offer, Quinert suspected that they may have put a competing offer to Wood. Accordingly, on 1 September 1999, he sent a letter, on the letterhead of Disctronics, to Cahill repeating a warning which he had earlier given about the latter's breach of fiduciary duty, requesting that Cahill withdraw as a competitor, threatening litigation and seeking a response. On the same day, 1 September 1999, in conversation with Bucknall, Wood said that his company had resolved to accept the offer from Emanbee. That is what subsequently happened. Kingston Links Country Club Pty Ltd ("KLCC") was registered on 12 October 1999 with Buxton, Edmonds and Cahill as directors. On 29 October 1999, KLCC executed a contract of sale with the registered proprietor of the land upon which the Kingston Links golf course stood. The transfer was registered on 14 December 1999. On 8 December 1999, KLCC entered into a lease with Spotless. 51 On 22 December 2000, Disctronics lodged a caveat over the title to the land on which the golf course stood, asserting the existence of a constructive trust in its favour. In her Honour's reasons of 23 October 2002, Warren J observed that no explanation had been given as to why Disctronics waited so long before taking that step. On 8 June 2001, KLCC commenced a proceeding for the removal of the caveat ("the caveat proceeding"). On 26 June 2001, the proceeding in the Supreme Court first referred to in para 2 above (and to which I shall hereafter refer as "the main proceeding") was commenced. Donovan, Quinert, Bucknall and the applicant were plaintiffs, as were Solette and Disctronics. In the then case of the plaintiffs, Disctronics was said to be a member of the joint venture which had been formed on 20 July 1999. 52 On 15 June 2001, Donovan, Quinert and the applicant, of the one part, and Disctronics, of the other part, executed an agreement (in which the parties of the first part were referred to as "the directors" and Disctronics was referred to as "DL") in the following terms: Whereas A. The directors were formerly members of a joint venture to acquire the Kingston Links Golf Course (KLGC) with others namely Christopher Edmonds (CT) [sic], Peter Cahill (PC) and Richard Bucknall (RB) to package an approved tenant and KLGC to an investor (the joint venture). The joint venturers agreed that the investor would be either a third party or DL; B. On or about 14.07.'99 in London meetings of DL, the directors agreed that if the equity requirement to require KLGC was less than AUD$1.5m then the directors would seek to have DL become the equity participant and purchaser of KLGC (the "option"). The directors further agreed that if DL exercised its Option then the directors would rebate to DL any entitlement (whether on revenue or capital account) they may have as a consequence of their participation in the joint venture; C. On 16.07.99 Mr Edmonds was informed of the directors' intention for DL to become the investor or equity participant. CE (for himself and PC) agreed with the directors' Option proposal. RB separately agreed with the Option proposal; D. On 04.08.99 MJQ (for the directors of DL) wrote to CE exercising DL's Option and the right to acquire KLGC as the equity required to acquire KLGC was less than AUD$1.5m; E. CE and PC (with others), in wilful breach of the terms of the joint venture and their obligations and duties to the venturers (including DL) have acquired KLGC, via a corporate vehicle, for themselves utilising confidential information obtained whilst either a consultant to DL (or the directors) or as a member of the joint venture. As a consequence of the wrongful action of CE and PC, DL has been precluded by deceit of CE & PC from acquiring KLCC notwithstanding the valid exercise of the Option; F. In December 2000 DL lodged a caveat ("the caveat") claiming, inter alia, a constructive trust over and upon the freehold land component of KLGC; G. Legal proceedings are foreshadowed to be imminently issued out of Supreme Court of Victoria by DL, the directors and RB in relation to both the Option and the caveat ("the proceedings"); H. The directors have concerns about their ability to fund from their own resources the anticipated costs of the proceedings. The directors are advised that the case to be put is compelling and the prospects of a favourable outcome are strong. The directors desire to prosecute the proceedings, as contemplated, which requires the directors to accept the litigation risk of being individual [sic] named plaintiffs with DL, in order to ensure that DL is afforded the opportunity of exercising its right to seek damages and compensation for the loss of its corporate opportunity and the wrongful appropriation of KLGC by CE, PC and others. Now, for good and valuable consideration, this agreement witnesses: 1. DL shall pay all legal fees and disbursements associated with the prosecution of the proceedings, or either of them, to Mallesons, counsel, Oakley Thompson & Co including reasonable travel and accommodation costs; 2. The directors have agreed with RB that he will not be liable for either any legal fees or disbursements associated with the prosecution of the proceeding or in relation to any damages or costs orders of any description in favour of CE, PC (or others); 3. DL shall indemnify the directors (and for their obligation to RB) against payment of any order/s for costs, howsoever arising, in favour of CE, PC (or others) arising out of the prosecution of the proceedings or any damages they are found liable to pay to CE, PC (or others); 4. In consideration of DL's promises set out in paras 1 and 3 hereof the directors, and each of them, assign absolutely into and to the sole use of DL, any award of damages (whether our revenue or capital account), costs or interest made in their favour as a consequence of their participation in the joint venture or arising out of the proceedings and the ultimate outcome thereof; 5. The directors will do all such things required by DL, or its solicitors, to diligently prosecute the proceedings and to provide all reasonable assistance to DL. 53 On 16 November 2001, KLCC entered into a contract for the sale of the golf course to a third party, Gauntlet Services Pty Ltd ("Gauntlet") for the sum of $14m. Because of the existence of the Disctronics caveat, settlement of the contract was postponed. On 20 March 2002, the Supreme Court ordered that the caveat be removed, and that the proceeds of the sale of any settlement as between KLCC and Gauntlet be deposited into a trust account controlled by the parties' solicitors. On 9 April 2002, the trial of the main proceeding and the caveat proceeding commenced before Warren J, and ran until 1 May 2002. On 8 May 2002, notwithstanding the orders made on 20 March 2002, Gauntlett apparently served a notice of repudiation upon KLCC. The sale to Gauntlet did not, therefore, proceed. However, the property was in fact sold to another purchaser by contract of sale dated 17 June 2002. 54 On 23 October 2002, Warren J gave judgment in the main proceeding and the caveat proceeding. As to the former, her Honour explained the nature of the plaintiffs' case ([2002] VSC 454 at [95]): They alleged that it was a term of the joint venture agreement that investigations would be conducted as to the financial viability of a joint venture golf course project. The plaintiffs alleged that the project was to be investigated on two bases, first, that the equity participant to acquire and own the golf course would be a third party to be identified at a later time. Secondly, that Disctronics or one of its related entities would be the equity participant in the project if it chose to do so. The defendants accepted that a joint venture came into existence on 20 July 1999, but they denied that Disctronics was part of it, and they denied that Disctronics was entitled to be the equity participant if it chose to do so. Warren J described their position as follows ([2002] VSC 454 at [105]-[106]): 105. The K.L.C.C. defendants alleged that on about 20 July 1999 an agreement was entered into between Donovan, Quinert, Howard, Bucknall, Edmonds and Cahill to acquire the Kingston Links Golf Club, to split any profit share derived from such acquisition six equal ways between them and that the manner of funding the acquisition would be determined at a later time. …. 106. The defendants described this agreement as "the Golf Club Purchase Agreement". The defendants alleged that arising from that agreement each of the participants were in a fiduciary relationship and owed duties to one another. They alleged, also, that there were terms of the golf club purchase agreement that they would act in the interests of the group, act in good faith, not use confidential information imparted to them to the prejudice of the interests of the group and not seek to prefer their interests to the interests of the group and other related terms. 55 In the main proceeding, each side accused the other of repudiation. The defendants (including Edmonds and Cahill) alleged that Quinert's memorandum of 4 August 1999, and the actions of the Donovan interests thereafter down to about 9 August, repudiated the joint venture agreement which they (the defendants) asserted came into existence on 20 July. The plaintiffs alleged that Edmonds' memorandum of 10 August 1999 repudiated their own alleged version of the joint venture agreement of 20 July. Quite plainly, the intention of Donovan, Quinert and the applicant to put Disctronics forward as the purchaser of the golf course was central to this controversy. According to the plaintiffs, they were entitled to nominate Disctronics as the purchaser, such that Edmonds and Cahill were then contractually bound, without more, to proceed with the transaction at the price that had been negotiated with Wood. According to the defendants, assuming a purchase of the course at or about the negotiated price, all members of the joint venture were obliged to use their best endeavours to on-sell the property on the most advantageous terms, and the Donovan parties were not entitled to prefer their own interests, as directors of Disctronics, to those of the members of the joint venture. 56 Although Warren J decided the main proceeding favourably to Donovan, Quinert and the applicant, her Honour did not accept the entirety of their case as it was put. She accepted the contentions of the plaintiffs as to the nature of the joint venture formed on 20 July 1999, subject to two important qualifications: Disctronics was not a member of the joint venture, and there was no agreement that Disctronics could, if it so chose, be the equity provider (ie the ultimate purchaser of the property). As to the first aspect, her Honour said ([2002] VSC 454 at [132]-[134]): 132. I am not satisfied that Disctronics was contemplated as a part of that joint venture or, alternatively, to have an option to take the transaction over if it so desired. Indeed, Disctronics was not mentioned in the minutes of 20 July 1999. 133. There was extensive evidence as to conversations and communications between the plaintiffs and the defendants, particularly between Donovan, Howard and Quinert on the one hand and Edmonds on the other. There were inconsistencies on both sides. Donovan gave evidence as to a number of conversations that he had with Edmonds on 9 and 13 April and 2 and 6 July 1999 where he said he told Edmonds that the transaction for the acquisition of the Kingston Links Golf Course could be for the benefit of Disctronics if it so elected. Edmonds refuted the evidence of Donovan in this respect. Under intensive cross-examination Edmonds was emphatic that he was not told of the involvement of Disctronics until the conversation between he and Quinert on 14 July 1999. Despite some inconsistencies in Edmonds' versions of his conversations with Donovan I accept that he was not told of Disctronics' involvement until 6 July 1999, but even then, not in any detail until 14 July 1999. 134. I reached this view on four bases. First, it was apparent that at all times Donovan was the mastermind behind the transaction. He treated the acquisition of the golf course as his own to effect in whatever manner or form he chose including, if he wished, the involvement of a corporation. However, he kept his intentions to himself. This was all very well for his own commercial purposes but it is necessary to decide when Disctronics was first identified to Edmonds and Cahill for the purposes of that transaction. That date was on 6 July 1999 with respect to Edmonds and probably a short time later with respect to Cahill. Secondly, the plaintiffs were unable to identify any company records or minutes of board meetings of Disctronics that disclosed the making of a resolution that Disctronics would be involved in the transaction. The earliest evidence arose in the oral descriptions by Donovan, Howard and Quinert of the events at the board meeting in London on 13 April 1999 and the directions given at that meeting to Quinert as to what he was to say to Edmonds. It is difficult to accept that a corporation of the type such as Disctronics was did not have records of resolutions of financial decisions. Again it demonstrates that the involvement of Disctronics was a matter within the mind of Donovan to be revealed if and when he wished. The third factor was the notes of Quinert of the conversation with Edmonds of 14 July 1999. Quinert presented himself throughout the history of this matter as a solicitor who kept reasonable notes and records. I observe, also, that the evidence of Howard and Quinert did not contribute to any satisfactory way as to the involvement or even mention of Disctronics to Edmonds or Cahill before 14 July 1999. There is a fourth basis, the conduct in Donovan himself in this proceeding. He, somewhat carelessly given his membership of the legal profession, claimed the concept of the golf course investment was devised by he and Bucknall. In fact, he was forced to concede in cross-examination that the concept was derived from the CROI report. Donovan did not provide a plausible explanation for his falsehood. Unfortunately, it tainted his evidence as to his discussions with Edmonds prior to the formation of the joint venture particularly before 14 July 1999. 57 As to the second aspect, Warren J said ([2002] VSC 454 at [179]-[180]): 179. The plaintiffs claimed that the retainer of Edmonds and Cahill was for and by Disctronics and that the joint venture was for the benefit of Disctronics. It may have been and in all likelihood always was, intended by Donovan to be so. However, there are a number of difficulties as to the status and entitlement of Disctronics to make an election as asserted by the defendants. To some extent these matters have been addressed already. Nevertheless, I restate the position. 180. First, I do not accept that the identity of Disctronics was known by Edmonds and Cahill until about 6 July 1999 for the reasons stated. An agent cannot be retained to act for an unidentified principal. No retainer existed between Edmonds or Cahill on the one hand and Disctronics on the other. Secondly, there was no evidence of any board of directors' resolution, minute or other record of a resolution for Disctronics to proceed with the joint venture as alleged by the plaintiffs. Thirdly, the evidence as to the role and status of Disctronics in the transaction was inconclusive. Its role was very much in the mind of Donovan who treated the transaction throughout as his. I do not consider the evidence was sufficient to make out a claim by Disctronics that it could take the transaction as its own if it wished. It follows that the claim of Disctronics against the defendants fails. In the result, Warren J held that Disctronics had no caveatable interest in the golf course land, and that "appropriate orders" would be made in the caveat proceeding for the removal of the caveat. Her Honour made no comment about the orders of 20 March 2002 under which, it seems, the caveat ought already to have been removed. 58 In summary, Warren J expressed the following conclusions: 1. A joint venture was formed initially between Donovan, Howard, Quinert and Solette by about early June 1999 and possibly as early as April 1999. 2. The joint venture as originally formed was varied to remove Solette and to consist therefrom of Donovan, Howard, Quinert, Bucknall, Edmonds and Cahill from 20 July 2002. 3. The joint venture was dissolved on 10 August 1999 as a result of actions by Edmonds and Cahill. 4. The two groups, the plaintiffs and the K.L.C.C. defendants, owed each other continuing obligations. The plaintiffs met their obligations by informing Edmonds of their plain intention of proceeding as set out in the separate letters sent by Quinert and Howard to Edmonds on 12 August 1999. The defendants breached their obligations by not making any disclosure of their intentions to the plaintiffs and by using confidential information obtained during the life of the joint venture. 5. No question or issue of repudiation arises because the duties mutually owed to the joint venture were ongoing. 6. The K.L.C.C. defendants breached the fiduciary duty they owed to the other members of the joint venture to act honestly and in good faith by secretly and furtively approaching Wood, Rose and Buxton; by making an offer to Wood that they knew would exceed the offer of the plaintiffs; by not telling the plaintiffs of their intentions especially when the opportunity presented itself. 7. Edmonds and Cahill were retained initially as agents by Donovan, Howard, Quinert and Solette. 8. The joint venture effected on 20 July 1999 did not affect the enduring duties of honest and good faith that lay with Edmonds and Cahill as a result of the retainer but the duties were subsumed into the new relationship of the joint venture. It was these conclusions which provided the basis for her Honour's award of equitable damages in favour of Donovan, Quinert, Bucknall and the applicant. How those damages were calculated is of some importance in the present context, and I shall return to it. 59 The effect of the determinations made by Warren J is that there was no agreement, as between the six individual joint venturers, that Disctronics would be accepted as the purchaser to whom the golf course was on-sold if it elected to be that party. Thus, as against Edmonds and Cahill, Donovan and the others could not insist that the course be on-sold to Disctronics rather than to some third party who might have been prepared to pay more (as, presumably, Edmonds had in mind). If the Donovan group did not have a contractual entitlement to insert Disctronics as they intended, what colour did Warren J place upon Quinert's memorandum of 4 August 1999, and upon the actions of him and his colleagues thereafter until about 9 August? The answer was as follows: ([2002] VSC 454 at [165]-[166]): The prevailing tenor of the relationship between Edmonds and Cahill on the one side and Donovan and the others on the other side up until the resolution of 20 July 1999 was one of constant change and movement. Even when the joint venture was cemented on 20 July 1999, pursuit of change and movement remained the approach of Edmonds. It is clear that by 4 August 1999 Donovan, Howard and Quinert had enough of Edmonds' commercial aggression and decided to adopt that approach themselves towards Edmonds and Cahill. This different attitude was aggravated by their desire to include Disctronics. However, in the context of a fluid and aggressive commercial relationship the desire to include Disctronics was not the cause of the falling out between the parties. The memorandum of offer of Quinert of 4 August 1999 was an attempt to re-negotiate with Edmonds and Cahill, no more. It did not amount to a repudiation of the joint venture. …. From about 14 July 1999 onwards Edmonds and Cahill were aware of the desire of Donovan for Disctronics to be the equity provider in the transaction. That desire was maintained and openly known when the original joint venture was varied to include Edmonds and Cahill on 20 July and subsequently confirmed on 26 July 1999. The events thereafter until 10 August 1999 constituted no more than negotiations between the parties to change, even improve, their position. It started with the proposal of Edmonds on 3 August 1999 that the six joint venturers provide the equity themselves. That was rejected. It led to the proposal on 4 and 5 August 1999 of Howard and Quinert that Edmonds and Cahill be paid a fee, $150,000 each, and thereby be bought out. Edmonds and Cahill rejected that course. However, up until 10 August 1999 Edmonds and Cahill were members of a joint venture together with Donovan, Howard, Quinert and Bucknall. Mutual duties were owed by Edmonds and Cahill to Donovan and the others and vice versa. Donovan and the others could not exclude Edmonds and Cahill without the agreement of the latter two co-venturers. Nonetheless, Donovan and the others were entitled to attempt to re-negotiate their commercial relationship. There was nothing improper in that. Repudiation is constituted by conduct that is hostile to an existing contractual relationship. The conduct of Donovan and the others was not hostile. It was at most robust, commercially aggressive behaviour between experienced, tough business people. It seems that this approach may have been the subject of criticism by Edmonds and Cahill in their subsequent appeal to the Court of Appeal. But before reaching that point, I should deal with the nature of the remedies which Warren J granted in favour of Donovan, Quinert, Bucknall and the applicant. 60 Those plaintiffs had contended that the golf course was held on constructive trust for them (in addition to their primary - unsuccessful - case that Disctronics was the constructive beneficiary). Warren J rejected that part of their case. Rather, her Honour awarded equitable damages by reference to the following reasoning ([2002] VSC 454 at [216]): I am satisfied that it will be necessary for an assessment to be made for an amount of equitable compensation to be paid to the plaintiffs, except Disctronics, by Edmonds, Cahill and K.L.C.C. after the deduction of outstanding debts, including any adjustments to allow for ANZ, in an amount equivalent to four-sixths of the value of the golf course and, after the ascertainment of profits, an amount equivalent to four-sixths of the profit derived from the golf course. This component of the compensation is not the taking of an account in the strict sense, rather, an assessment of the opportunity that the plaintiffs lost. These amounts ought be calculated from the date of formal acceptance of the offer by the Kingston Group on 9 September 1999 to the date of final orders. They ought place the plaintiffs, excluding Disctronics, in the position they would have been save for the breaches of fiduciary duty by Edmonds and Cahill. 61 On 3 December 2002, Warren J made final orders in the proceeding before her. In reasons published on that day, her Honour identified the basis upon which the award of equitable damages would be calculated. Her Honour said ([2002] VSC 534 at [5]): It is to be recalled at the outset that the task of the court at this stage is the assessment of equitable compensation. It is not the task of assessing damages or the taking of an account. The imperative of the assessment of equitable compensation here is to place the plaintiffs Donovan, Howard, Quinert and Bucknall in the position they would have been save for the breach of fiduciary duty by Edmonds and Cahill and as perpetrated through the vehicle of Kingston Links Country Club Pty Ltd. Warren J noted that the parties had reached agreement on the "parameters of the issues between them" in the assessment of damages, such agreement providing for the assessment to be based on the calculation of profits arising from the acquisition, management and eventual sale of the golf course. They agreed that the operating profit and the capital profit of the golf course should be calculated as a single item. The parties were also agreed as to a basic figure for damages, and the matters upon which the adjudication of Warren J was required related only to various adjustments, which are not presently relevant. The profit arising from the "eventual sale" of the golf course arose for consideration because, by the time of Warren J's award of damages, KLCC had sold the golf course to a third party, by way of a transaction which is otherwise presently irrelevant. What is both relevant and important is the circumstance that Warren J's award uncontroversially took into account the profit which KLCC had derived from the operation of the golf course over the period during which it was the owner thereof. 