Whether the outgoings the Applicants claim to have incurred in the years of income ended 30 June 1996 and 30 June 1997 respectively were allowable deductions under subs 51(1) of the ITAA
94 The text of subs 51(1) of the ITAA has remained constant from the time the ITAA was first enacted, and is reproduced below:
"All losses and outgoings to the extent to which they are incurred in gaining or producing the assessable income, or are necessarily incurred in carrying on a business for the purpose of gaining or producing such income, shall be allowable deductions except to the extent to which they are losses or outgoings of capital, or of a capital, private or domestic nature, or are incurred in relation to the gaining or production of exempt income."
Each Applicant claims to have incurred outgoings in favour of ATTORI by way of research fees, and in favour of BARM by way of management fees associated with that research, in relation to two fiscal years, being yearly expenditure comprising $12,000, and thus $24,000 in the aggregate, and multiples thereof in the case of Messrs Harvey and Davidson as indicated by [27] above. Such expenditure is asserted by the Applicants to fall within the second limb of subs 51(1), or alternatively the first limb thereof, or both. The convenient course is to first consider the issue of deductibility under the second limb, that issue having been at least initially the preferred focus of the Applicants' case for entitlement to income tax deductibility.
95 The nature and objectives of the business which each participant was informed by the Prospectus would be carried on by him or her as an individual have been identified earlier in these Reasons for Judgment, some examples, and the judgment paragraphs relating thereto, being set out below:
"…a business proprietor in a business of development for potential manufacture and sale of specified tea tree oil based products including all necessary research…" [9]
"By participating in the Budplan Personal Syndicate you will engage in the business of development for potential manufacture and sale of specified tea tree oil based products including all necessary scientific research…" [12]
"Your business is the development and sale of tea tree oil products to marketers or manufacturers of products in the target areas of research…" [21]
It was further indicated in the Prospectus that the nature and objectives of the business, which each participant was to conduct, would be incorporated into the Budplan Syndicate Deed by virtue of the definition of "Business" contained in Clause 1.1.2 thereof, which contained in turn the Deed's definitions of "Product Packages", "Research and Development" and "Research Results", all such definitions being extracted in [28] above. Such Syndicate Deed was in turn incorporated in effect into the Principal Deed to be signed by each participant in the circumstances described in [23] above, and the Principal Deeds took effect as sub-trusts in relation to the Trust Deed dated 5 December 1995 identified in what has been extracted at the culmination of [11] above. Incidentally, the Commissioner did not raise any issue as to whether the Applicants, along with the numerous other participants, in substance carried on business in a partnership, and not purportedly as individuals, and if so, the consequences in law that might have followed.
96 The drafting regime adopted in the Prospectus for the purpose of describing the nature and objectives of the business to be undertaken by each participant individually as a member of the BPS, as I have earlier pointed out in [10] above, purported to merge the proposed research and development activities required to be undertaken for the creation of marketable TTO products and product packages, with the processes of manufacture and subsequent distribution of those products and product packages. However, other statements appearing in the Prospectus, also earlier extracted in these Reasons for Judgment in the paragraphs indicated below, reflected more of the reality of what had to be achieved by way of successful research and development in advance of the occurrence of income producing activities:
"Both Syndicates will contract with [ATTORI] to undertake the necessary scientific research including enhancing existing product formulae and product concepts and to develop new products" [9]
"You will commence business by entering into the Budplan Personal Syndicate Deed and contributing $200 (or multiples thereof) to the Syndicate to cover business establishment expenses and purchase of the initial formulae and product concepts…" [12]
Nevertheless as appears from the many events and circumstances set out in the preceding segments of these Reasons for Judgment commencing from [49] above, the BPS members, including of course the Applicants, never achieved the goal of manufacturing and selling TTO products or product packages resulting from the research and development activities foreshadowed and outlined in the Prospectus, the only assessable income ever derived by them as BPS members being that particularised in [69] above, and there explained as income unrelated to the research and development for which subscribers for units or syndicate participations, such as the Applicants, outlaid the funds the subject of claims to subs 51(1) deductibility. Contrary to the Applicants' submissions, and despite what I would describe as the creative draftsmanship readily discernible in the Prospectus to which I have referred on several occasions, it is plain that what was objectively intended by subscribers for syndicate participations, upon the true interpretation of the Prospectus, including the pro forma Syndicate Deed forming part thereof, was that the initial activity of the members of the BPS was research and development activity to be undertaken over an initial period of two years or thereabouts, and further that there was a real risk that the same would be unsuccessful, with the consequence that any income producing activities to result therefrom would never in fact occur. I am therefore unable to accept as accurate the often repeated theme of the Applicants' submissions that "commercialisation [began] at the outset". Of course, to adopt the Applicants' submission, there was a commitment to manufacturing and marketing as well as to research and expenditure, but those activities were not in substance or reality contemporaneous commitments. Without successful research and development in place, there would be no product contemplated by the Prospectus which would be available to be marketed. The fact that only one fund raising process was contemplated by the Prospectus to occur in relation to the BPS does not enable the Applicants to avoid the significance of those mutually exclusive sequential circumstances.