62 Warren J's reasons of 3 December 2002 dealt also with the caveat proceeding, in which KLCC had claimed compensation under s 118 of the Transfer of Land Act 1958 (Vic) because, it alleged, Disctronics had lodged the caveat "without reasonable cause". That aspect of the caveat proceeding was not the subject of her Honour's reasons on 23 October 2002, but was dealt with on 3 December 2002. Her honour upheld that claim, and granted compensation to KLCC in the amount $100,000. 63 I note that neither the orders made by Warren J on 3 December 2002, nor her Honour's orders of that date in the caveat proceeding, were placed into evidence in the present proceeding. 64 Edmonds and Cahill appealed against the orders for equitable compensation made against them by Warren J, and Disctronics appealed against her Honour's orders for s 118 compensation made against it in the caveat proceeding. 65 While those appeals were pending, on 22 December 2003, the applicant wrote a letter to Bucknall, on Disctronics letterhead, in the following terms: This letter is compiled for the purpose of being furnished to the auditor of Disctronics Limited (Mr Michael Phillips of PKF, Chartered Accountants, Level 11, 485 Latrobe Street, Melbourne VIC 3000) in relation to the conclusion of the financial audit of Disctronics Limited for year ended 30 June 2003. We confirm: 1. Between 5 August 1999 and 26 June 2002 Disctronics Limited advanced to you (or at your direction to the Frontier Leisure Group) a gross amount of $204,262.28 against a success fee for services rendered in relation to, inter alia, the development and implementation of a concept for the acquisition, financing and leasing of existing or turn-key pay-as-you-play golf course and allied leisure projects; 2. On 6 December 2002 at the Supreme Court of Victoria at Melbourne Her Honour Justice Warren ordered that Messrs Cahill, Edmonds and others pay to Messrs Bucknall, Donovan, Howard and Quinert an amount of $3,327,174.67, (together with interest of $75,015.62) for breach of joint venture obligations or as a consequence of the Defendants' breach of fiduciary duties; 3. Further, Her Honour ordered that Disctronics: i. claim as Plaintiff for compensation from Messrs Edmonds, Cahill and others be dismissed; ii. caveat lodged upon land owned by Kingston Links Country Club Pty Ltd be removed; iii. pay compensation to Kingston Links Country Club Pty Ltd in the sum of $107,000 (including interest); iv. pay the costs of Kingston Links Country Club Pty Ltd in relation to the caveat to be taxed on a party/party basis (the quantum of which costs have not yet been determined); v. pay costs of $130,000 to one of the Defendants namely Mr Michael Buxton; and vi. pay the additional costs of certain of the other Defendants incurred by reason of the joinder of Disctronics claims in the substantive proceedings. Again the quantum of these costs has not yet been determined; 4. Disctronics has appealed against the finding of a trial judge that its caveat was lodged without reasonable cause and further it asserts that Kingston Links Country Club Pty Ltd did not suffer any damage by reason of a lodgement of that caveat and hence is not entitled to compensation; 5. Messrs Bucknall, Donovan, Howard and Quinert have appealed against Her Honour's finding that Messrs Edmonds and Cahill were each entitled to one-sixth profit arising on the sale by Kingston Links Country Club Pty Ltd of property owned by it and assert in their appeal that the breaches of duty made by Messrs Edmonds and Cahill (and their associated entities) to either Disctronics Limited or he individual joint venturers are so manifest that their claims to one-sixth profit shares ought to be forfeited; 6. Messrs Edmonds and Cahill have filed cross-appeals seeking to overturn the trial judge's findings; 7. Disctronics has paid all of the legal costs associated with the substantive proceedings, the caveat proceedings and the appeal to date; and 8. Disctronics has agreed to pay all of [the] legal costs associated with the prosecution of the appeal and further agree to indemnify all of Messrs Bucknall, Donovan, Howard and Quinert in relation to any liability for cost orders should the appeal by Messrs Edmonds and Cahill succeed (and the finding of the trial judge be reversed) in exchange for an agreement that the ultimate net proceeds of the litigation be applied as follows: a. payment of any compensation, interest or legal costs to Messrs Edmonds, Cahill, Buxton or litigation-related corporations thereof; b. in reimbursement of legal expenses paid or properly payable by Disctronics Limited to their solicitors (Mallesons and Oakley Thompson & Co) or counsel (various) in relation to the prosecution of the substantive proceedings, the caveat proceedings or the appeal(s) (the likely aggregate which is estimated to be in the vicinity of not less than $1.3m); c. the sum then remaining be distributed into one-fifth shares as follows: i. to you one-fifth from which the sum of $204,262 shall be repaid by you to Disctronics Limited in reimbursement of the advance against success fee paid to date to you (or to Frontier Leisure Group); ii. to Disctronics Limited (in consideration of matters aforesaid - costs and indemnities) one-fifth iii. to Messrs Donovan, Howard and Quinert (collectively hereafter referred to as the "Directors") three-fifths which aggregate net amount or benefit has been assigned by the Directors to Disctronics Limited (subject always to a satisfactory resolution of taxation issues relating to that assignment). If this letter accurately sets out your recollection and understanding of the agreement, I would be grateful if you could sign the duplicate of this letter where indicated and return promptly to me. Given the myriad possibilities of outcome, and the cost events that would follow, it is neither practical nor possible to determine what net sum you would receive as the balance of your success fee or profit entitlement if judgment at first instance were to be upheld by the Court of Appeal. Those possibilities range across the A-Z of speculation. Should you have any queries in relation to any part of this letter please do not hesitate to contact me at your earliest convenience. On the same day, Bucknall endorsed the duplicate of the letter "received and acknowledged", and signed it. 66 The appeals from the judgment of Warren J were heard in the Court of Appeal on 8, 9 and 10 November 2004. Judgment was pronounced on 22 February 2005. The main judgment was that of Phillips JA, with which Winneke P and Charles JA agreed. 67 The nature of the complaint expressed on behalf of Edmonds and Cahill in the Court of Appeal was expressed by Phillips JA as follows (12 VR at 526 [29]): 29. For the appellants, Mr. Sher submitted that the Quinert memorandum of 4 August plainly amounted to repudiation in that it claimed, falsely he said, that Disctronics had the right to take over the project as its own. No such "right" existed, he contended. Moreover, as the memorandum demonstrated, upon the exercise of that so-called right the agreement for profit-sharing with Edmonds and Cahill was simply put aside. No more were they to receive a share of the profits: they were relegated simply to the receipt of fees for services rendered. What Quinert proposed by the letter of 4 August was (Mr. Sher submitted) no more and no less than an exit fee, the amount of which had yet to be agreed but none the less a fee as distinct from a share of profit. Phillips JA rejected that argument. His Honour said (at 526-527 [30]-[31]): 30. In my opinion the argument fails at both points. First, the introduction of Disctronics into the venture was not the departure that Mr. Sher was at pains to establish. As will be seen, Disctronics had always been in the wings. Disctronics was the vehicle of Donovan and, at least as between the respondents, it was always Donovan's call whether and when Disctronics would come into the venture. The claim that it had the "right to take over the venture" was perhaps misleading, but in a sense it was true. As Mr. Scerri pointed out, the joint venture into which Edmonds and Cahill were taken on 20 July always called for an equity provider and Disctronics now emerged as such. What was always proposed was that the six members of the consortium (once Edmonds and Cahill were admitted) would arrange for the purchase of a suitable golf course, arrange for a long term tenant to be installed and then on-sell the whole to some third party, thereby reaping what was called "the day 1 profit" (although in truth it was the only profit to be reaped by the consortium as such). That profit would be the difference between the price at which the vendor of the golf course could be persuaded to sell and the price which the third party would be willing to pay. It was as if the members of the consortium themselves purchased the golf course, installed the tenant, and then on-sold to the third party. Whether that third party itself kept the golf course and ran it with the tenant installed by the consortium was a matter for the third party: it would be of no direct concern to the consortium. In the various scenarios which were considered, and most of them were prepared by Edmonds, the third party was called "the equity provider" or "the investor" 31. As Mr. Scerri submitted, when the joint venture is properly understood the introduction of Disctronics on the scene was no departure at all. Disctronics was now to be the "equity provider" or "the investor" - the third party which had always been envisaged. In one sense it was true that Disctronics was to "take over the venture", but only in as much as the transfer of the golf course to Disctronics, as to any other third party, would mark the end of the joint venture as such. Importantly, the possibility that Disctronics would in the end be the purchaser had always been in contemplation, at least as one possibility. From the outset, Edmonds had been concerned to prepare what he called scenarios as a means of enabling the consortium to estimate how much an equity provider might be expected to pay for the golf course once the tenant was installed and thus to estimate in turn how much profit might be involved in the venture for the members of the consortium. Such figuring by Edmonds depended in part upon the value which he attributed to the golf course, which he did by capitalising the rental which the long term tenant might be expected to pay, and, as well, upon the debt-to-equity ratio adopted by the equity provider itself. Initially all such figures were speculative, but more certainty was introduced as negotiations progressed and the parties were able to establish the likely price of purchasing the golf course and the likely annual yield from the long term tenant. What is important for present purposes is that in the early scenarios prepared by Edmonds, he made allowance expressly for the possibility that Disctronics would be the equity provider. …. 37. … As Mr Scerri analysed it, and as I have described it above, the consortium which was set up on 20 July did in a sense "cease to exist" once the equity provider was identified as Disctronics and agreed to acquire the golf course. The consortium was in existence only to bring into relationship the vendor of the golf course and its ultimate purchaser, the consortium existing to act as the go-between and deriving a "day-1 profit" on the day a deal was achieved. In that sense the consortium "ceased to exist" on 4 August with the arrival of Disctronics on the scene as purchaser of the golf course. All else was detail; all else was to be worked out. In my view, in these passages Phillips JA took the matter of Disctronics' entitlement a stage beyond that which had been reached by Warren J. His Honour said, in effect, not only that it was not a repudiation of the joint venture when Donovan and his colleagues proposed Disctronics as the purchaser of the golf course, but also that that proposal was in conformity with the agreement of 20 July 2002, and that Edmonds and Cahill were contractually obliged to go along with it. 68 In the appeal from Warren J's judgment in the caveat proceeding, Phillips JA noted (12 VR at 549 [93]) that it had been shown to be untenable to contend that KLCC held the golf course property on a constructive trust for Disctronics. However, that was apparent "only after a fifteen-day trial and more than 100 pages by way of reasons for judgment". His Honour held (at 549 [94]) that Donovan, Quinert and the applicant - … were entitled to take the position that, had the joint venture gone ahead, it would have gone ahead with Disctronics as the equity provider and Disctronics would have been the company that took the golf course from the vendor and held it with the long term tenant installed. His Honour also held (at 549-550 [95]): … Disctronics was not a member of the consortium established on 20 July and therefore it was not the beneficiary of those fiduciary duties of which Edmonds and Cahill stood in breach. Those fiduciary duties were owed only as between members of the consortium, and that meant in the circumstances only owed to the respondents. Disctronics therefore was not a proper plaintiff for equitable relief against the appellants: it was still only on the side lines. Moreover, Disctronics had no interest of its own in the property being the golf course because, unless and until the vendor agreed to sell the property to Disctronics (the equity provider), the latter's interest in the property was no more than an expectation: a pretty sound expectation given the attitude of the respondents, but still only an expectation. And so it was on the date when the caveat was lodged. Disctronics had no interest of its own, even in equity, in the property itself and it had no claim as a plaintiff to compensation for breach of fiduciary duties. Hence the decision of the judge that it had no claim to relief and, importantly for present purposes, no caveatable interest. Nonetheless, Phillips JA upheld Disctronics' case that the caveat had not been lodged without reasonable cause. His Honour said (at 550 [96]): Disctronics could not act otherwise than by its directors. Its directors were Donovan, Howard and Quinert. The history of the proceeding makes it plain that those directors had reasonable grounds for supposing that they were entitled to equitable relief against Edmonds and Cahill and, perhaps, equitable relief by way of constructive trust, depending upon the evidence that was ultimately given and the discretion of the trial judge. Such might have led in the end to a constructive trust being recognised and, perhaps, even a constructive trust in favour of their nominee. Certainly had Disctronics not been named as caveator, it is difficult to suppose that a caveat would not have been lodged by the respondents themselves: one way or the other they were claiming that they, with Disctronics, were beneficially entitled to the golf course which was being run so successfully by Edmonds and Cahill through the new consortium. With great respect, it seems to me somewhat artificial to conclude that the caveat lodged in the name of Disctronics was lodged without reasonable cause when those who lodged it were the directors of Disctronics, the company which would have taken title to the golf course had the joint venture proceeded as planned and without the breaches of fiduciary duty for which the respondents were held entitled to compensation. In short, I think that in December 2000 the matter was sufficiently complex to warrant the caveat for the protection of the respondents' interests and I cannot think it determinative that the caveat named the company as caveator, even if, in the final analysis and in hindsight, the company was held to have no caveatable interest of its own. 69 In the result in the Court of Appeal, the appeal of Edmonds and Cahill was unsuccessful, and the appeal of Disctronics was successful. I do not overlook, of course, the circumstance that Disctronics had itself been unsuccessful before Warren J in the main proceeding, and from that outcome it did not appeal. The significance of that was pressed upon me by counsel for the Commissioner, and I shall return to it. 70 On 7 January 2004, the applicant, in his capacity as chairman of the Board of Disctronics, signed the Directors' Report which was part of the Annual Report of Disctronics for the year ended 30 June 2003. Under the heading "Litigation Report", the following appeared: On 23 October 2002 the trial judge at the Supreme Court of Victoria: (i) dismissed the Company's claim as plaintiff and awarded compensation to three of the directors of the Company namely Messrs Donovan, Howard and Quinert; (ii) ordered the Company's caveat lodged upon land owned by Kingston Links Country Club Pty Ltd be removed. At the Supreme Court on 6 December [2002] the Company was variously ordered to pay: (i) compensation in the amount of AUD107,000 (including interest) to the registered proprietor of the land, upon which the Company lodged a caveat, and the registered proprietor's costs of the caveat proceedings to be taxed on a party-party basis. The quantum of these costs has not yet been determined; (ii) all costs, on a party-party basis, of one group of the defendants to the substantive proceedings. This liability has been settled in the amount of AUD130,000; (iii) the additional costs of certain of the other defendants incurred by reason of the joinder of the Company's claims in the substantive proceeding on a party-party basis. The quantum of these costs has not yet been determined. The Company has appealed against the finding of the trial judge that the caveat was lodged without reasonable cause and further asserts in the appeal proceeding that the registered proprietor of the land did not suffer any damage by reason of the lodgement of the caveat and is not entitled to compensation. Advice has been received from its solicitors that the Company has reasonable prospects of successfully appealing the order for compensation. A hearing date for the appeal has not yet been set. The company has been advised by its solicitors that it is unlikely that the appeal will be determined in the 2004 financial year. Subject always to judgment of the trial judge being upheld in the appeal hearing, the three directors of the Company awarded compensation by the Supreme Court have agreed, subject to satisfactory resolution of appurtenant taxation issues, to assign unto the Company such net compensation or benefit so received and to apply the receipt of net compensation or benefit in the manner following: (i) First, in recoupment of all net legal expenses paid to the Company's solicitors (including counsel) and in recoupment of fees paid, or advances made, to the Company's external Consultants incurred in relation to the sports and leisure business project or the litigation arising therefrom; and (ii) Secondly, for the Company's own use and benefit. 71 Turning now to the present proceeding, the applicant's case is broadly as follows. When the directors of Disctronics met in London over the period 12-14 July 1999, it was apparent to them that the combination of purchase price and anticipated rental income in respect of the Kingston Links golf course might well be such as to provide a valuable investment opportunity that was within the capacity of Disctronics. They informally resolved, therefore, that the investment would be made available to Disctronics if the amount of equity required to be injected at the outset was within the capacity of the company to raise. Having done so, it was not open to the directors thereafter to prefer their own benefit to the interests of Disctronics and to revert, in effect, to the original idea of securing a "day-one profit" from an on-sale to a third party investor. At the very latest by 4 August 1999, when Quinert, on behalf of himself and the other directors, informed Edmonds that Disctronics proposed to take up what was asserted to be the opportunity of making the investment, the directors had tied themselves into a position in which they were acting as such, rather than as individual investors. And once they were acting as such, they were, by nature of the fiduciary duties, precluded from deriving any individual profit from the purchase of the golf course. When the applicant received his share of the award of equitable damages, he was, therefore, precluded from asserting a beneficial entitlement thereto. He held that share on trust for Disctronics. Assuming the award to have the character of income, the applicant was not liable to pay income tax thereon: 1936 Act, s 96. 72 Counsel for the Commissioner made a number of what might be described as collateral attacks on the applicant's case that he received the award of equitable damages as fiduciary, and I shall come to them presently. First, however, I propose to consider whether that case is coherent in its own right. 73 That a director must account to his or her company for any benefit received by him or her in his or her capacity as such is an uncontroversial proposition which the Commissioner did not dispute. But the present was not a conventional case of a director taking personal advantage of a business opportunity which rightfully belonged to the company. The circumstances which made it unconventional, and which made the applicant's case more problematic, were, first, that the opportunity to make the Kingston Links investment was not originally Disctronics', secondly, that the proposed investment was not in Disctronics' normal line of business, thirdly, that the proposed investment was never adopted, or even mentioned, at a Disctronics Board meeting, and fourthly, that - at least according to the Commissioner's case - Disctronics did not have the right, as against all members of the joint venture, to acquire the golf course in its own name. I shall consider each of these circumstances in turn. 74 The first and second of them are related. If a company director comes upon a promising investment opportunity in the normal line of the company's business - eg if Donovan, as director of Disctronics, had come upon an opportunity to make an investment in some new optical disc venture - he or she would be regarded as holding the opportunity, and any resulting gain, as fiduciary for the company: Regal (Hastings) Ltd v Gulliver [1967] 2 AC 134; Canadian Aero Service v O'Malley [1974] SCR 592; Warman International Ltd & Anor v Dwyer & Ors (1995) 182 CLR 544. However, the mere fact that a person is a director of a company - perhaps of a number of companies - does not give a fiduciary character to every investment which he or she makes, or to every profit-making opportunity of which he or she takes advantage. In its origins, the concept of investing in a golf course, engaging a stable, long-term, tenant, and then on-selling the course for a day-one profit was Donovan's, or perhaps Solette's. It was not Disctronics'. Neither was it in Disctronics' normal line of business. At the outset at least, Donovan was not under any obligation to involve Disctronics in that concept, or to offer the investment opportunity to Disctronics. 75 Had Donovan implemented his concept, as originally devised with the assistance of Bucknall, then, Disctronics could have claimed no interest in the resulting investment. When, as Warren J found, Quinert and the applicant (and possibly also Solette) were included in what her Honour found to be a joint venture in May or June 1999, the position was no different. The investment then envisaged had nothing to do with Disctronics. 76 On the applicant's case, the position was different from at least when the directors of Disctronics met in London over the period 12-14 July 1999. Had they procured the Board to resolve to make the investment contemplated, then, at least as between the three individuals involved and Disctronics, the proposed investment would have belonged in equity to the latter. Their failure to have done so brings into consideration the third circumstance referred to above. The applicant contends that the directors did enough then, and later, to preclude themselves from later asserting, as against Disctronics, that the investment opportunity belonged to them rather than to it. Although not made by the Board as such, the decision provisionally (ie subject to the equity requirement falling within a certain limit) to involve Disctronics in the proposed investment was made by all directors in a context in which they had come together for the purposes of a Board meeting. The decision was made by them in their capacities as Board members. The decision was communicated contemporaneously to Edmonds (and, inferentially, by him to Cahill). That Disctronics would be the purchaser if the equity requirement was within the specified limit was known to all six venturers when the joint venture was formed on 20 July 1999. Once it became known that the equity requirement was within that limit, Quinert, on behalf of himself, Donovan and the applicant, notified Edmonds on 4 August 1999 that Disctronics would take up the opportunity to be the purchaser. According to the applicant, by that stage at least, it was no longer open to him to assert, as against Disctronics, the right to insert some other purchaser into the proposed transaction with Kingston Links for the purpose of securing, for himself, the originally-intended day-one profit. 77 To the extent that it is significant, I would find that there is no doubt about the reality of the intention of Donovan, Quinert and the applicant to make the opportunity to purchase the golf course available to Disctronics. They made their decision so to proceed in what were plainly the interests of Disctronics rather than of themselves, they identified the source of funds which would be used, they informed their co-venturers of the condition under which the opportunity would be taken up by Disctronics, and they caused Disctronics to be issued a share in the company which was to be the nominee under the contract of sale, Corwen Grange. Indeed, it was the reality of their insistence upon Disctronics being the purchaser, and the refusal of Edmonds and Cahill to accept that, that ultimately led to the disintegration of the joint venture of 20 July 1999. 78 I am disposed to think that, if Disctronics' right to stand as the purchaser under any contract which the joint venture negotiated with Wood was, as between the joint venturers, uncontroversial, the applicant would be very close to making good his case. However, that right was, in the Supreme Court proceeding, highly controversial. This is, of course, the fourth problematic circumstance to which I referred above. Edmonds and Cahill rejected the entitlement of the Disctronics directors to introduce their company as the purchaser, and, according to the Commissioner's present case, Warren J rejected Disctronics' claim of an entitlement to stand as the purchaser. Disctronics did not appeal. The Commissioner submits that it follows that, as at the time when Edmonds and Cahill acted in breach of their fiduciary duties, it was not Disctronics that was the purchaser-in-waiting. Disctronics was not, therefore, in any position to claim, as against its directors, that it would have been the beneficiary of the outcome of whatever transaction was ultimately carried through with Wood. 79 There are, in my view, two broad considerations which the Commissioner's submissions in this regard encounters, and with which it did not come fully to grips. The first is to be found in the reasoning of Phillips JA in the Court of Appeal. A difficulty in the reasoning of Warren J, with respect, was that it left unanswered the question of what would have happened if Edmonds and Cahill had not acted as they did. I do not for a moment suggest that that question had to be answered on that occasion, but it does now. Warren J's reasoning would seem to imply that, had Edmonds and Cahill not walked away from the venture, the six venturers might have continued to negotiate aggressively (to use her Honour's term) on the subject of the identity of the equity provider. While her Honour appeared to accept that the Donovan group had every right to insist that it be Disctronics, clearly her reasons provide no support for the proposition that Edmonds and Cahill were contractually bound to accept that outcome. 80 It is not difficult to see why Edmonds and Cahill would, in such a situation, argue before the Court of Appeal that, unless they were contractually bound to accept Disctronics as the equity provider, they were entitled to have all members of the joint venture work towards finding a third-party investor whose offer for the course would yield the maximum day-one profit. For the Donovan group to have refused to tread that path, and to have insisted that the purchaser be Disctronics, would surely - according to Edmonds and Cahill - have been inconsistent with the joint venture agreement, and with the obligations of the venturers to each other. This was, however, the case that Phillips JA rejected. And his Honour did so not merely on the basis that, without any binding agreement on the identity of the equity provider, the parties would persevere with their joint venture to reap the day-one profit. Rather, his Honour did so on the basis that it had at least been the understanding of all the venturers on 20 July 1999 that, if the equity required were within a certain limit which was then known, Disctronics would provide that equity and purchase the course. Although subtle to a degree, the difference in reasoning between that of Phillips JA and that originally expressed by Warren J is, in my opinion, marked and, in the present context, important. Both lines of reasoning led to the same result in the Supreme Court, such that the discriminations which would have required the difference which I have mentioned to be revealed and confronted did not need to be made. In this state of things, counsel for the Commissioner submitted that, so far as the rights of Disctronics were concerned, the legally relevant determination was that of Warren J. Her Honour rejected Disctronics' claim to an entitlement to be the equity provider, and Disctronics did not appeal. Whatever might be implicit in the reasoning of Phillips JA, Disctronics could not now assert an interest of a kind that was rejected by Warren J. 81 The difficulty with this submission, in my view, is that it addresses the problem along the Disctronics - Edmonds/Cahill axis. As between the applicant and Edmonds and Cahill, the latter appealed from the orders made by Warren J, and put in issue the applicant's (and his colleagues') right to introduce Disctronics as the equity provider. In the Court of Appeal, the applicant's right to introduce Disctronics was accepted. As I read the reasons of Phillips JA, it was largely in consequence of his Honour accepting that right that the claim of Edmonds and Cahill - that Quinert's memorandum of 4 August 1999 was repudiatory - was rejected. Having run the case before Warren J, and subsequently the appeal, on the proposition not only that he was entitled to introduce Disctronics as the equity provider but also that, had Edmonds and Cahill continued to observe their fiduciary obligations, he would have introduced Disctronics, and considering his position as director, it would not have been open to the applicant later to assert, as against Disctronics, a personal right to retain the award of equitable damages by reference a different, contradictory, proposition. 82 Nothing I have written above should be taken as implying any doubt on my part as to the correctness of the conclusion by Warren J that Disctronics had no cause of action against Edmonds and Cahill. I am not here concerned with Disctronics' rights as against those parties. I am, of course, concerned with the obligations of the applicant towards Disctronics with respect to the award of equitable damages which was made in his name. I do not regard the findings which ultimately emerged from the Supreme Court proceeding as compromising the conclusion otherwise proper to be reached on the facts of the case. Indeed, if anything, I consider that the reasoning of Phillips JA rather supports it. 83 The second consideration is to be found in the basis upon which Warren J's award of equitable damages was calculated. The award included both the profit which KLCC had made on the operation of Kingston Links golf course during the period of about 30 months that it owned it and the profit which it made by the resale on 17 June 2002. Neither of these elements had anything in common with the gain that the six individual venturers would have made in August 1999 or thereabouts if Disctronics had not been the equity provider. That gain was to have been the so-called "day-one profit". If there is one thing that is absolutely plain in a picture which is murky in some regions, it is that neither the applicant nor any of the other individual plaintiffs in the Supreme Court had any intention of acquiring the golf course in his own name and thereafter holding it as a personal investment over the medium or long term. Indeed, the idea that they should do so, proffered by Edmonds as a possible scenario on 3 August 1999, was immediately, and rather categorically, rejected. 84 In the present case, counsel for the Commissioner submitted that the award of equitable damages should be viewed as compensation for the four individual plaintiffs for their loss of the anticipated day-one profit. It will be clear form what I have written above that I cannot accept that interpretation of the award. It was based on gains made by KLCC through the holding, and the eventual resale, of the property. Warren J made it clear that her award should be calculated in a way that placed the individual plaintiffs in the positions they would have occupied but for the breaches of fiduciary duty on the part of Edmonds and Cahill. But Donovan, Quinert and the applicant would never have beneficially derived the gains which formed the basis of her Honour's award. Those gains were calculated from the standpoint of an entity which retained the course in its ownership as an ongoing investment. Absent a suggestion that some other company might have been that presumptive investor - and, if there were any such suggestion, these gains could not have been the individual plaintiffs' in any event - it could only have been Disctronics whose denied gains formed the basis of the award of damages. 85 The position thus arrived at is, in my view, as follows. Albeit not by Board resolution, the directors of a company made a firm decision that they would cause the company to take up an attractive investment that was then available. By no fault of theirs, or of the company's, the opportunity to make that investment was denied them. Because of the contractual arrangements which governed the availability of the investment opportunity, the company could not sue. But the directors could. They did sue, and secured damages which represented not what they, as individuals beneficially entitled, had actually lost, but what would have been the gain of the company had the breaches of duty which denied it the investment opportunity not occurred. In these circumstances, are the directors entitled to assert, as against the company, that the damages are theirs to keep, as individuals? In my opinion, the nature of the problem needs only to be exposed as I have here for a negative answer to that question to be both necessary and obvious. In the circumstances postulated, and subject to the matters to which I turn below, the applicant's share of the damages awarded by Warren J belonged in equity to Disctronics. 86 I have not mentioned what might be thought to be a complication introduced by the position of Bucknall. He was not a director of Disctronics, but he was a joint venturer. He received his share of the damages awarded by Warren J, calculated in the way I have described above. I am prepared to assume, for present purposes, that he came under no obligation to account to Disctronics for that share. It may be true that, had the purchase of the golf course gone ahead as intended by Donovan and the other directors with Disctronics as the equity provider, Bucknall would have achieved somewhat less as day-one profit than was his share of the award. Notwithstanding that the Donovan group apparently proposed that Bucknall would receive something for his services in addition to the day-one profit, I am disposed to think that the outcome of the Supreme Court case was something of a windfall for him. But this view of things - which is tentative and taken for present purposes only, since Bucknall was not a party to this proceeding - does not in any sense compromise the conclusion which I have reached above as to the duties which the applicant, as director, owed to Disctronics when he received his share of the award. 87 I turn next to the collateral attacks made by the Commissioner on the applicant's case which I mentioned on para 72 above. The Commissioner first submitted that the applicant was estopped, "by conduct and election" from denying that he received the award of equitable damages as a fiduciary. Reliance was placed on the words of Mason J in Sargent v ASL Developments Ltd (1974) 131 CLR 634, 655: A person is said to have a right of election when events occur which enable him to exercise alternative and inconsistent rights, i.e. when he has the right to determine an estate or terminate a contract for breach of covenant or contract and the alternative right to insist on the continuation of the estate or the performance of the contract. It matters not whether the right to terminate the contract is conferred by the contract or arises at common law for fundamental breach - in each instance the alternative right to insist on performance creates a right of election. From this general position, the Commissioner moved to the more specific prohibition on approbating and reprobating. His counsel drew my attention to what was said by Brennan J in The Commonwealth v Verwayen (1990) 170 CLR 394, 421 (which was said to be of good general authority, notwithstanding that his Honour was in dissent): A doctrine closely related to election, and sometimes treated as a species of election, is the doctrine of approbation and reprobation. This doctrine precludes a person who has exercised a right from exercising another right which is alternative to and inconsistent with the right he exercised as, e.g., where a person "having accepted a benefit given him by a judgment, cannot allege the invalidity of the judgment which conferred the benefit": Evans v. Bartlam, per Lord Russell of Killowen. An election is binding on the party who makes it once it is made overtly - or, at all events, not later than on the communication of the election to the party or parties affected thereby: Newbon v. City Mutual Life Assurance Society Ltd.; Scarf v. Jardine. It is binding whether or not others who are affected by the election have acted in reliance on it. In this respect, election is to be distinguished from estoppel: Khoury v. Government Insurance Office (N.S.W.). The subject dealt with by Lord Russell in Evans v Bartlam [1937] AC 473 in the passage to which Brennan J referred was said to be an instance where the approbation in question was constituted by acceptance of the benefit of a judgment. 88 The Commissioner next relied on Kok Hoong v Leong Cheong Kweng Mines Ltd [1964] AC 993, in which the Privy Council had cause to consider the principle that there can be no estoppel in the face of a legislative provision. For reasons which their Lordships gave (at 1017), they expressed their opinion that Roe v Mutual Loan Fund (1887) 19 QBD 347 - … cannot now be relied upon for any general principle governing estoppel in the face of a statute and that its continuing authority depends on the resort that a court may feel to be necessary in special circumstances to the general rule forbidding approbation and reprobation on the part of a litigant. Thus, despite the principle that limits estoppels where statutes are infringed, a litigant may be shown to have acted positively in the face of the court, making an election and procuring from it an order affecting others apart from himself, in such circumstances that the court has no option but to hold him to his conduct and refuse to start again on the basis that he has abandoned. ([1964] AC 993 at 1017-1018). 89 The principle on which the Commissioner relied was said to have application in a situation in which a benefit had been accepted, or a position had been abandoned, in earlier litigation in which the parties were the same as that in which the approbation and reprobation point later arose. But, according to the Commissioner, the principle applied also in later litigation where the parties were different. As to this proposition, reliance was placed on Express Newspapers plc v News (UK) Ltd [1990] 1 WLR 1320. That was a case in which, according to the headnote: On 3 April 1989 in the "Daily Express" the plaintiff published an article, based on an exclusive interview, which quoted the words of the person interviewed. The first defendant published a report of the same story in its newspaper, "Today," on the same day. In the second edition of "Today" the story appeared in an altered form, similar to that in the "Daily Express," and containing the same quotations, without acknowledgment of the source of the story or the quotations. The plaintiff brought an action for breach of copyright in respect of that report. On 9 October the first defendant published an article on an unrelated topic, also based on an exclusive interview. On 10 October the plaintiff published a similar story in one of its newspapers, the "Daily Star." On 16 October the defendants served a defence to the plaintiff's claim, and the first defendant served a counterclaim in respect of the October article which was in form, the mirror image of the plaintiff's claim. On 18 October the plaintiff obtained summary judgment under R.S.C., Ord. 14 on its claim, with an order for an inquiry into damages. The passage from the judgment of Browne-Wilkinson VC upon which the Commissioner relied was the reference to "legally indistinguishable" facts in the following extract: However, I come back to the first point raised by Mr. Prescott, which greatly impresses me. The plaintiff applied for and obtained summary judgment against "Today" in relation to the Bordes article on facts which, in my judgment, are legally indistinguishable from the facts of the Ogilvy case. Mr. Burton sought to draw a distinction between the two cases on the grounds that the "Today" copying of the Bordes article involved the changing of the newspaper story between the first and second editions so as to appear on the same day as the article on Mrs. Bordes appeared in the "Daily Express." He contrasted that with the position where the "Daily Star" copying of the Ogilvy story occurred on the following day and was merely picked up in the ordinary course of press activity. In my judgment, the fact that "Today" were more efficient pirates than the "Daily Star" has no legal significance. The fact is that if the defences now being put forward by the defendants in relation to the "Daily Star" article are good defences to the Ogilvy case, they were and are equally good defences to the claim by the "Daily Express" against "Today" newspaper relating to the Bordes claim. I think that what Mr. Montgomery describes as what is sauce for the goose is sauce for the gander has a rather narrower legal manifestation. There is a principle of law of general application that it is not possible to approbate and reprobate. That means you are not allowed to blow hot and cold in the attitude that you adopt. A man cannot adopt two inconsistent attitudes towards another: he must elect between them and, having elected to adopt one stance, cannot thereafter be permitted to go back and adopt an inconsistent stance. It will, however, be immediately apparent that Express Newspapers has very limited potential to provide a legal principle of any practical utility in this case. In that case, one party was blowing hot and cold in the one proceeding. It was not even a case of different situations, much less of different parties. It is of no assistance to the Commissioner here. 90 According to the Commissioner, the sense in which the doctrine of approbation and reprobation is relevant to the present case is that, in the Supreme Court proceeding, the applicant had the choice of suing either on his own account or as agent for Disctronics. He chose to sue on his own account, and succeeded. He should not now be permitted to contend that it was not really his cause of action which was then involved, but Disctronics'. It is true, the Commissioner adds, that Disctronics also sued, but it failed, and did not appeal. For his part, the applicant was content to take the benefit of the judgment which he secured in his own name, and to defend it on appeal without any suggestion that it was Disctronics which was actually entitled as principal. 91 Assuming for the moment that the Commissioner's principal/agent framework of analysis is appropriate in the circumstances presently under discussion, I would accept that judgment in favour of an agent against the other contracting party would stand in the way of a subsequent proceeding, on the same cause of action, by the agent's principal. The principal's cause of action against the other party would have merged in the judgment in favour of the agent. But the principal's rights as against the agent would remain, as would the agent's rights as against the principal. Thus if, having taken the benefit of the judgment, the agent refused to account to the principal in relation to that benefit, the latter could sue the former. Or if the principal, having taken the benefit of the judgment obtained by the agent, then refused to indemnify the agent for his or her reasonable costs of obtaining the judgment, the agent could sue the principal. Far from standing in the way of subsequent proceedings of either of these kinds, the original judgment against the other contracting party would provide the basis for them. 92 I cannot see, in point of principle, why the analysis undertaken in the previous paragraph should be affected by the circumstance that, in the proceeding against the other contracting party, the agent sued not as such but as principal on his or her own behalf. The other party would be entitled to raise any defence that the plaintiff in the proceeding was not the true party with which he or she contracted. But if that defence were not taken, and judgment was entered against the other party, the agent/plaintiff could not resist later proceedings brought by the principal upon the ground that he or she had sued the other party in his or her own name and right. An agent cannot defeat the rights of a principal by taking it upon himself or herself to pretend, contrary to the facts, to be the principal. Likewise, if, in such a case, the agent had obtained judgment pretending to be the principal in his or her own cause, and then later had, without the need for any further proceeding by the real principal, agreed with the latter, truthfully to the facts, that he or she was indeed an agent and held the benefit of the judgment on behalf of the latter, cadit quaestio. 93 In a case of the kind just mentioned and assuming that the benefit of the judgment was in the nature of income, the question as to whose income it was would fall to be determined objectively, in accordance with the facts as they actually were. As against the revenue, the agent, having accounted to his or her principal for the income, would not be precluded from taking a position which was consistent with the facts, and with that accounting. 94 But I do not accept that the present issue is to be resolved by reference to the archetypal principal and agent dichotomy upon which the submissions made on behalf of the Commissioner were based. Indeed, I consider that the introduction of that dichotomy is something of a distraction. Had the applicant been no more than the agent of Disctronics, he would himself have had no cause of action against Edmonds and Cahill. On any view, however, the six individuals at least were principals in the joint venture. The applicant and others contended that Disctronics was too, but that contention was rejected in the Supreme Court. That was, however, neither here nor there. The applicant's obligations apropos the award of equitable damages arose out of the fiduciary office which he held, and the allocation of the golf course investment opportunity to Disctronics, and away from the applicant, by reason of the decisions which he and his fellow directors made in July 1999. It was open to the directors so to proceed without ipso facto converting themselves into mere agents in their dealings with Edmonds and Cahill. As between the directors of the one part and Edmonds and Cahill of the other part, the former were indeed principals, in the sense of being actual members of the joint venture, and not merely agents to bring the latter into contractual relations with Disctronics. But that circumstance is in no sense inconsistent with the directors owing duties as fiduciaries to Disctronics, and being held to account for any benefit which they derived from the joint venture. 