97 The issues therefore to be addressed boil down to whether the expenditures on research and development of the relevant TTO products envisaged by the Prospectus constituted losses or outgoings in the hands of the Applicants, as members of the BPS, and were incurred in gaining or producing assessable income, or were necessarily incurred in carrying on a business for the purpose of gaining or producing such assessable income. The convenient course, having regard to the sequence of addresses adopted by the parties, is to first determine the implications of the expenditures in relation to the second limb of subs 51(1) of the ITAA, that is to say, the issue whether the expenditure of the $24,000 parcels (or multiples thereof) over about two fiscal years, as was contemplated in the Prospectus segment set out in [17] above, constituted losses or outgoings of the Applicants necessarily incurred in carrying on his or her business for the purpose of gaining or producing assessable income, being an issue of which the authorities speak as involving matters of fact and degree, with no one factor being necessarily decisive.
98 The Applicants have referred me to a number of authorities establishing or restating principles relating to the operation of the second limb of subs 51(1). A convenient starting point, in the context of what may be described as small business undertakings, such is the case of each participant's purported individual business said by the Prospectus to be involved, is the often cited dicta of a Full Federal Court (comprising Bowen LJ, Franki and Fisher JJ) in Ferguson v Federal Commissioner of Taxation (1979) 37 FLR 310. At 314, the passage appearing in the joint judgment of Bowen LJ and Franki J reads as follows:
"…There are many elements to be considered. The nature of the activities, particularly whether they have the purpose of profit-making, may be important. However, an immediate purpose of profit-making in a particular income year does not appear to be essential. Certainly it may be held a person is carrying on business notwithstanding his profit is small or even where he is making a loss. Repetition and regularity of the activities is also important. However, every business has to begin and even isolated activities may in the circumstances be held to be the commencement of carrying on business. Again, organisation of activities in a business-like manner, the keeping of books, records and the use of system may all serve to indicate that a business is being carried on. The fact that, concurrently with the activities in question, the taxpayer carries on the practice of a profession or another business, does not preclude a finding that his additional activities constitute the carrying on of a business. The volume of his operations and the amount of capital employed by him may be significant. However, if what he is doing is more properly described as the pursuit of a hobby or recreation or an addiction to a sport, he will not be held to be carrying on a business even though his operations are fairly substantial…."
And at 321-2, Fisher J added the following observation:
"…A person may conduct a business, albeit of a limited nature, the activities of which business are preparatory to or in preparation for the conduct of another business on a larger scale. The question is whether the more limited activities at the earlier stage, standing alone, constitute a business."
Guided by the foregoing statements of principle, and notwithstanding that the taxpayer in Ferguson carried on his activities as an individual in a traditional sense (and not as in the circumstances here, where 2371 individual taxpayers undertook the activities now under scrutiny purportedly as such, but in reality in some kind of confederate sense, albeit not purportedly in partnership), I put aside as not disqualifying in principle the circumstances in the present proceedings merely that the financial involvement of each Applicant (particularly in the case of Ms Howland-Rose and Mr Braysich) was relatively modest, and that all four Applicants were primarily engaged otherwise in income-producing activities, mainly as employees, and further that there was not an immediate purpose on their respective parts of profit-making in relation to the fiscal years of expenditure, being those ended on 30 June 1996 and 1997 (except in the case of Mr Davidson, which ended on 30 June 1997 and 1998).