95 Neither is the position affected by Disctronics' failure to make good its claim, before Warren J at least, that it was entitled to be the equity provider - ie the purchaser - in relation to the Kingston Links golf course. That was a claim against Edmonds and Cahill. It was sufficient, to sustain the rejection of the claim, for the court to have found that, as a matter of contract, Edmonds and Cahill never agreed to accept Disctronics as a joint venturer. The court was not required to consider the obligation that fell upon the applicant qua recipient of a share of its award. Indeed, for the applicant now to assert, contrary to the decision of Warren J, that Disctronics was entitled to be the equity provider on the sale of the golf course would not amount to approbating and reprobating at all. It would be the adoption of the very position which he adopted in the Supreme Court. He would, in the metaphor of Browne-Wilkinson VC, be blowing hot and hot, not hot and cold. If there be a principle of law under which the applicant is precluded from pressing for a judgment here which is inconsistent with that given against Disctronics in the Supreme Court, it is not the prohibition on approbation and reprobation. 96 The only other principle on which counsel for the Commissioner relied was issue estoppel. They submitted that the principle was as stated by Dixon J in Blair v Curran (1939) 62 CLR 464, 531-532: A judicial determination directly involving an issue of fact or of law disposes once for all of the issue, so that it cannot afterwards be raised between the same parties or their privies. The estoppel covers only those matters which the prior judgment, decree or order necessarily established as the legal foundation or justification of its conclusion, whether that conclusion is that a money sum be recovered or that the doing of an act be commanded or be restrained or that rights be declared. It will immediately be apparent why this submission on behalf of the Commissioner cannot be accepted: the parties here are not the same as those in the Supreme Court proceeding, where the first "judicial determination" was presumptively made. Ultimately, I did not understand counsel for the Commissioner to have any answer to this difficulty in their submission. In my view, it is fatal to it. 97 The next collateral attack made by the Commissioner involved the submission that the litigation agreement executed by the applicant, Disctronics and others on 15 June 2001 reflected an appreciation on the part of the applicant that any award of damages which he received in consequence of the then contemplated Supreme Court proceeding would be his to assign as he chose and would, therefore, prior to the operation of any such assignment, be his beneficially. I should say at once that the jurisprudential character, and relevance, of this contention on behalf of the Commissioner was never made very clear in the submissions presented on his behalf. The headline proposition with which this contention was associated was "the applicant has recognised his own liability and acted inconsistently with the 'fiduciary claim'". If the applicant had acted in the way thus proposed, it was never made clear how that circumstance would damage his claims in the present case, or advance those of the Commissioner. These submissions on behalf of the Commissioner were, of course, quite separate from those on preclusion and estoppel to which I have referred above. 98 The applicant was cross-examined as to why the litigation agreement was made. He said that, although dated 15 June 2001, the agreement was in fact executed immediately prior to the issue of the Supreme Court writ on 26 June 2001. At the time, "there were … some very substantial money concerns." According to the applicant, Donovan required a formal written commitment from Quinert and himself to the position upon which they had agreed in London in the period 12-14 July 1999, and which had been conveyed to Edmonds by Quinert's memorandum of 4 August 1999, namely, that Disctronics would be the equity provider if the Kingston Links golf course were acquired as envisaged by the joint venturers. In making this requirement, Donovan was, I infer, advancing the interests of Disctronics as such, and doing so from the position of the effective majority shareholder. For his part, the applicant was content to agree with what Donovan wanted, but required an indemnity against exposure to costs orders in return. 99 I do not accept that the litigation agreement involved a recognition by the applicant of his own liability for taxation, or conduct on his part which should now be seen as inconsistent with his claim to have received the award of equitable damages as fiduciary. The agreement was made more or less immediately before the main proceeding was commenced in the Supreme Court. It was anticipated, I infer, that that proceeding would have involved claims by Disctronics, Donovan, Quinert and the applicant. Disctronics was to pay the costs of all. Having extracted that promise from a public company of which they were directors, it was, to say the least, prudent for Donovan, Quinert and the applicant to assign any benefit which they stood to gain from the litigation to that company. Far from being inconsistent with the position that the applicant and his colleagues were suing in their capacity as directors, and therefore as fiduciaries, in my opinion the agreement reinforced that position. The shareholders of Disctronics who were not associated with the directors might reasonably, in my view, have raised their critical eyebrows at the suggestion that their company should pay the costs of litigation commenced, in part, by directors in their personal names without some prior written acknowledgment of the capacity in which those directors sued, and of the entitlements which would belong to the company if the directors should succeed. The litigation agreement was, in my opinion, both unsurprising and prudent, and wholly consistent with the position now taken by the applicant. 100 It was submitted on behalf of the Commissioner that the parenthetical expression in para B of the recitals to the litigation agreement, and in para 4 of the agreement itself, "whether on revenue or capital account", involved "language reflecting a consciousness of personal taxation attending the potential receipt". However, although the applicant was cross-examined about the purpose of his execution of the litigation agreement, and in an attempt to have him accept that it was based upon an assumed starting point that he, and the other directors, would otherwise hold the beneficial title to any award of damages which they secured, the applicant was not cross-examined with respect to the parenthetical expression which mentioned "revenue or capital account". It was not put to him that the use of that expression necessarily reflected a consciousness on his part of personal taxation issues that might attend the receipt of an award of damages in the Supreme Court. For that reason alone, if for no other, I could not uphold this submission on behalf of the Commissioner. 101 Counsel for the Commissioner next argued that the letter from Disctronics to Bucknall, over the hand of the applicant, dated 22 December 2003 was consistent only with an assumption then made both by the applicant and by Disctronics that the applicant's interest in the award of damages which had by then been made was, prior to assignment, a beneficial one. Counsel relied specifically upon so much of para 8(a)(iii) of the letter as acknowledged that the three-fifths of the award which was the share of Donovan, Quinert and the applicant had been assigned by them to Disctronics "subject always to a satisfactory resolution of taxation issues relating to that assignment". Pressed in cross-examination about this passage, the applicant refused to accept that it reflected a recognition on his part that he would be obliged to pay tax upon his one-fifth share before the assignment to Disctronics took effect. The applicant was unconvincing in those denials, and I am inclined to accept the position asserted, during cross-examination, by counsel for the Commissioner that the applicant was seeking to place a construction on the letter of 22 December 2003 which was most favourable to the case which he now advances. However, I am also disposed to the view that the passage on which the Commissioner relies is relatively benign for the applicant in the present circumstances. It seems clear - and the applicant himself accepted - that the only assignment to which para 8(c)(iii) could have been referring was that dated 15 June 2001. In terms at least, that assignment was not subject to the resolution of taxation issues. The applicant was unable to identify any taxation issues, the resolution of which amounted to a pre-condition, or the like, of the operation of the assignment of 15 June 2001. I am, therefore, of the view that the parenthetical expression inserted into para 8(c)(iii) of the letter of 22 December 2003 was something of a gloss on the actual terms of the assignment to which it referred, probably because the letter was required by auditors. The passage amounted to a statement by the applicant, as director of Disctronics, that the assignment should not be understood as passing to Disctronics the full net proceeds of the litigation, if it should be the case that the applicant himself was left with a taxation liability in relation thereto. 102 Notwithstanding that I have accepted the Commissioner's case about this letter to the extent indicated above, I cannot read the passage in question as involving a recognition by the applicant that he would be obliged to pay tax on his share of the award of damages because he received the share absolutely. I read it only as flagging, as it were, a possibility which might qualify the quantification of Disctronics' entitlement under the assignment. As such, there is nothing in the passage, in my view, which ties either Disctronics or the applicant to the position for which the Commissioner now contends, or which precludes the applicant from contending, as he does, that there were no "taxation issues" which would stand in the way of Disctronics beneficially receiving the full amount of the applicant's one-fifth share in the award of damages as proposed in this letter. 103 The next respect in which the Commissioner made a collateral attack on the applicant's case related to the Litigation Report contained in the Director's Report of 7 January 2004, to which I have referred at para 70. The applicant was cross-examined extensively on the Litigation Report, it being put to him that it was consistent only with a view, said to be held by him at the time, that he and his fellow directors received the award of equitable damages beneficially, and then assigned their interests therein to Disctronics. Although there were unconvincing aspects of the applicant's evidence when under cross-examination on this subject, he consistently maintained that he had, from the outset, been conscious of the fiduciary capacity in which he held the award of damages and, in my view, did so credibly. 104 More importantly, perhaps, the character of the applicant's obligations to Disctronics apropos his award of equitable damages was not to be determined by the view of the matter which the applicant himself took at the time, or at any time. Whether he held the award, or the anticipated award, as fiduciary is a question to be determined by an objective consideration of the facts and circumstances giving rise to the applicant's entitlement. As it happens, I consider that the Litigation Report was a fair, albeit spare, report to the shareholders of Disctronics about what actually happened in the Supreme Court proceeding, and the existence and operation of the litigation agreement of 15 June 2001. In my view, it is only with an eye artfully focused upon the legal distinctions which have become relevant in the present case that a reader of the report would readily see the kind of inconsistency to which the Commissioner now points. To the general reader of the Report, the message conveyed was that Donovan, Quinert and the applicant had secured damages in the case, that they had done so in their capacities as directors of Disctronics, and that they had made a formal assignment of their entitlements to those damages to Disctronics. At the high level that would be of interest to shareholders, and at the documentary level that would be of interest to auditors, these indications were not, in my view, inconsistent with the position for which the applicant now contends. 105 The final collateral attack made by the Commissioner on the applicant's case was to submit that the applicant's "demeanour and non-responsiveness in giving oral evidence" betrayed an appreciation on his part of the frailty of his now assertion that he held his share of the award of equitable damages as the fiduciary of Disctronics. Substantially for the reasons given in the previous paragraph, I would reject that attack. There were no contentious issues of fact here, the resolution of which might be influenced by a view which the court might take as to the applicant's credibility. Although there were some respects in which the applicant's responses under cross-examination were tendentious to a degree, I would reject any suggestion that he was making less than a conscientious attempt to deal truthfully with events which occurred many years ago. More relevantly for present purposes, I am unable to perceive how the quality or style of the oral evidence given by the applicant in 2011 should have anything more than the most marginal influence on the findings which the court should make with respect to well-documented transactions and events occurring in 1999. My conclusions in this aspect of the case have been based on uncontentious documents, and the record of the proceeding in the Supreme Court. 106 For the above reasons, I am satisfied that the applicant received his share of the award of equitable damages made in the Supreme Court as fiduciary for Disctronics. The award was not assessable income in his hands. The Commissioner's assessment should be set aside. 107 In the circumstances, I have not been required to consider a submission made by the applicant that the Commissioner's amended assessment of 5 August 2009 was out of time under s 170(1) of the 1936 Act. However, I would not have upheld that submission. The Commissioner submitted that he had four years, not two years, within which to amend because item 1 in the table in s 170(1) did not apply. The Commissioner relied on several "qualifications" to justify that submission, to none of which did the applicant offer a response on the merits. His case, rather, was that the form of s 170(1) on which the Commissioner relied had not been enacted (by amendment) until December 2005, subsequent both to the end of the 2005 tax year itself and to the lodgement of the applicant's return for that year. However, as the Commissioner pointed out in written submissions filed on 15 June 2011, item 15 of Sch 1 to the Tax Laws Amendment (Improvements to Self Assessment) Act (No 2) 2005 (Cth) provided for the relevant amendments to apply in relation to assessments for the 2004-05 year, and later years, of income. In their oral submissions, counsel for the applicant said nothing further about this aspect of their client's case.

2006 Year - the esparto trust distributions 108 Before the events which are presently contentious - (a) there was a discretionary trust established in Jersey for the benefit of the members of Donovan's family called the Esparto Trust; (b) since 15 November 2005, the applicant had been within the class of discretionary beneficiaries under the Esparto Trust; (c) Mourant & Co Trustees Ltd ("Mourant") of Jersey was the trustee of the Esparto Trust; (d) Juris Ltd ("Juris") and Lively Ltd ("Lively") (both incorporated in Jersey) were nominees through which Mourant held certain property as trustee of the Esparto Trust; (e) pursuant to that arrangement, Juris and Lively so held all the issued shares in Esparto Ltd ("Esparto") (incorporated in Jersey), namely, 50 £1 shares each; (f) Esparto was originally a shareholder in Disctronics, and became a shareholder in Disctronics Holdings Ltd, later called Koda Holdings Ltd ("Koda"), as the result of an in specie distribution of the shares of Koda upon the sale of the business assets of Disctronics to Koda in December 2000; (g) in the period 30 June 2001 to 30 June 2006, Koda made no profits on revenue account; (h) Koda held shares in Disctronics Europe Ltd ("Disctronics Europe"); (i) in July 2003, Koda sold its shares in Disctronics Europe for a net return (ie after allowing for the repayment of debt and other adjustments) of about ₤14.4 m; and (j) by the time of the events mentioned in the next paragraph, Esparto was the only shareholder in Koda. 109 In March 2006, using part of the funds made available by the sale of Disctronics Europe, Koda purchased a total of 1,862,303 of its own shares back from Esparto at a price of ₤4.43 per share. This was done in two transactions: on 10 March 2006, 764,842 shares were so purchased for a total consideration of £3,388,250; on 16 March 2006, 1,097,461 shares were so purchased for a total consideration of £4,861,752. On 9 March 2006, Esparto purchased 34 of its own £1 shares back from Juris at a price of ₤96,551.47 per share, yielding a total consideration of ₤3,282,750. By direction of Mourant, the proceeds of this sale were credited to itself as trustee of the Esparto Trust. Using those proceeds, the trust made two distributions to the applicant in his capacity as discretionary beneficiary: a cash distribution equal to $5,528,817 and a non-cash distribution equal to $810,916. The latter was, it appears, by way of the forgiveness of a debt which, according to submissions made on behalf of the applicant, had originally been owed by him to Koda Investments Ltd (a UK corporation) and was subsequently assigned - "intra-group" as it was put - to Koda and to Esparto, after which it was said to have become part of the consideration paid by Esparto for the buy-back of its shares from Juris. What part, and how this was done generally, were not very well covered in the evidence or, I would have to say, in the parties' submissions. 110 The Esparto Trust was constituted on 21 July 1998. Donovan was the settlor. The trustee was Orbis Trustees Jersey Ltd ("Orbis") of Jersey. In November 2005, Mourant became the trustee, and was the trustee at all times relevant to the present proceeding. The trust instrument was a detailed document under which the "trustees", as Orbis was called, were given broad and apparently quite conventional powers and duties. At the broadest level, it was provided as follows: The Trustees shall hold the Trust Fund and the income thereof upon such trusts for the benefit of all or any or more exclusive of the others of the Beneficiaries at such ages or times with such powers of appointment maintenance advancement and otherwise in favour of all or any one or more of them and with such administrative powers and subject to such provisions (whether or not such powers and provisions are similar to those contained in this trust) and generally in such manner in all respects as the Trustees may at any time during the Trust Period revocably or irrevocably appoint but so that any revocable appointment if not revoked before the date of expiration of the Trust Period shall become irrevocable on that date. Any trust so appointed may be either mandatory or discretionary and may create any interests whatsoever in either capital or income or both whether absolute or limited and whether vested or contingent and whether in possession or in reversion and whether revocable or irrevocable and may divide the Trust Fund or the income thereof or any part thereof respectively into any shares and any discretionary trusts or powers may by any such appointment be conferred upon any persons (not necessarily being or including the Trustees) and any such trusts or powers so conferred may authorise the delegation of any discretion and it shall not be an objection to any appointment that the same makes provision of an administrative nature only and does not alter or vary any beneficial interest in the Trust Fund or the income thereof. …. Until and subject to and in default of any such appointment as aforesaid: the Trustees may at any time during the Trust Period pay or apply the Trust Fund and the income thereof or any part thereof to or for the benefit of all or such one or more excusive of the others of the Beneficiaries and in such shares if more than one and in such manner generally as the Trustees shall in their discretion think fit; subject as aforesaid the Trustees shall stand possessed of the income of the Trust Fund upon trust to accumulate the same by way of compound interest investing it and the resultant income thereof in the acquisition of any investments or other property authorised hereunder and all accumulations of income so made shall be held as additions to the Trust Fund for all purposes but with power at any time to treat the accumulations already then so made (or any part thereof) as current income. …. The Trustees shall in relation to the trust property have all the same powers as a natural person acting as the beneficial owner of such property and without prejudice thereto and to all statutory powers and immunities shall have the powers and immunities set out herein without being limited by any specific powers expressed herein provided that the Trustees shall not exercise any of their powers so as to conflict with the beneficial provisions of this trust or to infringe any restrictions expressly imposed herein upon the exercise of any powers. …. Any monies requiring investment hereunder may be invested in or upon any such investments of whatsoever nature and wheresoever situate and whether producing income or not (including the purchase of any immovable or movable property whatsoever or any interest therein) as the Trustees shall in their discretion think fit without being limited by any specific powers expressed herein. 111 Evidence as to the relationship between Mourant and Juris (and, although not directly relevant to the distribution made to the applicant, Lively) was given by Charles Stuart Hornby ("Hornby"), who was the trust officer employed by Mourant at the time of the transactions which have become relevant in this case. He said that Juris held the legal interest in the 50 Esparto shares to which I have referred as the "bare trustee" for Mourant. Although the instrument by which that trust had been constituted had been misplaced, Hornby swore that that instrument "would not have differed in any material extent" from the following pro-forma instrument: To: (name of trustee together with name of trust) of (address of trustee) We (name of nominee company) of (address of nominee company), as registered holder of (number of shares held in company) fully paid share/s of (nominal value of shares)(the share/s) in the company known as (name of company) hereby acknowledge and declare in accordance with your directions that with effect from x:- (a) Subject to receipt of further directions from you we hold the said share/s registered in our name as nominee and trustee for you. (b) We shall not be under any duty to monitor, enhance or preserve the value of the said share/s and that our duties are strictly confined to:- i. Holding the said share/s accordingly until receipt of further directions from you in respect of the terms upon which the share/s are to be held, transferred or disposed of; ii. accounting to you for all dividends and profits which may be paid to us from time to time upon the said share/s and for all moneys or profits which may be payable to us in respect thereof; iii. exercising our voting power as holder of the said share/s at any annual general meeting covering the ordinary business of the company, but for extraordinary or special purposes only in such a manner and for such purpose as you may from time to time direct or determine and without liability on our part should you fail or neglect so to direct or determine; and iv. dispensing with annual general meetings, if thought fit. (c) This instrument of trust shall be governed by and construed in accordance with the law of the Island of Jersey any dispute in connection herewith shall be submitted to the courts of the said Island. Hornby was not challenged on that evidence. 