99 Moreover, although the test as to satisfaction of the second limb of subs 51(1) requires an appraisal of the objective circumstances attending the outlay of expenditure, and in particular the objective purpose or purposes of a taxpayer in making the outlay, nevertheless, relevant to the determination of that objective purpose or purposes may be, in the circumstances described in the joint judgment of Deane and Fisher JJ (Brennan J delivering a concurrent judgment) in a Full Federal Court in Magna Alloys & Research Pty Ltd v Federal Commissioner of Taxation (1980) 33 ALR 213 at 233-235, the taxpayer's subjective purpose in so doing. At 235, the joint judgment stated as follows:
"To the extent that the subjective element is relevant, what is important in the case of a voluntary outgoing is the identification of the advantage or advantages which the outgoing was intended to achieve on behalf of the taxpayer regardless of whether that advantage or those advantages were seen as the direct result of the outgoing or as individually flowing therefrom or of whether the pursuit of them should be seen as 'purpose' or 'object' or as 'motive'."
I would refer also to Federal Commissioner of Taxation v Radnor (1991) 91 ATC 4689 at 4700, where Hill J observed in similar vein:
"While an intention to carry on a business must exist this does not mean that the question is subjective… a man will be held to intend the natural and probable consequences of this act, so that, albeit that he does not intend to carry on a business, if his acts amount to a business in fact, he will ordinarily be held to be carrying on a business. However, intention may, nevertheless, be relevant, particularly in a case where the determination of business or no business is to be made at the time of commencement of a business, or in a time of business quietude…"
In that regard, and without intending to modify what I have already observed in [42] above, it is pertinent to revisit the evidence of each of the Applicants to the effect that his or her primary intention to commit to BPS participation was the future income forecast by the Prospectus to be derived after a successful completion of the research and development activity contemplated by the Prospectus, rather than the likelihood of income tax deductibility postulated by the Prospectus, albeit that the latter factor provided an important incentive: see again [33-34] as to Ms Howland-Rose, [35-36] as to Mr Harvey, [38] as to Mr Braysich and [39-40] as to Mr Davidson.
100 Following Ferguson, the Applicants referred me to the often cited "small business" dictum of Walsh J in Thomas v Commissioner of Taxation (1972) 46 ALJR 397 at 400-401:
"On the foregoing facts, the question whether or not the appellant embarked upon a business venture has to be determined. There is no doubt that the appellant's chief occupation was the practising of his profession and that the tree farming, if it had a business character, was relatively of minor importance both as to the time devoted to it and as to the returns to be expected from it. But a man may carry on a business although he does so in a small way."
Subsequently in Walker v Federal Commissioner of Taxation (1983) 70 FLR 354 (Supreme Court of New South Wales) and Federal Commissioner of Taxation v Walker (1984) 2 FCR 283 (Full Federal Court majority on appeal), it was held that a taxpayer, who acquired at the outset only one (albeit expensive) goat for use in an embryo transplant programme with the intention of building up a small herd, thereby commenced the carrying on of a business of primary production for income tax purposes. One member of the majority in the Full Court (Davies J) observed at 296-297 that "A business, as distinct from a scheme or undertaking, has continuity, an ongoing character, though it may have quiescent periods… if there is a transaction, which, if repeated, would be a transaction in a business and if it is shown to be undertaken with the intent it should be the first of several transactions in the carrying on of a business, then that first transaction will be a transaction of a business". That restatement of principle echoed what appears in the passage extracted above from the majority judgment in Ferguson that "…every business has to begin, and even isolated activities may in the circumstances be held to be the commencement of carrying on a business".
101 A further established principle here material is that a person may carry on a business for income tax purposes, notwithstanding that management of the business has been delegated to an agent. Numerous illustrations abound, including the cases upon which the Applicants placed particular emphasis, and which will be considered in some detail below, namely Federal Commissioner of Taxation v Lau (1984) 6 FCR 202, (a Full Federal Court comprising Fox, Jenkinson and Beaumont JJ), Federal Commissioner of Taxation v Emmakell Pty Ltd (1988) 22 FCR 157 (a Full Federal Court comprising Wilcox, Burchett and Beaumont JJ), and Federal Commissioner of Taxation v Brand (1995) 95 ATC 4633 (a Full Federal Court comprising Lee, Lindgren and Tamberlin JJ). As will be seen however from my digest of the circumstances in each below, no deductible expenditure was said to have been initially outlaid by the taxpayers involved in the schemes in order to determine, by way of research and development, whether the intended business activity was soundly based in the first place with appropriate regulatory approvals, and would be productive of financial returns.