112 In his oral evidence, Hornby explained the purpose of the interposition of a company such as Juris as nominal shareholder on the register in situations in which Mourant itself was the trustee in control of the particular assets: In most circumstances in both Jersey and the UK when a trust holds an underlying asset that is, for example, a company in particular, when that company has its books it can -- you can see who the shareholders are. So for confidentiality reasons quite often a nominee company is used and that's what Juris was and is. It is a nominee company and its sole purpose is to act as a nominee and it holds shares in underlying companies and then those shares are held by a declaration of trust for the ultimate beneficiary. But it is the legal owner of the shares. In the present case, there was some minor controversy as to whether Juris was to be regarded as a "bare" trustee. To the extent that this went beyond merely playing with words, I shall deal with it below in the specific context in which the question is relevant. Juris' role apropos the shares it held in Esparto was a nominal one, but the existence of Juris between Mourant and Esparto cannot be ignored. This is a subject to which I shall also return below. 113 The question which arises in the present case is whether the cash and non-cash distributions referred to were assessable as income in the applicant's hands. The bedrock proposition upon which the applicant's case is based is that the trust assets from which the distributions were sourced were in the nature of capital rather than income, and that the distributions themselves were, therefore, of a capital nature. Under the trust instrument, the trustees had the following power: The Trustees may determine as the Trustees shall in the discretion think fit and the law may permit whether any moneys for the purposes of this trust be considered as capital or income and whether out of the capital or income any taxes expenses outgoings or losses shall or ought to be paid or borne but unless the Trustees shall otherwise determine all dividends and other income received by the Trustees shall be treated as income at the date of receipt whether or not such dividends or other income shall have been earned wholly or partially in respect of a period to the date of receipt. According to an affidavit by Hornby filed on behalf of the applicant without objection on 29 November 2011, Mourant determined that the proceeds of the sale-back of the Esparto shares in March 2006, and the distributions to discretionary beneficiaries in that month, were capital. Subject only to certain supplementary written submissions to which I shall refer in due course, the Commissioner did not engage with the applicant at this level. He submitted that the income or capital nature of the distributions was irrelevant to the operation of the particular statutory provisions upon which he relied. Indeed, with respect to the operation of s 99B(2)(a) of the 1936 Act, to which I shall turn later, the Commissioner accepted that the property of the Esparto Trust from which the distributions were sourced represented the corpus of the trust estate. To the extent that it matters, therefore, I must proceed on the basis that the distributions were of capital as submitted by the applicant. 114 The Commissioner's case that, notwithstanding that the distributions of March 2006 by the Esparto Trust were of capital, they were brought into the applicant's assessable income had two aspects. The first involved the operation of s 97(1)(a) of the 1936 Act, which provided: (1) Subject to Division 6D, where a beneficiary of a trust estate who is not under any legal disability is presently entitled to a share of the income of the trust estate: (a) the assessable income of the beneficiary shall include: (i) so much of that share of the net income of the trust estate as is attributable to a period when the beneficiary was a resident; (ii) so much of that share of the net income of the trust estate as is attributable to a period when the beneficiary was not a resident and is also attributable to sources in Australia; …. In the presently relevant context, the application of s 97(1) depended on the answers to two questions: (a) was the putative taxpayer "a beneficiary of a trust estate who is not under any legal disability [and] is presently entitled to a share of the income of the trust estate"; and, if so, (b) what was his or her "share of the net income of the trust estate"? Having obtained an answer to these questions, it was then necessary to divide the share of the net income by reference to the periods during which the beneficiary was, and was not, a resident. 115 In the case of a non-resident trust estate, the answers to questions (a) and (b) referred to in the previous paragraph were given by the deeming provisions of s 96B of the 1936 Act, which provided as follows: (1) If at any time during the 1992-93 year of income or a later year of income a taxpayer had an interest (including an interest that is to arise at a future time or is contingent on the happening of an event) in a non-resident trust estate in relation to the year of income, this section has effect for the purposes of the application of this Division to the taxpayer in relation to the trust estate in relation to the year of income. (2) The taxpayer is taken to be a beneficiary of the trust estate who is presently entitled to a share of the income of the trust estate of the year of income and who is not under a legal disability. (3) The taxpayer's share of the net income of the trust estate of the year of income is the amount calculated in accordance with section 96C. Subsection (1) of this section specified the circumstances in which the section had effect, while subs (2) and (3) were the operative provisions. They dealt, respectively, with the two questions to which I referred in the previous paragraph, thereby providing the foundation for the operation of s 97. 116 Dealing first with subs (1) of s 96B, the Commissioner relied upon the words in parenthesis. He submitted that, once the applicant was appointed a discretionary beneficiary of the Esparto Trust in November 2005, he had, at the least, an interest in the trust estate "that [was] to arise at a future time or [was] contingent on the happening of an event". The Commissioner put this in two ways. The first was that the applicant was a "taker in default" under the trust instrument dated 21 July 1998. Clause A(7) of the instrument, headed "Ultimate Trusts", provided as follows: Subject to and in default of any appointment payment or application thereof and so far as not wholly disposed of for any reason whatever the Trustees shall at the expiration of the Trust Period stand possessed of the Trust Fund and the income thereof upon trust for all or such one or more exclusive of the others of the Beneficiaries in such shares and proportions if more than one and generally in such manner as the Trustees may prior to the expiration of the Trust Period in their discretion determine and in default of and subject to such determination upon trust for such of the individual Beneficiaries as shall be living and capable of benefiting hereunder at the expiration of the Trust Period in equal shares absolutely …. Under other provisions of the instrument, the applicant was a "beneficiary" within the meaning of this provision. As a beneficiary entitled on default of appointment under the provision set out above, the applicant had an "interest" in the trust estate: In Re Brooks' Settlement Trusts [1939] 1 Ch 993, 997; Commissioner of Stamp Duties (NSW) v Sprague (1960) 101 CLR 184, 193; Lygon Nominees Pty Ltd v Commissioner of State Revenue (2007) 23 VR 474, 491 [63]. I accept these submissions of the Commissioner, and hold that, in the 2006 year, the applicant had a interest in the Esparto Trust within the meaning of s 96B(1) of the 1936 Act. 117 It was also submitted on behalf of the Commissioner that the distributions made to the applicant from the Esparto Trust in March 2006 "demonstrated" that he then had an interest in the trust. Given that those distributions were regularly made to the applicant in his capacity as discretionary beneficiary under the trust, I must accept that submission. Section 96B(1) operates by reference to an interest which exists "at any time during … a … year of income", and the fact of the distributions raises the clearest of inferences that the applicant had such an interest at a time which was relevant to the Commissioner's assessment for the 2006 year. 118 It follows that s 96B had effect for the purposes of the application of Div 6 to the applicant in relation to the 2006 year. By the operation of subs (2), the applicant was a beneficiary of that trust presently entitled to a share of the income thereof in the 2006 year for the purposes of s 97(1) of the 1936 Act. 119 Turning to subs (3) of s 96B, the applicant's share of the net income of the Esparto Trust was to be calculated in accordance with s 96C. Here the Commissioner put his argument in two ways. The first involved reliance on s 96C(1), which provided: (1) If all of the income, profits or gains derived by a non-resident trust estate during the year of income consisted of either or both of the following: (a) income, profits or gains to which beneficiaries of the trust estate were presently entitled; (b) income, profits or gains to which beneficiaries of the trust estate were not presently entitled but which were distributed to beneficiaries of the trust estate during the year of income or within 2 months after the end of the year of income; the share of a taxpayer referred to in section 96B of the net income of the trust estate of the year of income is the amount worked out using the formula: Net income x Attribution percentage In the formula: Net income means the net income of the trust estate of the year of income. Attribution percentage means the percentage of the total income, profits and gains derived by the trust estate during the year of income to which the taxpayer was presently entitled or to which the taxpayer was not presently entitled but which was distributed to the taxpayer during the year of income or within 2 months after the end of the year of income. 120 This provision required the identification of the income, profits and gains made by the trust referred to in the year of income in question. Since the subsection was part of a series of provisions concerned, ultimately, with the assessable income of a taxpayer, it was the taxpayer's "year of income" which was relevant: in the present case, that which ended on 30 June 2006. The accounts of the Esparto Trust were prepared by reference to income years ending on 31 December. That creates a difficulty but, as it happens, not an insuperable one. I shall return to that aspect. For the moment it is sufficient to note that, in the year ended 30 June 2006, the proceeds of the sale of the Esparto shares, which were received by the Esparto Trust in March 2006, should, at least to the extent that those proceeds exceeded the £34 paid up on those shares, be regarded as "profits or gains" within the meaning of s 96C(1). 121 The Commissioner submitted that all the beneficiaries of the trust were, between them, and by reason simply of being beneficiaries, presently entitled to the whole of that income, and of those profits or gains, for the purposes of para (a) of s 96C(1) of the 1936 Act. That is a problematic proposition. The trust was a discretionary one. At the general level, a person is not, merely by being a member of a class in whose favour the trustee may exercise a discretion, presently entitled to the income, profits or gains of the trust: Pearson v Commissioner of Taxation (2006) 232 ALR 55, 62 [14]. My attention was not drawn to any evidence to the effect that the trustee exercised its discretion in favour of beneficiaries in relation to the whole of the proceeds of the sale of the Esparto shares in the 2006 year. So the Commissioner cannot rely on s 101 of the 1936 Act. Neither do the provisions of s 14ZZO of the Administration Act assist the Commissioner here. In an attempt to discharge the burden of demonstrating that the Commissioner's assessments were excessive, the applicant tendered the trust instrument of the Esparto Trust and the accounts of that trust. He called Hornby, who was cross-examined. No suggestion was made to Hornby that, in the 2006 year, the whole of the proceeds of the share sale were the subject of a discretion exercised in favour of the beneficiaries. In the circumstances, I would hold that the Commissioner cannot invoke s 96C(1)(a) of the 1936 Act in the calculation of the applicant's share of the net income of the Esparto Trust in the 2006 year. 122 Alternatively, the Commissioner submitted that, to the extent that s 96C(1)(a) did not apply, the proceeds of the sale of the Esparto shares were distributed to the beneficiaries of the trust during the 2006 year or within two months after the end of that year, as required by para (b) of the subsection. This submission proceeded on the basis that it was not possible to tell from the evidence (particularly since the accounts of the trust were prepared by the calendar year) whether all of those proceeds had been so distributed, in which circumstances the court had no choice but to hold, adversely to the applicant who bore the onus of proof, that they had been. For reasons which follow, I do not accept that submission. 123 I deal first with the evidence of Donovan and Hornby. It is true that they both said that the Esparto Trust had received no income in the year to 30 June 2006. But they also made it equally clear that the trust had received capital inflows by way of the proceeds of the sale of the Esparto shares. The circumstance that the trust received no "income" in the relevant year does not, therefore, exclude the prospect that it received "profits or gains" - a term which, on the Commissioner's own submission, is sufficiently wide to include gains of a capital nature. 124 I deal next with the point that, apart from the oral evidence of Donovan and Hornby, there was insufficient evidence to support a finding that all of the profits or gains derived by the Esparto Trust in the year to 30 June 2006 were not distributed to beneficiaries by 31 August 2006 (as would be necessary for the applicant to exclude the operation of s 96C(1)(b)). Here there are two enquiries to be made: what were the profits or gains of the trust in the year to 30 June 2006, and were all of those profits or gains distributed to beneficiaries on or before 31 August 2006? 125 The unaudited accounts of the Esparto Trust for the year ended 31 December 2006 were exhibited to Hornby's affidavit in the present case. Those accounts showed that, in that year, there was a "net addition" to the capital account of the trust in the sum of £8,182,200. Of that, £8,109,916 was shown as "surplus on disposal of underlying company". There was no suggestion that that company might have been any other than Esparto. A copy of an extract from the Esparto share register is in evidence. It shows that, on 9 March 2006, 34 shares then owned by Juris were cancelled; and that, on 15 March 2006, 50 shares then owned by Lively were cancelled. So far as I can see, there is no direct evidence of the price at which the 50 shares held by Lively changed hands, but counsel for the Commissioner laid out certain calculations in supplementary written submissions filed on behalf of their client which, in effect, pressed for findings along the following lines: Juris buyback receipt: £ 3,282,750 Lively buyback receipt: £ 4,827,250 Total buyback receipts: £ 8,110,000 Paid up value of shares: £ 84 Profit or gain £ 8,109,916

I accept those submissions. I find that the sum of £8,109,916 was received by way of profit or gain by the Esparto Trust in March 2006. 126 The next question is whether all of the profits or gains made by the trust in the year to 30 June 2006 had been distributed to beneficiaries by 31 August 2006. Here I confine myself to the gain of £8,109,916 referred to in the previous paragraph. The unaudited accounts of the trust show that, in the year to 31 December 2006, capital distributions of £8,073,224 were made. That sum is short of £8,109,916 by £36,692. No other distributions were made in that year. It must follow that, between the share sales by Juris and Lively in March 2006 and 31 December 2006, something less than the proceeds of those sales had been distributed to beneficiaries. Necessarily, something less than those proceeds had been so distributed by 31 August 2006. 127 It was submitted on behalf of the Commissioner that the applicant had not, merely by giving evidence of the relevant trust transactions over the year to 31 December 2006, discharged his onus of proving that something less than all of the profits or gains made by the trust in the year to 30 June 2006 had been distributed to beneficiaries by 31 August 2006. As I have attempted to demonstrate above, however, once it be accepted (as the Commissioner submitted) that a profit of gain of £8,109,916 was received in March 2006, and that something less than that figure was distributed to beneficiaries over the whole year to December 2006, the inference is arithmetically irresistible that the whole of that profit or gain was not so distributed in the period to 31 August 2006. Hornby was cross-examined quite extensively by counsel for the Commissioner, but not in any way as would suggest that the picture conveyed by the accounts of the Esparto Trust did not represent reality. I would, therefore, find that the whole of the profits or gains of the trust in the 2006 year had not been distributed to beneficiaries by the date which is relevant under s 96C(1)(b) of the 1936 Act. 128 For the reasons given above, I would hold that neither para (a) nor para (b) of s 96C(1) of the 1936 Act applied in the case of the Esparto Trust in the 2006 year. The applicant's share of the net income of the trust cannot be worked out under that subsection. 129 The second, and alternative, dimension of the Commissioner's argument under s 96C relied on subs (2), which operated in circumstances to which subs (1) did not apply. To give content to subs (2) in a practical situation, it is necessary to refer also to certain other provisions of s 96C. I set them out, with subs (2) itself, hereunder: (2) If subsection (1) does not apply in respect of a non-resident trust estate of the year of income, the share of a taxpayer referred to in section 96B of the net income of the trust estate of the year of income is the amount determined by calculating: (a) the part of the taxpayer's share of the net income that is attributable to any interest or interests in the trust estate that the taxpayer had in the trust estate throughout the whole of the year of income; and (b) the part or parts of the taxpayer's share of the net income that is or are attributable to any interest or interests in the trust estate that the taxpayer had throughout a particular part or particular parts of the year of income; and adding up the amounts so calculated. (3) The part of the taxpayer's share of the net income that is attributable to an interest or interests that the taxpayer had throughout the whole of the year of income is the amount worked out using the formula: Net income x Attribution percentage (4) The part of the taxpayer's share of the net income that is attributable to an interest that the taxpayer had throughout a particular part of the year of income is the amount worked out using the formula: Net income x Attribution percentage x Number of days held Total number of days (5) For the purposes of the formulas in subsections (3) and (4): Net income means the net income of the trust estate of the year of income. Attribution percentage means: (a) the percentage of the income of the trust estate represented by the share of the income to which the taxpayer was entitled, or was entitled to acquire, at the test time because of: (i) the taxpayer's interest or interests in the trust estate; and (ii) any interest or interests in the trust estate that the taxpayer was entitled to acquire; or (b) the percentage of the corpus of the trust estate represented by the share of the corpus to which the taxpayer was entitled, or was entitled to acquire, at the test time because of: (i) the taxpayer's interest or interests in the trust estate; and (ii) any interest or interests in the trust estate that the taxpayer was entitled to acquire; or, if those percentages differ, the greater of those percentages. Number of days held means the number of days in the part of the year of income throughout which the taxpayer had the interest. Total number of days means the number of days in the year of income. the test time means: (a) if the taxpayer had an interest or interests in the trust estate at the end of the year of income - the end of the year of income; or (b) if the taxpayer ceased during the year of income to have any interest in the trust estate - the time immediately before the taxpayer ceased to have such an interest. …. (6) If, apart from this subsection, the sum of the attribution percentages at a particular time in relation to a non-resident trust estate of all taxpayers who are residents would exceed 100%, the attribution percentage of each of those taxpayers is the percentage worked out using the formula: where: Individual percentage means the percentage that, apart from this subsection, would be the attribution percentage of the taxpayer concerned. Total percentage means the sum of the percentages that, apart from this subsection, would be the attribution percentages of all taxpayers that are residents. (7) For the purposes of subsection (5): (a) the percentage of the income of the trust estate represented by the share of the income to which the taxpayer was entitled, or was entitled to acquire, at the test time because of the interest or interests referred to in subparagraph (a)(i) or (ii) of the definition of attribution percentage in that subsection; or (b) the percentage of the corpus of the trust estate represented by the share of the corpus to which the taxpayer was entitled, or was entitled to acquire, at the test time because of the interest or interests referred to in subparagraph (b)(i) or (ii) of the definition of attribution percentage in that subsection; is to be worked out by: (c) ascertaining whichever of the following is applicable: (i) the income of the trust estate for the year of income; (ii) the corpus of the trust estate as at the end of the year of income; and (d) assuming that the share to which the taxpayer was entitled, or became entitled to acquire, at the test time because of the interest or interests was the same at all other times during the year of income; and (e) ascertaining the percentage concerned: (i) if the test time is a time other than the end of the year of income - at the end of the year of income instead of at the test time; and (ii) on that assumption. (8) In this section: entitled to acquire has the same meaning as in Part XI. (9) A reference in this section to income, profits or gains having been distributed to a beneficiary of a trust estate is a reference to an amount included in such income, profits or gains having been paid or credited to, or applied for the benefit of, such a beneficiary. The applicant was made a beneficiary of the Esparto Trust on 15 November 2005. He did, therefore have an interest in the trust for a "particular part" of the 2006 year, which invoked the operation of para (b) of subs (2), and of subs (4), of s 96C. 130 Critical to the calculation required by subs (4) was the component identified as "net income", which was defined in subs (5) as "the net income of the trust estate of the year of income". That takes one to the following definition in s 95(1) of the 1936 Act: [N]et income, in relation to a trust estate, means the total assessable income of the trust estate calculated under this Act as if the trustee were a taxpayer in respect of that income and were a resident, less all allowable deductions …. That is, if Mourant were a resident taxpayer, what would have been the total assessable income of the Esparto Trust for the year to 30 June 2006, less allowable deductions? Here it is necessary to consider both the ordinary income and the statutory income of the trust: 1997 Act, ss 6-5 and 6-10. 131 Dealing first with ordinary income, the unaudited accounts for the trust for the year to 31 December 2006 were in evidence. They included corresponding entries for the year to 31 December 2005. The "income account" was as follows: 2006 2005 INCOME Deposit interest received 2,013 13 EXPENDITURE Professional services and Trustee's fees 924 - Bank charges 25 - 949 - NET SURPLUS FOR THE YEAR 1064 13 BALANCE BROUGHT FORWARD 13 - BALANCE CARRIED FORWARD £ 1,077 £ 13 Statement of total recognised gains and losses There are no recognised gains and losses for the current and previous year other than the surplus shown above and the amounts shown in the capital account on page 4.