102 The taxpayer in Lau sought deductibility in respect of the fiscal year ended 30 June 1981 in relation to the growing of pine trees for the purpose of ultimate pine wood harvesting, for the respective sums of $39,200 outlaid by way of a management fee, $640 outlaid by way of rental, and $180 outlaid by way of legal fees and stamp duty. Such outlays were made pursuant to a scheme promoted by others whereby individual parcels of land marked out for each participant, including Dr Lau, would be planted with infant pine trees or pine tree seeds, and thereafter cared for by the promoters or entities associated with them, and the grown timber when ultimately harvested would be sold for the benefit of the participants. The scheme as presented by promoters was said to be attractive to the participant taxpayer, because it offered the prospect of immediate and substantial tax deductibility, in addition to the ultimate benefit of sale of the timber when harvested. It was apparently common ground that at least seven years would elapse before the trees could be sufficiently developed to be marketable. A number of agreements were contemporaneously entered into by the taxpayer with the scheme promoters' associated companies for terms approximating 21 years, relating first to the leasing by the taxpayer of an area of about 14 hectares, secondly to the management for the taxpayer of the cutting, harvesting and selling of the timber by the companies, thirdly to the guarantee of net proceeds of sales of trees harvested by the companies, and fourthly to the borrowing of funds by the taxpayer to pay the management fees in advance. In the proceedings at first instance before the Supreme Court of Queensland (84 ATC 4618) (Connolly J), the Commissioner disputed that Dr Lau's expenditure fell within s 51(1) of the ITAA, upon the basis, inter alia, that the same was an outgoing of capital. Connolly J found however that the classic test as to deductible expenditure enunciated by Dixon J (as he then was) in Sun Newspapers Ltd & Associated Newspapers Ltd v Federal Commissioner of Taxation (1938) 61 CLR 337 at 362, namely "expenditure is to be considered of a revenue nature, if its purpose brings it within the very wide class of things which in the aggregate form the constant demand which must be answered out of the returns of a trade or its circulating capital, and actual recurrence of the specific thing need not take place or be expected as likely", was satisfied. In the Full Court, both Fox J and Beaumont J delivered separate judgments upholding the taxpayer's entitlement to deductibility under s 51(1) of the ITAA, and Jenkinson J agreed with both judgments. The reasons for judgment of Beaumont J indicate that at least the second limb of the sub-section was applicable, His Honour finding (at 218) as follows:
"Once it is concluded that the moneys were outlaid by the taxpayer for a real or genuine commercial purpose, any inquiry as to the manner in which those funds were subsequently applied by their recipients is immaterial for the purposes of s 51."
At 219, his Honour continued as follows:
"Although the transaction was structured so as to offer tax advantages to participants, it would be wrong to say it was not a real business transaction. The arrangements were underpinned by genuine commercial considerations and, in my view, those considerations are decisive for the purposes of s 51."
I would interpolate to observe the adverse implications of that dictum to the viability and relevance of the issues pursued by the Commissioner which are the subject of the substantial evidentiary material I have recorded under the segment headings The nature of the project foreshadowed and outlined by the Prospectus and the expert evidence raised at the hearing of the proceedings in relation thereto and The further expert evidence relating more specifically to the extent of achievability of the BPS productivity goals portrayed by the Prospectus. As in the case of Connolly J at first instance, Beaumont J considered (at 221) that the Sun Newspapers test was duly satisfied, the "contractual quid pro quo for the expenditure determining the nature of the outgoing". All judges in Lau rejected the Commissioner's alternative contention that s 260 of the Act, the precursor of course to Part IVA later to be considered in these Reasons, applied so as to deny deductibility. The difficulty confronting the Applicants in the present circumstances is that the contractual quid pro quo for each Applicant's expenditure was in substance and reality the undertaking of research and expenditure which would not necessarily lead to any assessable income ever being derived from products which might subsequently be manufactured upon the basis of the results therefrom. Whilst it may be said that a successful outcome to the undertaking of the research and expenditure may well have led ultimately to the viable manufacture and sale of TTO products and product packages based upon or arising out of the same, it would not be conceptually correct to categorise such consequences as the contractual quid pro quo for what was in truth research and development expenditure.