Under the 1936 Act, the £949 indicated as "expenditure" in the 2006 column above would be allowable as a deduction, with the result that the "net surplus", shown as £1064, would be included in the "net income" of the trust for the year ended 31 December 2006. 132 That does not, of course, produce a figure for the year ended 30 June 2006, but the table above shows also that ordinary income of £13 was derived by the trust in the year to 31 December 2005. Looking at the two calendar years together, the "net income" of the trust, in the s 95(1) sense, would have been £1077. As the applicant has the onus of proof, I am in no position to exclude the realistic possibility that the whole of this sum was received between 1 July 2005 and 30 June 2006. Indeed, it strikes me as very probable, viewing the accounts as a whole, that the significantly larger sum derived by way of interest in the year to 31 December 2006 was to be explained by the sums that the trust received in March 2006 on the buy-back of the Esparto shares which were presumably on deposit for a brief period only. I would find, therefore, that the net income of the Esparto Trust in the year to 30 June 2006 included this sum of £1077. 133 Turning next to statutory income, it was submitted on behalf of the Commissioner that the proceeds of the share sales in March 2006 would, had Mourant been a resident taxpayer, have been drawn into the assessable income of the Esparto Trust either by s 44(1) or by s 97 of the 1936 Act. I shall deal with those alternatives in turn. As will appear, the Commissioner's case under s 44(1) encounters difficulties, in point of detail, by reason of the interposition of Juris and Lively between Esparto and Mourant, but, for the sake of clarity and to resolve some general issues which arise, I propose to deal first with the case as though those companies did not exist, and Mourant directly held the shares in Esparto. 134 It was submitted on behalf of the Commissioner that the effect of Div 16K of Pt III of the 1936 Act would have been that the proceeds of the share buy-back were treated as dividends paid by Esparto out of profits. In that Division, s 159GZZZK was an interpretation provision, as follows: For the purposes of this Division, where a company buys a share in itself from a shareholder in the company: (a) the purchase is a buy-back; and (b) the shareholder is the seller; and (c) if: (i) the share is listed for quotation in the official list of a stock exchange in Australia or elsewhere; and (ii) the buy-back is made in the ordinary course of trading on that stock exchange; the buy back is an on market purchase; and (d) if the buy-back is not covered by paragraph (c) - the buy-back is an off-market purchase. Thus, the transaction by which Esparto bought back its own shares in March 2006 was a "buy-back", and an "off-market purchase", for the purposes of Div 16K. 135 For an off-market purchase, the operative provision of Div 16K was s 159GZZZP(1) of the 1936 Act. Regrettably for those who prefer simple solutions, it was not uncontroversial in the present case which version of s 159GZZZP(1) was applicable. The provision was amended by the Taxation Laws Amendment (Company Law Review) Act 1998 (Cth), but, on the case of the Commissioner, those amendments did not apply to a company whose shares had a par value. He submitted that the form of s 159GZZZP(1) which existed before the 1998 amendment continued to apply to companies whose shares had a par value. The subsection was then as follows: For the purposes of this Act, … where a buy-back of a share by a company is an off-market purchase, so much of the purchase price as exceeds the sum of: (a) the amount to which the share was paid-up immediately before the buy-back; and (b) the part (if any) of the purchase price in respect of the buy-back of the share which is debited against amounts standing to the credit of a share premium account of the company; is taken to be a dividend paid by the company: (c) to the seller as a shareholder in the company; and (d) out of profits derived by the company; and (e) on the day the buy-back occurs. In the 1998 amendments, the words "so much of the purchase price as exceeds the sum of" were replaced by the words "the difference between", the whole of para (a) was replaced by "the purchase price; and", and the words in para (b) "a share premium account" were replaced by the words "the share capital account". Additionally, the definition of "share premium account", to which I shall turn, was repealed. 136 In presently relevant respects the 1998 amendments were consequential upon changes then being made to the Corporations Law by the Company Law Reform Bill 1997. According to the Explanatory Memorandum to the Bill which affected the 1936 Act, the Bill changing the Corporations Law - … will also abolish the concept of par value and with it the associated concepts of share premium, share premium accounts and paid-up capital. As a result the distinction between share premium and paid-up capital will be removed, effectively creating one share capital account comprising both paid-up capital and share premiums. This will increase the amount of capital that will be capable of being streamed to shareholders as well as necessitate consequential amendments to the tax laws that are dependent on these concepts. By item 67 of Sch 5 to the amending Act of 1998, the amendments to which I have referred "apply to things done after the commencement of this item where the relevant company has shares with no par value". 137 Counsel for the applicant contested the Commissioner's proposition that the pre-1998 version of the subsection continued to apply to Esparto. Although it was uncontroversial that Esparto shares had a par value, as it happens Esparto itself was not incorporated until 21 July 1998. The 1998 amendments commenced on 1 July 1998. Accordingly, so the argument ran, Esparto was never subject to the earlier version of s 159GZZZP(1), and that version could not "continue" to apply to it. I do not accept that argument. Although the amendments commenced on 1 July 1998, they applied to things done thereafter only if the relevant company had shares with no par value. The amendments did not apply, therefore, to things done after 1 July 1998 in the case of Esparto. I accept the Commissioner's submission that it was the unamended version of s 159GZZZP(1), set out above, that had application to the events which are relevant in this proceeding. 138 In the application of s 159GZZZP(1) to the facts of the present case, no difficulty arises with respect to para (a) thereof. It is clear that the 84 shares bought back by Esparto in March 2006 were paid up in the amount of £84 at the time. A matter of some contention does, however, arise under para (b). It was submitted by the Commissioner that no part of the purchase price paid by Esparto in respect of the buy-back was debited against amounts standing to the credit of a share premium account of Esparto. Before the 1998 amendments, a "share premium account" was defined in the 1936 Act as - … an account, whether called a share premium account or not, to which the company has, in respect of premiums received by the company on shares issued by it, credited amounts, being amounts not exceeding the respective amounts of the premiums, but does not include: (a) where any other amount is included in the amount standing to the credit of such an account - that account; or (b) where an amount that has been credited to such an account in respect of a premium received by the company on a share issued by it (not being an amount that has been so credited immediately after the receipt by the company of the premium) could not, at any time before it was so credited, be identified in the books of the company as such a premium - that account; There was no definition of "premiums" or of "premiums received by the company on shares issued by it", but counsel for the Commissioner submitted that the latter expression denoted "amounts of premium paid by a shareholder who is the holder of issued share capital", and that it could have no application to amounts received by a company other than from its own shareholders. 139 The "Unaudited Abbreviated Financial Statements" of Esparto for the year ended 31 December 2006 were in the evidence. The share transactions which are relevant in this proceeding were reflected in the section of the balance sheet headed "Capital and Reserves", as follows: CAPITAL AND RESERVES Notes 2006 2005 Called up share capital 7 16 100 Profit and loss account 60,601 (89,230) Capital reserves 8 206,719 252,878 £267,336 £163,748

Note 7 indicated that the "called up share capital" was £100 (100 x £1 shares) on 31 December 2005 and £16 (16 x £1 shares) on 31 December 2006. Part of the difference arose from the buy-back of the 34 shares the subject of the evidence in this case. As also appears, Esparto made a profit of £60,601 in the year to 31 December 2006. The item "capital reserves", in the amount of £206,719, was explained in Note 8 to the accounts as follows: 8. CAPITAL RESERVE 2006 2005 Balance brought forward 252,878 252,878 Capital profit on buy back of unquoted investments 8,250,003 - Purchase of own shares (8,109,916) - Transfer to profit and loss account (186,246) - Balance carried forward £206,719 £252,878

The "capital profit on buy back of unquoted investments" was, of course, the proceeds of the two sales of shares in Koda referred to in para 109 above. The debit item of £8,109,916 - "purchase of own shares" - included, but clearly was not limited to, the purchase of shares from the Esparto Trust in March 2006. 140 Nothing in the financial statements of Esparto, and nothing to which my attention was otherwise drawn, would provide any support for the suggestion that what Esparto received from Koda for the sale of its shares in the latter had the character of a premium received by Esparto on shares issued by it. The proceeds of the sale-back of the Koda shares were treated as a capital profit arising on the disposal of an asset. The purchase price paid on the buy-back of Esparto's own shares was debited to the capital reserve account of Esparto. That was not a share premium account as defined. It follows that, subject to the matters referred to presently, the purchase price paid for the buy-back of the Esparto shares in March 2006, net of the paid-up value of £84, must be taken to be a dividend paid to Mourant as trustee out of profits derived by Esparto. 141 To complete the circuit required by the definition in s 95(1) of the 1936 Act, the Commissioner then relied on s 44(1), which provided, relevantly: The assessable income of a shareholder in a company (whether the company is a resident or a non-resident) includes: (a) if the shareholder is a resident: (i) dividends (other than non-share dividends) that are paid to the shareholder by the company out of profits derived by it from any source; and (ii) all non-share dividends paid to the shareholder by the company; and (b) if the shareholder is a non-resident: (i) dividends (other than non-share dividends) paid to the shareholder by the company to the extent to which they are paid out of profits derived by it from sources in Australia; and (ii) non-share dividends paid to the shareholder by the company to the extent to which they are derived from sources in Australia; and …. This subsection does not apply to a dividend (or non-share dividend) to the extent to which another provision of this Act that expressly deals with dividends includes some or all of the dividend (or non-share dividend) in, or excludes some or all of the dividend (or non-share dividend) from, the shareholder's assessable income. Although s 44(1) dealt expressly with the position of a non-resident shareholder, the relevant part of the subsection in the present circumstances was para (a), and specifically subpara (i) thereof, because of the requirement under s 95(1) to assume that the relevant trustee was a resident. 142 On the assumption by reference to which I am working here (that Juris and Lively did not exist), the sum of £8,109,916 (see para 125 above) would be included in the net income of the trust under s 95(1) of the 1936 Act, and therefore in the calculation required by s 96C(4). 143 I do not accept the quite lengthy written submissions made on behalf of the applicant which appeared to take issue with the correctness of the Commissioner's reading of ss 44, 95 and 159GZZZP in the way I have outlined above. I must confess to some difficulty appreciating quite what was the problem to which counsel adverted, and I must say, with respect to those involved, that there was little focus in those written submissions. As best I can make out, however, the applicant's points are essentially twofold: that the so-called "fiction" created by the definition of "net income" in s 95(1) could not have been intended to set at nought the apparently conscious distinction made in s 44(1) between resident and non-resident shareholders; and that the literal application of that definition in s 96B(3) would create a tension with subs (1) of the same section, confined as it was to a non-resident trust, which likewise could not have been intended by the legislature. 144 If these are indeed the applicant's arguments, they both encounter the fairly uncontroversial proposition that what the legislature intended is most likely to be reflected in what it said. It is true that, in the normal course under s 44(1), a dividend paid to a non-resident shareholder from profits derived from sources outside Australia was not brought into his or her assessable income. But Div 6 of Pt III made special rules in relation to trust income. It did so because (presumably amongst other reasons), even where a shareholder was a non-resident, the trust beneficiary - the presumptive taxpayer - may have been a resident for all or part of the year in question: see s 97(1)(a)(i). It was that circumstance which provided the nexus with Australia. The definition of "net income" in s 95(1) was a carefully-devised part of this statutory scheme, and, upon proper analysis, it was supplemental to, rather than inconsistent with, s 44(1). 145 It is likewise in relation to s 96B. In terms, that section was concerned with non-resident trust estates. By subs (3), the taxpayer's share of the "net income" of the trust estate was to be calculated under s 96C. In dealing with the subject of "net income" in that sense, one had to consider what the result would have been if the trustee had been a resident: s 95(1). Of course, so to proceed was inconsistent, in a sense, with the known fact that the trustee was not a resident, but it was the way that s 96B made its contribution to the series of provisions under which certain sums were brought into the assessable income of a taxpayer who was a resident. There is, in my view, no reason not to give these provisions the meaning which their terms naturally conveyed. It is a meaning which was manifestly in harmony with the scheme and objects of Div 6 generally. 146 It is now necessary to abandon the assumption that Juris and Lively did not exist, and to return to reality. Juris and Lively were the registered shareholders in Esparto. Mourant was not. In the context of the Commissioner's case as laid out above, this aspect is relevant at two points: under s 159GZZZP(1)(c), where the purchase price is taken to be a dividend paid by the company "to the seller as a shareholder", and under s 44(1), which brings dividends paid by a company into the assessable income of "a shareholder". 147 Under Australian law, where shares are held on trust for a beneficiary, it is the trustee whose name is on the register that is regarded as the shareholder: Commissioner of Taxation (Cth) v Patcorp Investments Ltd (1976) 140 CLR 247, 293-295, 305; Kingston v Keprose Pty Ltd (1987) 11 NSWLR 404, 410-412; Jalmoon Pty Ltd (in liq) v Bow [1997] 2 Qd R 62, 69. That would make Juris and Lively the relevant shareholders on the facts of the present case. The question is not, however, entirely a matter of Australian law. The foundation of the reasoning in Patcorp Investments is to be seen in the judgment of Gibbs J. Speaking first of the 1936 Act, his Honour said (140 CLR at 293): By s. 6 (1) of the Act, "shareholder" is defined to include "member or stockholder", but that definition provides no assistance in the present case, because in the case of a company limited by shares a member must be a shareholder. For present purposes, the terms "shareholder" and "member" are synonymous. Their meaning must be sought in the rules of company law. Section 16 of the Companies Act, 1961 (N.S.W.) (as amended) provides (inter alia) as follows: (4) On and from the date of incorporation specified in the certificate of incorporation, but subject to this Act, the subscribers to the memorandum together with such other persons as may from time to time become members of the company shall be a body corporate by the name contained in the memorandum ... (5) The subscribers to the memorandum shall be deemed to have agreed to become members of the company and on the incorporation of the company shall be entered as members in its register of members, and every other person who agrees to become a member of a company and whose name is entered in its register of members shall be a member of the company. These provisions appear to declare, in the clearest possible way, that a person, other than a subscriber, does not become a member of a company until his name is entered on the register. By s. 151 the company is required to keep a register of its members and to enter therein (inter alia) - (a) the names and addresses of the members ... (b) the date at which the name of each person was entered in the register as a member. Counsel for the appellant companies submitted that the effect of this section is that the register records the fact of membership but does not in itself confer the status of membership. This submission, however, gives too little weight to the words of s. 16 and is opposed to the views that have consistently been expressed in cases decided on similar company legislation. The judgment in Patcorp Investments, therefore, proceeded by reference to the provisions of Australian statutory law. 148 Esparto was incorporated in Jersey. At trial, there was no evidence as to the provisions of Jersey law, if any, that might correspond with those set out above in the judgment of Gibbs J. Indeed, the parties appear not to have appreciated the potential significance of matters of this kind. The issue was raised in correspondence sent by my Associate to the parties on 29 August 2011, and the parties' responses were received on 30 September 2011. Both sides noted that there had been no evidence as to the relevant aspects of the law of Jersey applicable to Esparto. However, both sides referred me to that law in their supplementary submissions, and I believe I am entitled to have regard to it as though it were properly before the court. At the relevant time, s 25(1) of the Companies (Jersey) Law 1991 provided as follows: The subscribers of a company's memorandum are deemed to have agreed to become members of the company, and on its registration shall be entered as such in its register of members. Relevantly, this aspect of Jersey law corresponds with the provisions on which the judgment in Patcorp Investments was based. Indeed, that Patcorp Investments applied to the determination of the issues arising in the present case was accepted both by the Commissioner and by the applicant. 149 Applying Patcorp Investments in the conventional way, therefore, would produce the result that Juris and Lively were the relevant shareholders for the purposes of ss 159GZZZP(1) and 44(1). The net proceeds of the share buy-back in March 2006 would not be taken to be a dividend paid to Mourant under s 159GZZZP(1), which of itself would be sufficient to break the chain of deeming provisions on which the Commissioner relied. However, the Commissioner had several means by which, he submitted, the chain could and should be repaired, and it is to his arguments in that respect that I next turn. 150 The Commissioner's first argument was based on a construction of s 159GZZZP(1) itself. He submitted that Mourant was the "shareholder" for relevant purposes because the section was "a deeming provision". The words "is taken to be a dividend paid by the company … to the seller as a shareholder in the company" were said to deem not only that the relevant amount of the purchase price was a dividend, but also that the seller was, in relation to the receipt of that amount, a shareholder. The Commissioner submitted: By using the word "seller", the legislature's intention is that this provision extends beyond mere or bare legal shareholders to include others who, in substance, are sellers of shares. I cannot accept that submission. It ignores the words of s 159GZZZK(b) of the 1936 Act (see para 134 above). By that provision, the shareholder is deemed to be the seller. A seller who is not in fact the shareholder cannot be treated as the shareholder under Div 16K. The present question cannot, therefore, be resolved on the basis that Mourant was deemed by s 159GZZZP(1) itself to be the relevant shareholder. 151 The Commissioner's next argument under s 159GZZZP(1) was that there was only a "single net income" derived by the trusts of which Juris and Mourant were trustees. In this respect, the Commissioner relied on Colonial First State Investments Ltd v Commissioner of Taxation [2011] FCA 16. As in the present case, in that case Stone J was concerned with the operation of ss 95(1) and 97(1)(a) of the 1936 Act. On the facts of the case, the applicant, as trustee of a retail unit trust, held units in a wholesale unit trust. One of the questions which had to be answered in the case was whether an apparent capital gain made on the redemption of units in the wholesale trust would be - … included in the assessable income taken into the calculation of the net income of the trust estate of the Retail Fund, as being that part of the net income of the Wholesale Fund to which the Applicant is, in consequence of the redemption and the operation of clause 12 of the amended Constitution, presently entitled for the purposes of s 97 of the 1936 Act…. The Commissioner pressed for a negative answer to that question. One of the bases upon which he did so was that the units in the wholesale trust were not held by the applicant in its own name: they were held by another company as "custodian" in order to comply with s 601FC(1)(i) of the Corporations Act 2001 (Cth). The Commissioner argued that, for that reason, the applicant was not a "beneficiary" of the wholesale trust for the purposes of s 97 of the 1936 Act. Stone J rejected that argument. Her Honour said ([2011] FCA 16 at [19]): The Commissioner's conclusion that the applicant is not a beneficiary of the Wholesale Fund because of the interposition of the custodian ignores equity's concern with substance rather than form: see Corin v Patton (1990) 169 CLR 540 at 579 per Deane J. It is undoubtedly the case that the structure of the Retail Trust requires payment of the Redemption Amount to be made to Citicorp, in its capacity as custodian of the Retail Fund. In that sense it is correct to say that Citicorp has "title" to the unit however the concept of title is of limited relevance in determining who is a beneficiary. Because of the legal arrangements pursuant to which the applicant, as trustee of the Retail Fund, has appointed Citicorp as the custodian, Citicorp is the conduit through which the payment must flow to the applicant but it is the applicant not Citicorp to whom the Redemption Amount must be paid. 152 In the present case, it was submitted on behalf of the Commissioner that "a single 'net income' is to be calculated for both estates under s 95(1) pursuant to the reasoning in Colonial First State". That reasoning was said to be based upon an "in-substance approach" to the calculation of net income. I should say at once that Colonial First State was not concerned with the calculation of net income. Rather, it was concerned with the question whether a beneficiary once removed could be considered as the "beneficiary" in the operation of s 97 where the direct beneficiary, a custodian only, was the entity which immediately derived the income in question. I would say also that Colonial First State was not concerned with a non-resident trust estate. The deeming provisions of s 96B(2) were not, therefore, relevant. It was by reference to general concepts that Stone J was obliged to consider whether the applicant in the case was a "beneficiary". By contrast in the present case, not only does s 96B(2) absolve the court from the need to consider those general concepts, it is by reference only to the statutory deeming provisions that the questions which arise must be resolved. Whatever the force, therefore, of the "single net income" argument advanced on behalf of the Commissioner, it does not, in my view, derive any support from Colonial First State. 153 The real problem confronting the argument is that it does nothing to overcome the circumstance that the trustee of the Esparto Trust was not the "shareholder" for the purposes of s 159GZZZP(1)(c). Whether or not there was a "single net income" is thus irrelevant to the fracture in the Commissioner's chain of reason brought about by that circumstance. I do not accept that the approach proposed in this argument is sufficient to bring the proceeds of the share sales of March 2006 into what would have been the assessable income of Mourant under s 44(1) of the 1936 Act, had it been a resident taxpayer at the time. 154 The Commissioner's final argument under s 159GZZZP was that the trusts of which Juris and Lively were trustees and the Esparto Trust itself were in point of substance but one trust, the role of Juris and Lively being no more than that of "delegates" of Mourant as trustee of the Esparto Trust. Here, the Commissioner relied on the judgment of Tate JA in Commissioner of State Revenue v Lend Lease Funds Management Ltd [2011] VSCA 182. That case involved the removal of a custodian from the property-holding arrangements of an investment trust, and the resumption of custodial functions by the trustee itself. The question which arose was whether the transfer of title to real property consequent upon the removal of the custodian was "made solely … because of the retirement of a trustee or the appointment of a new trustee, or other change in trustees" within the meaning of s 33(3) of the Duties Act 2000 (Vic), and thereby exempt from duty. The Commissioner of State Revenue argued that it was not since the custodian held title to the property by way of a separate trust, that its removal was the extinguishment of that trust, and that the transfer of the property to trustee was the creation of a new trust. Tate JA and Pagone AJA rejected that argument. Tate JA referred ([2011] VSCA 182 at [145]) to what was said by Gummow and Hayne JJ in Trust Company of Australia Ltd v Commissioner of State Revenue (Qld) (2003) 197 ALR 297, 303 [29]: The result in the present case appears to have been that TCA held the legal (that is, registered) title to the land on trust for Cromwell which, in turn, was trustee of the equitable title in favour of the syndicate of investors whose moneys had funded the purchase of the land. Tate JA continued ([2011] VSCA 182 at [146]): The High Court recognised not only that the effect of a custody agreement, in the context of a managed investment scheme, is that the custodian holds, and holds only, legal title but also that the responsible entity holds the equitable title on trust for the unitholders. A consequence of a custody agreement, in the context of a registered managed investment scheme, is thus the separating out of legal and equitable title of the assets of the scheme trust so that the scheme trustee holds only the equitable title for the ultimate beneficiaries and the custodian holds, on the scheme trustee's behalf, no more than the legal (ie registered) title to the trust assets. While the separation of the interests associated with the scheme trust means that the custodian acts as a trustee, the separation does not entail that a separate and different trust has been created. Pagone AJA said ([2011] VSCA 182 at [171]): In this case there was, at most, the removal of a trustee (TCAL as special trustee under the custody agreement) of a pre-existing (and continuing) trust. It may be that the custodial duties assumed by TCAL created a special trust but its holding pursuant to the custodial agreement was of the land on behalf of the responsible entity as trustee of the pre-existing HRP Trust. The transfer was relevantly a change of trustee of that trust sufficient to come within the terms of s 33(3). The third member of the court, Maxwell ACJ, dissented. 155 The essence of these conclusions in Lend Lease was that the removal of the custodian did not affect the continuity of the main trust and did not give rise to the creation of a new trust. It was merely a change of trustee within the terms of s 33(3). The use to which the Commissioner put Lend Lease in the present case is revealed in the following extract from his supplementary written submissions: If there were a single Esparto trust estate, then only one net income would be calculated under s 95(1). Both Mourant and Juris would be trustees of the single Esparto Trust. Accordingly, it would not matter whether Mourant or Juris was the shareholder of the Esparto Trust. A deemed dividend paid to either of them under s 159GZZZP would be treated as part of the net income of that single trust estate under s 44 of the 1936 Act on the assumption that they were both Australian residents. In my view, the position for which the commissioner contends does not reflect what their Honours held in Lend Lease, and is not a legitimate means to overcome the effect of the principle for which Patcorp Investments stands. 156 The existence of the sub-trusts by which Juris and Lively held the Esparto shares in the present case does seem to have a deal in common with custodial arrangements of the kind seen in Lend Lease. However, at base, the Commissioner's problem is one of statutory interpretation. As I understand Patcorp Investments, it is the custodian, alone, which would have been regarded as the "shareholder", had company shares been held by the trust in Lend Lease. Perhaps that might not have been the case had the custodian's shareholding been instrumental only, without the existence of any kind of trust at that level (assuming such a situation could exist). But Pagone AJA seems to have considered that there was a "special trust" of which the custodian was the trustee, and the passage from Trust Company of Australia, upon which Tate JA relied, bespeaks a like perception. In the present case, there was on any view a distinct trust, albeit a very simple one, interposed between Mourant and the share register of Esparto, in which circumstances the Commissioner's submissions that a deemed dividend under s 159GZZZP(1) "would be treated as part of the net income of [the] single trust estate under s 44 of the 1936 Act" cannot be accepted. 157 For the above reasons, I would reject the Commissioner's argument that, for the purposes of the definition of "net income of the trust estate" in s 95(1) of the 1936 Act, the proceeds of the share buy-backs of March 2006 would have been included in the assessable income of the trust, had Mourant been a resident taxpayer, pursuant to s 44(1) of that Act. 158 I turn next to the Commissioner's argument that Mourant, if a resident taxpayer, would have had those proceeds drawn into its assessable income by s 97 of the 1936 Act. The point was that it was (to quote from his supplementary written submissions filed on 30 September 2011) - … necessary that each trust estate (the Juris bare trust and the Esparto Trust) be recognized in the application of the methodologies under s 96C. In effect a two step process is required. The first step is to identify the net income of the Juris bare trust estate. Next it is necessary to identify the net income of the Esparto Trust (as the ultimate recipient of the proceeds of the Buyback Payment). As I understand this submission on behalf of the Commissioner, the 1936 Act would operate as follows with respect to the facts of this case. First, the "net income" of Juris and Lively would be calculated via ss 159GZZZP(1) and 44(1) in the manner described above. Secondly, that "net income" would be the reference point for the operation of s 96C(1). In that context, Mourant would be the "taxpayer" (that term being defined in the 1936 Act as "a person deriving income or deriving profits or gains of a capital nature"). Since Juris and Lively were nominee trustees only, and since Mourant was the only beneficiary, in the absence of evidence to the contrary it must be taken as a fact that Mourant was presently entitled to all of the income, profits or gains derived by them in the year to 30 June 2006. Thus subs (1) of s 96C would operate in the circumstances. Thirdly, that net income, adjusted by the "attribution percentage", would then be the taxpayer's (ie Mourant's) share of the net income of the Juris and Lively trusts for the purposes of s 96B(3). In the premises, the attribution percentage would self-evidently be 100%. Fourthly, that share would then be used to calculate the presumptive "assessable income" of Mourant under s 97(1)(a). Because of the assumption required by s 95(1), it would be to subpara (i) of s 97(1)(a) that recourse would be had - ie, in the calculation required, it would be assumed that Mourant, as beneficiary under the Juris and Lively trusts, was a resident for the whole of the income year. 159 In putting the matter this way, counsel for the Commissioner did not revisit the question whether it was the pre-1998 or the post-1998 version of s 159GZZZP(1) which would apply to the circumstances of Juris and Lively. Counsel proceeded on the silent assumption that the position was the same in all respects as that which I have outlined above in relation to Mourant. Counsel for the applicant did not submit otherwise, and I shall proceed on that assumption. 160 Conceptually, this series of propositions advanced on behalf of the Commissioner appears to be sound. Applying it to the facts of the case, the sum of £8,109,916 would be included in the net income of Juris and Lively together for the year ended 30 June 2006. There is no evidence that Juris or Lively derived any other income, profits or gains in that year, so it was subs (1) of s 96C to which recourse would be had to calculate the share referred to in that section. That share would necessarily be £8,109,916. That sum would be fed into s 97(1) and, because of the assumption that Mourant was a resident, it was the whole of that sum that would stand as the presumptive assessable income of Mourant under the section. 161 The sum of £8,109,916 would then be used as the assessable income of Mourant, qua trustee now, for the purposes of the definition of "net income" in s 95(1). This brings the analysis back to the point reached in para 142 above. It remains to insert that sum into the calculation required by s 96C(4), and it is to the matter of "attribution percentage" that I next turn. 162 In his case as conducted at trial, the Commissioner's submissions were unhelpful at this level. That state of affairs caused me to have my Associate send a memorandum to the parties in the following terms: In regard to the above proceeding, his Honour would be assisted by a more detailed submission from each of the parties as to the application of s 96(2) [sic - later clarified as s 96C(2)] of the 1936 Act to the facts of the present case, including - a) references to the evidence which would fit into the calculations required by the subsection; b) a setting-out of those calculations. Without limitation, it would be of assistance if such a submissions were to cover each of the following questions which appear to arise under s 96C(2): c) Are the references to "the income of the trust" in the definition of "attribution percentage" in subs (5), and in subs (7), references to the "net income" of the trust as defined in s 95(1)? d) If not, what does "the income of the trust" mean in those provisions, and what is the evidence as to the income of the Esparto Trust in the year ended 30 June 2006? e) What is the evidence as to the applicant's "share of the income" of the Esparto Trust in the 2006 year for the purposes of the definition of "attribution percentage" in subs (5), and of subs (7)? In supplementary submissions filed in response to that memorandum on 30 September 2011, the Commissioner submitted that the "income of the trust" in subss (5) and (7) was not a reference to the net income of the trust as defined in s 95(1). Rather, it was a reference to the income of the trust as a matter of "ordinary meaning under general trust law and accounting principles". That is to say, I presume, the "income" to which subss (5) and (7) referred was "income according to ordinary concepts" as understood in s 6-5(1) of the 1997 Act. 163 The Commissioner's supplementary submissions then moved to the dichotomy referred to in the definition of "attribution percentage" in s 96C(5), commencing with para (a) of the definition. He submitted that the proceeds of the share sales in March 2006 were income in the ordinary sense of the word, relying upon a number of English decisions commencing with Bouch v Sproule (1885) 29 Ch D 635, and of which Hill v Permanent Trustee Company of NSW Ltd [1930] AC 720 was said to be the leading authority. That was, with respect to those involved, a surprising submission, as it was directly inconsistent with a submission made on behalf of the Commissioner at trial about s 99B(2)(a) which was never withdrawn. 164 On the subject of s 99B(2)(a), the following exchange occurred between the court and senior counsel for the Commissioner during the course of the latter's final address: HIS HONOUR: Do you accept that the amount paid to the taxpayer for the purpose of 99B did represent the corpus of the Esparto Trust? MR SEST: Your Honour, I put it this way: I can't - I don't argue against that proposition. There's an issue about - I'm sorry to sound less than definite, your Honour - but there's a question as whether corpus could possibly represent the original property of the trust as settled as opposed to its accumulated sum from time to time, but, your Honour, I'm not here to make the argument that it isn't the latter. HIS HONOUR: Well, if you don't make the argument now, at least so far as this case is concerned ­ ­ ­ MR SEST: I understand, your Honour. HIS HONOUR: ­ ­ ­ I'm not sure when else it's going to be made. MR SEST: No. Well, I'm under instructions, your Honour, and there's certain propositions that I can put definitely and certain that I can't. HIS HONOUR: Yes. MR SEST: And what I'm saying now reflects that, your Honour. Bearing this exchange in mind, I would regard the following two propositions as self-evident: (1) that "corpus of the trust estate" in the definition of "attributable percentage" in s 96C(5) was the same entity as "corpus of the trust estate" in s 99B(2)(a); and (2) that paras (a) and (b) of the definition of "attribution percentage" in s 96C(5) set up a mutually exclusive dichotomy between the income of the trust estate and the corpus of the trust estate. Neither is there any relevant difference between what s 96C(5) refers to as the corpus of the trust estate as such and the concept of corpus as deployed in s 99B(2)(a) as the point of origin, or derivation, of an amount that was paid to, or applied for the benefit of, a beneficiary. 165 If that was all there was to it, I would be most reluctant to receive the submissions which the Commissioner sought to make in his supplementary submission of 30 September 2011 to the effect that the ordinary income of the Esparto Trust included the proceeds of the share sales of March 2006. As I mentioned at the outset, it was from the start the bedrock proposition on which the applicant's case was based that those proceeds were capital in nature. The Commissioner never put that proposition seriously in contest. Ultimately, he effectively conceded it. He relied, rather, upon the various deeming provisions to which I have referred in these reasons. The applicant conducted his case accordingly. It would have been unfair to permit the Commissioner to rely upon a new argument that was inconsistent with the way he conducted his case generally merely because it may have been a convenient means of dealing with an issue raised in correspondence by the court largely because the Commissioner's case itself was not adequately particularised. 166 As it happens, and on the invitation of counsel for the applicant, I am able to deal with this point raised on behalf of the Commissioner without unduly lengthening these reasons. The Commissioner treated Hill as the exemplar of an instance which should govern the determination of the present case. In Hill, a trust estate held shares in a trading company. The company declared a dividend "out of the profits arising from the sale of breeding stock, being assets of the company not required for purposes of resale at a profit". The question was whether that dividend was income or capital in the hands of the trustee. The Supreme Court had held the latter. The Privy Council did not agree. Their Lordships said ([1930] AC at 731): A limited company not in liquidation can make no payment by way of return of capital to its shareholders except as a step in an authorized reduction of capital. Any other payment made by it by means of which it parts with moneys to its shareholders must and can only be made by way of dividing profits. Whether the payment is called "dividend" or "bonus", or any other name, it still must remain a payment on division of profits. Earlier in their opinion, their Lordships had contrasted a distribution made to shareholders while the company was a going concern with a distribution on a liquidation. Their Lordships said ([1930] AC at 729): On the other hand, if the company instead of distributing the same balance as dividends, resolved upon liquidation, the shareholder would be repaid his share capital and in addition the share of surplus assets in the liquidation attributable to his shares. The moneys received by the shareholder in the liquidation may be swollen by reason of the fact that the company has in its possession undivided profits, but no part thereof would belong to a tenant for life as income; it would all be corpus of the trust estate. From this it would appear that moneys paid in respect of shares in a limited company may be income or corpus of a settled share according to the procedure adopted, i.e., according as the moneys are paid by way of dividend before liquidation or are paid by way of surplus assets in a winding up. Each process might appear to involve some injustice, the former to the remainderman, the latter to the tenant for life. 167 The present case did not involve a distribution by Esparto in the sense discussed in Hill. The moneys received by Juris and Lively in March 2006 were the consideration for the shares of which they then surrendered ownership. There was, therefore, an exchange of value for value. After the exchange, Juris and Lively no longer held the 84 shares with which the transaction was concerned. What they received for those shares may well have exceeded (perhaps by far) the investments which they originally made, but such issues are addressed as a matter of statute by provisions such as s 159GZZZP itself. In my opinion, Hill and other like cases upon which the Commissioner relied are no authority for the proposition that, when a trustee shareholder receives the proceeds of the sale-back of shares to the company of which he or she is a member, those proceeds must be, and be only, income according to ordinary concepts. 168 Turning then to para (a) of the definition of "attribution percentage" in s 96C(5), the income of the Esparto Trust for the years ended 31 December 2005 and 31 December 2006 was as shown in the table set out in para 131 above. There are, however, two respects in which I am required by s 96C(4) to take an approach which differs from that which I took under s 95(1). First, the calculation under s 96C(4) is not net of allowable deductions. Thus the figure to be derived from the table (for both of the calendar years) is £2026. Secondly, as the calculation required by s 96C(4) would have the income included as the denominator in the implicit fraction, the inclusion of the whole of the sum of £2026 in the calculation would work to the advantage of the applicant, and would, therefore, be inconsistent with s 14ZZO of the Administration Act. If the applicant cannot, on the evidence, exclude the realistic prospect that none of the income as shown in the table in para 131 was derived between 1 July 2005 and 30 June 2006, the denominator would be zero and the entity referred to in para (a) of the definition would be incalculable. For reasons set out in para 132 above, I think it highly improbable that this was the case, but any attempt on my part to nominate a figure for the denominator would be pure guesswork. 169 As it happens, I consider that the issues that arise under para (a) of the definition may be resolved by reference to the numerator of the fraction which is implicit in the calculation required. Of the income of £2,026 to which I have referred, what was the "share" to which the applicant was entitled on 30 June 2006? It seems clear that the trustee had not resolved to apply any part of that income in favour of the applicant at or before that date. I would find, therefore, that the applicant was not entitled to any share of that income: see para 121 above. Was he "entitled to acquire" any such share? Here, because of s 96C(8), I must refer to Pt XI of the 1936 Act, and specifically to s 475, which provided: For the purposes of this Part, a person is taken to be entitled to acquire anything that the person is absolutely or contingently entitled to acquire, whether because of any constituent document of a company, the exercise of any right or option or for any other reason. The Commissioner did not advance a case in the alternative that the applicant, because of the possibility that a distribution or application of a share of the income might be made in his favour, was "contingently" entitled to acquire that share. For my own part, where the amount of the putative distribution or application was - because it never happened - unknown, it would seem to be impossible to derive any meaningful result from the application of s 475 to the workings required by s 96C(5) and (7). 170 For the above reasons, I consider that the attribution percentage calculated under para (a) of the definition of that term in s 96C(5) was, in the circumstances of the applicant in the 2006 year, 0%. 171 I turn next to para (b) of the definition of "attribution percentage" in s 96C(5) of the 1936 Act. It is first necessary to consider the "corpus" of the Esparto Trust as at 30 June 2006 (the test time under the definition). The unaudited balance sheets for the trust for the years ending on 31 December 2005 and 31 December 2006 are in evidence, and show that the net asset position was £151,031 and £300,007 at each of those dates respectively. Pursuant to leave, at a late stage in the case the applicant led evidence, which the Commissioner was content to accept, that the figure for 30 June 2006 was £313,770. The applicant also led evidence that, on that date, there were seven discretionary beneficiaries of the Esparto Trust. It followed, according to the applicant, that the percentage yielded by para (b) of the definition was: 172 The Commissioner, however, saw things differently. He submitted that one of the possibilities under the Esparto Trust Deed was that the applicant might acquire 100% of the corpus of the trust. This might be because the trustees so determined, or because, in default of any determination, the applicant was the only living beneficiary at the time of the termination of trust. Under the trust deed for the Esparto Trust, the trust period was the period from the constitution of the trust in July 1998 until the earliest of - (a) the day on which shall expire the period of one hundred years from the date hereof; (b) the day on which shall expire the period of twenty years from the date of the death of the last survivor of the descendants of His Late Majesty King George the Sixth living at the date hereof; (c) such day as the Trustees may declare to be the date of expiration of the Trust Period as is hereinafter provided. What was "hereinafter provided" was the following: The Trustees may by instrument revocable or irrevocable at any time declare that a day earlier than the days mentioned in (a) and (b) of the definition of the Trust Period in clause A2.01.01 but not earlier than the date of such instrument shall be the date of expiration of the Trust Period. 173 According to the Commissioner, the unlikelihood of the applicant being the only one of the seven beneficiaries ultimately to derive the benefit of the corpus of the Esparto Trust was not to the point. The mere possibility justified the conclusion that he was, on 30 June 2006, "contingently entitled" (to use the wording of s 475) to 100% of the corpus. Rejoining to the obvious response that this would produce the result that all of the persons who, on 30 June 2006, were discretionary beneficiaries of the trust would likewise be contingently entitled to 100% of the corpus - yielding a total contingent entitlement of 700% - the Commissioner referred to s 96C(6), which not only contemplated, but provided a means of resolving, situations in which the sum of the attribution percentages of different Australian taxpayers exceeded 100%. 174 At the general level, I would accept the Commissioner's proposition that a beneficiary under a discretionary trust who is within the class of persons to whom the corpus of the trust was required to be distributed in default of any other disposition of the corpus either while the trust is an ongoing entity or upon termination of the trust is to be regarded, at every time while he or she remains in that position, as "contingently entitled to acquire" the corpus: see In Re Brooks' Settlement Trusts [1939] 1 Ch 993, 997-998; Hobbs v Federal Commissioner of Taxation (1957) 98 CLR 151, 161. Notwithstanding that, it must be said that the Commissioner's construction of para (b) of the definition of "attribution percentage" would yield some rather odd results in practice. Take, for example, a case in which there was one resident beneficiary in a non-resident discretionary trust of which there were, in total, 10 beneficiaries. The attribution percentage would be 100%. Subsection (6) would have no operation. The taxpayer's share of the net income of the trust estate under s 96C(2) would be 100%. That is to say, notwithstanding that the taxpayer was one of only ten persons who were equally contingently entitled, the whole of the net income of the trust estate would be treated, under s 97, as though it were the assessable income of the single resident taxpayer. It would not be difficult to reach the instinctive conclusion that a result like this is unlikely to have been intended. 175 Neither, however, is it difficult to envisage situations in which the construction for which the Commissioner contends would be the only one that would give sensible operation to the definition of "attribution percentage" in s 96C(5). Take the case of a testamentary trust, under which the testator left a fund on trust, to be taken by his son absolutely if the son married before the age of 25, otherwise to be taken by his daughter absolutely. Because the interests of the son and daughter would be in the alternative, at some point before the son turned 25 it could not be said that they each contingently held a 50% share of the corpus of the trust. Indeed, it could never be the case that either would become entitled to 50% of the corpus. One only of them would become entitled to 100% of the corpus. The conclusion that each was contingently entitled to acquire 100% of the corpus would, in my view, be inescapable. 176 Although the construction for which the Commissioner contends is not always an attractive one, I am bound to say that I do not see any satisfactory alternative. Given the universe of miscellaneous contingent entitlements with which the definition must potentially cope in practice, a legislative intent that all contingent beneficiaries should be assumed to have equal entitlements, or even that their respective interests could be horizontally calculated to yield total of 100%, cannot be regarded as likely. Indeed, as the Commissioner pointed out, subs (6) implies a legislative assumption that the attribution percentages of individual beneficiaries may well exceed 100%. In the circumstances, I would accept the Commissioner's case on the construction of the definition of "attribution percentage" in s 96C(5) of the 1936 Act. 177 It follows that it is not necessary to take account of what was the corpus of the Esparto Trust on 30 June 2006. One needs only to know, first, that there were seven discretionary beneficiaries of the trust on 30 June 2006, secondly, that the interests of these beneficiaries were identical and included the right to share equally in the corpus on default, and thirdly that three of then were residents of Australia on that date. That latter circumstance was the subject of evidence from the applicant received very late in the piece, after the Commissioner had indicated his reliance on subs (6) of s 96C in the way I have explained above. For the applicant the attribution percentage was, therefore, (100/300) x 100 = 33.33%. 178 In the year to 30 June 2006, the applicant held an interest in the Esparto Trust for 227 days. The calculation required by s 96C(4) is, therefore, as follows: The figure yielded by this calculation is £1,681,223.73. In recent submissions, the Commissioner referred to his "published exchange rate" as at the date of the share buyback, namely, $A1 = £0.4262. The applicant accepted that rate as applicable for present purposes. It would yield a figure of $3,944,682.61. That was the applicant's share of the net income of the Esparto Trust under s 96C(2) of the 1936 Act and it was, therefore, included in his assessable income under s 97(1) of that Act. 179 Alternatively, and supplementally, to s 97 of the 1936 Act, the Commissioner relied on s 99B as a basis for bringing into the assessable income of the applicant the benefit which he received as a beneficiary of the Esparto Trust in the year ended 30 June 2006. To the extent presently relevant, s 99B provided as follows: (1) Where, at any time during a year of income, an amount, being property of a trust estate, is paid to, or applied for the benefit of, a beneficiary of the trust estate who was a resident at any time during the year of income, the assessable income of the beneficiary of the year of income shall, subject to subsection (2), include that amount. (2) The amount that, but for this subsection, would be included in the assessable income of a beneficiary of a trust estate under subsection (1) by reason that an amount, being property of the trust estate, was paid to, or applied for the benefit of, the beneficiary shall be reduced by so much (if any) of the amount, as represents: (a) corpus of the trust estate (except to the extent to which it is attributable to amounts derived by the trust estate that, if they had been derived by a taxpayer being a resident, would have been included in the assessable income of that taxpayer of a year of income); (b) an amount that, if it had been derived by a taxpayer being a resident, would not have been included in the assessable income of that taxpayer of a year of income; (c) an amount: (i) that is or has been included in the assessable income of the beneficiary in pursuance of section 97…. On any view, the distributions received by the applicant from the Esparto Trust in March 2006 fell within subs (1) of s 99B. The more contentious issue was whether it was reduced, and if so to what extent, under subs (2). The Commissioner submitted that the figure calculated under s 97 (see para 178 above) should be taken into account under subpara (i) of para (c), but otherwise that there should be no reduction. 180 Dealing first with para (a) of subs (2), the Commissioner accepted that the whole of the distribution represented the corpus of the trust. The question which then arose was whether so much of the corpus as was represented by the distribution would, had it been derived by a resident taxpayer, have been included in his or her assessable income. This looks to the character of the corpus by reference to the circumstances of its derivation. In the present case, the relevant accretion to the corpus of the Esparto Trust was derived by way of the proceeds of the sale-back to Esparto of the shares held in the name of Juris. In my consideration of the issues arising under s 96C above, I have held that, had Mourant been a resident taxpayer, its assessable income would, pursuant to s 97, have included those proceeds. It follows that, although the whole of the amount paid to the applicant represented corpus, that whole amount was excepted under the parenthetical passage in s 99B(2)(a). There was, therefore, no reduction under that paragraph. It also, and correspondingly, follows that para (b) of the subsection is of no benefit to the applicant in the present case. 181 On the other hand, the reduction referred to in para (c) of s 99B(2) is clearly applicable on the conclusions I have reached in this part of the case. The sum of $3,944,682.61 included in the assessable income of the applicant under s 97, should be applied by way of reduction of the sum otherwise yielded under s 99B(1). 182 The result is that, of the total sum of $6,339,733 which was distributed to the applicant from the Esparto Trust - (a) $3,944,682.61 was included in his assessable income under s 97; and (b) the balance, $2,395,050.39, was so included under s 99B. The total sum was that in relation to which the Commissioner assessed the applicant for income tax. It follows that, save with respect to penalties (with which I deal separately below), the applicant's appeals in relation to the year ending on 30 June 2006 must be dismissed.

2006 year - penalty 183 The Commissioner took the view that, because the applicant did not return the distributions of March 2006 as income, he had made a statement that was false or misleading in a material particular within the meaning of s 284-75(1) of Sch 1 to the Administration Act. Because the statement would have produced a lower tax-related liability for the applicant than a return which disclosed the distributions, the applicant had a shortfall amount within the meaning of s 284-80(1). The Commissioner considered that the shortfall amount resulted from an intentional disregard of a taxation law on the part of the applicant, and assessed him for a 75% penalty under item 1 in the table in s 284-90(1). This was done both in respect of the cash distribution and in respect of the non-cash distribution. In the present case, the applicant challenges the correctness of this assessment. 184 In order to consider the strength of that challenge, it is necessary to return to the events which led to the distribution of March 2006, and to the lodgement of the applicant's tax return for the 2006 year. 185 In September 2005, Donovan, Mackie, Quinert and the applicant met in Hong Kong as members of the Board of Koda. They discussed the future direction of the Koda group. Donovan proposed a business opportunity which would, it seems, have involved the applicant in spending considerable periods of time outside Australia. For that reason, he did not favour the proposal. Neither did Quinert or Mackie. In his affidavit of 1 December 2010, the applicant continued (with reference to the Board meeting of September 2005): I recall that Kevin Donovan acknowledged to the meeting the contributions of Messrs Mackie, Quinert and me in helping the owners of the company realise a significant increase in the real value of the company over a long period of time. I recall Kevin Donovan then advised that he, as the Settlor of the Esparto Trust, would approach the Trustee of the Esparto Trust and request that it exercise its discretion to add Messrs Mackie, Quinert and me as beneficiaries of that trust for the purpose of making a distribution to each of us out of the corpus of the Esparto Trust. I recall he said words to the effect that he recognised and appreciated the respective contributions, over and above our past contributions as directors, of each of Messrs Mackie, Quinert and me, which culminated in the Esparto Trust obtaining a demonstrable value for the holdings its nominees had held in Esparto Limited since the establishment of the trust. The applicant was not challenged on this evidence. 186 Anticipating the receipt of a distribution from the Esparto Trust, the applicant promptly sought the advice of counsel as to the taxation consequences of any such distribution. Counsel was briefed with a copy of the trust instrument, but no record of any other written instructions provided to counsel is in evidence. Notwithstanding that deficiency, the drift of those instructions may be gathered from the opening paragraphs of counsel's memorandum of advice dated 12 October 2005: 1. I am briefed to advise as a matter of some urgency on the Australian tax consequences of a distribution from the corpus of the Esparto Trust to an individual Australian resident taxpayer. 2. I have been favoured with a copy of the Esparto Trust Deed which upon examination gives a power to the trustee on the exercise of its discretion to make either capital or income distributions to its specified beneficiaries. 3. On my instructions: (a) Esparto Ltd, as trustee for the Esparto Trust is a non-resident trust for Australian tax purposes; (b) Esparto Ltd as trustee for the Esparto Trust owns 100% of the issued capital of Koda Holdings Ltd. ("Koda Holdings")(non-resident corporation); (c) Koda Holdings is in a position that requires it to consider its options in relation to its future direction; (d) As a result of decisions made by Koda Holdings, the Esparto Trust is capital enriched; (e) By Deed of Variation, the Esparto Trust was varied to include further specified beneficiaries which included Australian residents; (f) A decision has been made by the trustee, Esparto Ltd. in the exercise of its discretion to make capital distributions from corpus to various specified beneficiaries, including an Australian resident beneficiary during the 2005/2006 year. I would make the following observations about the apparent tenor of counsel's instructions. First, it is not clear why counsel's advice was required "as a matter of urgency". Secondly, it seems that counsel had been misinformed as to the identity of the trustee of the Esparto Trust. Thirdly, it also seems that counsel was not informed as to the existence of Juris and Lively. Fourthly, counsel appears to have been informed that, as at October 2005, the trust itself was "capital enriched", whereas the enrichment of capital which ultimately funded the distributions of March 2006 then lay in the future. 187 In his memorandum of advice, counsel considered the provisions of the 1936 Act that might have had the potential to include distributions from the Esparto Trust in the applicant's assessable income, and expressed the view, substantially because those expected distributions would be sourced from capital, that they would not be so included. With respect to s 99B of the 1936 Act, counsel said: A further relevant provision in Division 6 is Section 99B of ITAA36 which is headed: RECEIPTS OF TRUST INCOME NOT PREVIOUSLY SUBJECT TO TAX, and states, "where, at any time during a year of income, an amount, being property of a trust estate, is paid to, or applied for the benefit of, a beneficiary of the trust estate who was a resident at any time during the year of income, the assessable income of the beneficiary of the year of income shall, subject to subsection (2) include that amount." So, where an amount is paid to an Australian resident beneficiary out of foreign source income that has been accumulated in a non-resident trust, such an amount is assessable to the beneficiary in the year of receipt. But, of course the operative word is income and sub-section 99(2) excludes from that section amounts paid out of the corpus of the trust and so, the provisions of Section 99B are not applicable to our fact situation. Counsel did not advert to the parenthetical passage in subs (2)(a) of s 99B. 188 As a member of the Board of Koda in March 2006, the applicant was involved in the resolution to buy shares back from Esparto. I would readily infer that the applicant well knew that the ultimate purpose of that buy-back was to put the Esparto Trust in funds sufficient to make the distributions foreshadowed by Donovan in September 2005. There is no evidence that the applicant sought supplementary advice from counsel as to the taxation consequences, if any, of these developments. 189 On 3 July 2006, the Commissioner served a notice under s 264 of the 1936 Act upon Oakley Thompson & Co with respect to certain international funds transfers made in March 2006. As it happened, those transfers included the cash distribution from the Esparto Trust in favour of the applicant. Amongst other things, the notice required the firm to identify the person on whose behalf it was acting in relation to the transfers, and to state the "nature and purpose of the transfers". Writing on behalf of the firm, on 7 August 2006 the applicant provided written responses to the s 264 notice. He said that the nature and purpose of the particular transfer which related to him was "capital distribution". He also provided the following information: On behalf of Mr Howard we are instructed to advise that these funds are the remittance of a capital distribution from the Trustee of the Esparto Trust. This Trust is a non-resident discretionary trust for Australian taxation purposes. We enclose a copy of correspondence dated 19 July 2006 received from Mourant & Co Trustees Limited of Jersey, Channel Islands. It is noted that Mr Howard became a discretionary beneficiary (contingent or otherwise) to, any part of the corpus of the Esparto Trust prior to being so added as a beneficiary. 190 Along with his correspondence to the Commissioner of 7 August 2006, the applicant enclosed a letter from Mourant to Oakley Thompson & Co, the relevant terms of which were as follows: Stephen Howard was added as a discretionary beneficiary of the Esparto Trust, a Jersey Discretionary Trust, on the 15 November 2005. Mr Howard along with Mr Michael Quinert are the only 2 Australian resident beneficiaries of the Trust. Prior to this date Mr Howard had no interest in this Trust and therefore had never received any benefit from it. The statement that the applicant and Quinert were the only Australian resident beneficiaries of the trust was, of course, incorrect, but nothing presently turns on that. The applicant also wrote a letter to the Commissioner on his own behalf dated 4 August 2006. In that letter, the applicant said: I advise that I became a beneficiary of the Esparto Trust on 15 November 2005. On or about 13 March 2006 Oakley Thompson & Co Pty Ltd received the sum of $5,528,817 to the credit of its trust account from Mourant & Co Trustees Limited of Jersey, Channel Islands. I am the ultimate beneficiary of those moneys. I wish to fully cooperate with the Australian Taxation Office in relation to enquiries it may have about my receipt of a capital distribution from the Trustee of the Esparto Trust. 191 Assuming that the Commissioner's interest in the international funds transfers of March 2006 had been satisfied by his correspondence of 7 August 2006, on 24 May 2007 the applicant lodged his income tax return for the 2006 year. He did not return as income either of the March 2006 distributions. 192 Dealing first with the cash distribution of $5,528,817, the Commissioner justified his conclusion that the applicant had intentionally disregarded the law by reference to the fact that he had, in instructing counsel in September or October 2005, stated that the distribution was of capital, rather than laying out all "the unadorned facts" so that counsel himself might have formed a view as to the capital or income nature of the distribution. The Commissioner then submitted that the applicant's omission to return the distribution as income was "a deliberate act based on legal advice". I cannot accept this attack on the applicant's conduct in relation to his tax return. In the present case as ultimately conducted in court, the Commissioner did not contest that the distribution had been made from the corpus of the trust and was, therefore, of a capital nature. That is to say, the characterisation of the distribution given to counsel by the applicant was, in point of substance, ultimately uncontroversial. It follows that, with respect to the question whether the applicant intentionally disregarded the law, nothing turns on that characterisation. 193 The Commissioner also submitted that counsel's advice of 12 October 2005 "inter alia did not address the operation of s 159GZZZP(1)" of the 1936 Act. To the extent that this submission implied a criticism of counsel, or of the applicant for not having referred to this provision in his instructions to counsel, I would reject it. There was no suggestion that, in September or October 2005, the Esparto Trust was going to be put in funds to make the then contemplated distributions by a sequence of off-market share buy-backs. When the applicant was under cross-examination, it was not put to him that he then ought to have anticipated that such a mechanism would be used. At that time, neither the applicant nor his counsel had any reason to think that s 159GZZZP might play a crucial role in determining the assessability as income of the then contemplated distribution. The result, unsurprisingly, was that counsel's advice of 12 October 2005 did not give consideration to the potential relevance of s 159GZZZP - with respect either to s 96B(3) or to the parenthetical exception in s 99B(2)(a) - to the question then at hand. 194 However, by March 2006, things were different. The applicant then knew the means by which the trust was to be, and had been, put in funds to make the cash distribution. Because this was done by way of off-market share buy-backs, s 159GZZZP potentially came into play. Not directly, of course, as I have held above. But, to the extent that his instructions to counsel in September/October 2005 reflected the applicant's thinking in March 2006 (and there is no reason to think that they did not), he appears not to have been giving any consideration to the position of Juris and Lively. What is presently important is that he appears to have given no consideration to the potential role of s 159GZZZP in the calculation of assessable income. What was the quality of the applicant's shortcoming in that regard? It was not put to him that, in March 2006, then knowing how the distribution was to be funded, he also knew, or recklessly turned a blind eye to the prospect, that the 1936 Act operated, or might well be held to operate, so as to bring the amount of the distribution into his assessable income. It was not put to him that, conscious of such a prospect, he deliberately refrained from returning to counsel to obtain further advice on the question of his tax liability. In these circumstances, I could not uphold the Commissioner's position that the applicant's shortfall amount resulted from his intentional disregard of the law. Neither did it result from his recklessness as to the operation of the law. 195 But I am of the view that the shortfall amount resulted from a failure by the applicant to take reasonable care to comply with the 1936 Act. The instructions by reference to which counsel had given his advice in October 2005 were very high-level ones. That may have been entirely appropriate in the circumstances which were then known to the applicant. However, particularly given the size of the distribution, the complexity of the transactions by which the Esparto Trust was put in funds to make it, and the applicant's position as director of Koda, the applicant's omission to take further advice in March 2006 once he knew the details of those transactions was not, in my view, the conduct of a taxpayer who was concerned to take reasonable care to ensure that his obligations under the 1936 Act were met. A taxpayer in the position of the applicant who was concerned to take reasonable care would, in my view, have realised that much more potentially relevant information was to hand in March 2006 than had been available when counsel gave his advice in the previous October, and that it was not prudent to rely, or to rely only, on that advice. 196 I also consider that the relative state of inactivity on the part of the Commissioner after the sending of the applicant's letter of 7 August 2006 was not a sufficient basis for an assumption by the applicant that the Commissioner most probably would accept that the cash distribution of March 2006 was not income in the applicant's hands. That state of inactivity would certainly not provide a justification for the applicant omitting to take the additional steps of a reasonable taxpayer as referred to in the previous paragraph. The letter of 7 August 2006 said nothing about how the trust came to be sufficiently funded to make the distribution and gave the Commissioner, therefore, no immediate reason to consider the significance of Div 16K of Pt III of the 1936 Act. To the extent that the applicant relies, for the purposes of penalty, upon the Commissioner's response to his letter of 7 August 2006, then, the letter itself was associated with the same failure to take care as I have found above in relation to the applicant's own position generally. 197 Turning next to the non-cash distribution of March 2006, the only respect in which the Commissioner submitted that that involved considerations different from those applicable to the cash distribution was that the applicant did not disclose it in his correspondence of 7 August 2006 in response to the Commissioner's s 264 notice. That is, in my view, a distinction rather than a difference, or at least a relevant one. The s 264 notice enquired only about the international funds transfer. The applicant was not asked about, and had no reason to provide information about, the forgiveness of his debt to the trust which constituted the non-cash distribution. 198 In other respects the questions which arise under s 284-90(1) of the schedule to the Administration Act with respect to the non-cash distribution are precisely the same as those which arise with respect to the cash distribution. I would provide the same answers. The applicant's omission to return the non-cash distribution was, in my view, the result neither of an intentional disregard of the law, nor of recklessness, on the part of the applicant. It was, however, the result of the failure by him to take reasonable care to comply with the 1936 Act. 199 For the above reasons, I consider that item 3 in the table to s 284-90(1) of the schedule to the Administration Act is applicable in the case of the cash and non-cash distributions of March 2006. The penalty payable by the applicant was, therefore, 25% of the shortfall amount. I shall uphold his appeals to that extent. I certify that the preceding one hundred and ninety-nine (199) numbered paragraphs are a true copy of the Reasons for Judgment herein of the Honourable Justice Jessup.