103 It is convenient to record at this stage that the judgments in Lau are relied upon by the Applicants additionally for the purpose of rebutting the "round robin" contention propounded by the Commissioner, as foreshadowed in [47] above. The "round robins" in Lau related to cheques contemporaneously banked, whereas in the present circumstances, bills of exchange were exchanged without any accompanying or consequential bank statement entries. At 4621 Connolly J observed as follows:
"Both N.Q. and Liberton banked with the Commercial Bank of Australia Limited at its Sherwood Road, Toowong branch. N.Q's account was in credit$70,782.33 immediately before the exchange of cheques and Liberton's was in credit $50. It is not suggested that the bank would have permitted either transaction standing alone. The only conclusion to which one can come is that the bank gave credit to N.Q. in the sum of nearly one quarter of a million dollars for virtually an instant of time on the strict understanding that it would be immediately repaid."
104 In presenting the case on appeal to the Full Court from the decision of the Supreme Court, the Commissioner did not pursue in Lau the contention of sham, but raised the issue as to whether any outgoing was incurred by the taxpayer at all, just as the Commissioner has done here by reference to the "round robin" of bills of exchange. In the reasons for judgment of Fox J concluding at 207, his Honour there found as follows:
"The net result of the dealings so far as concerned the taxpayer was to make meaningful the loan to him, as well as to provide a record. The [taxpayer] had performed his obligation to pay N.Q. the balance of the management fee, albeit he had incurred a liability to Liberton for the same amount. Liberton had also incurred a liability to N.Q."
To similar effect was the conclusion of Beaumont J at 215 as follows:
"Notwithstanding the absence of any real movement of money, his Honour held that the transactions were not shams. On the contrary, he found… that it was the common intention of the participants in the scheme, of Liberton and of N.Q., that the various instruments should take effect according to their tenor."
I will return later to the "round robin" issue raised by the Commissioner in the present proceedings.
105 The next authority upon which the Applicants placed particular emphasis, as foreshadowed above, was that of Emmakell. That case arose out of a tea tree growing scheme having the objective of commercial exploitation of the tea tree oil to be obtained therefrom, coincidentally having been promoted by Mr Stotter. Shortly before 30 June 1983, the taxpayer became interested in the scheme, which involved the leasing to participants of parcels of land on which trees were to be planted and cultivated for the production of tea tree oil. Participants in the project were offered firstly, the lease of a one acre parcel located within what had been a grazing property, pursuant to which rentals were payable in advance, and secondly management services pursuant to management agreements. The lease rentals and management fees were payable in advance on or before that date, and subsequently on or before 30 June 1984, 1985, 1986 and 1987. The sole issue was deductibility pursuant to subs 51(1) in respect of the rental and management fees which were payable in advance during the year ended 30 June 1983. The reasoning of the Court's earlier decision in Lau was held by the Full Court in Emmakell to require that the taxpayer's objection to disallowance of deductibility in respect of the rentals and management fees be upheld. The Commissioner did not apparently raise a Part IVA issue in Emmakell, Part IVA having application in respect of transactions entered into after 27 May 1981.
106 Grouped in submission by the Applicants with Lau and Emmakell, as I have earlier indicated, was the subsequent decision in Brand. The circumstances there involved were that the taxpayer entered into an agreement with one company to license certain "acquaculture" ponds in Northern Queensland for the purposes of prawn farming, and a further agreement with another company to manage the prawn farming activity, both agreements being made on 4 June 1987. The two companies were apparently related. The taxpayer made payments, pursuant to those agreements, totalling $16,000 prior to 30 June 1987, and claimed deductibility in respect thereof pursuant to subs 51(1). At first instance, Nicholson J found that the taxpayer's objective was to invest the funds in what he regarded as a good commercial investment, and that tax deductibility of the payment was a consequence, not an objective, of the investment. The trial judge rejected the Commissioner's proposition that a loss or outgoing, to qualify pursuant to subs 51(1), must be made contemporaneously with activity of the taxpayer which is directed to gaining or producing assessable income, being a submission not here made by the Commissioner. In the events which had happened, the prawning activities never in fact began. It was the second ground of attack that the Commissioner pressed on appeal, which related primarily to dicta in Goodman Fielder Wattie Ltd v Federal Commissioner of Taxation (1991) 29 FCR 376, and also to Federal Commissioner of Taxation v Osborne (1990) 26 FCR 63, and Griffin Coal Mining Co Ltd v Federal Commissioner of Taxation (1990) 90 ATC 4870, being decisions to which I will later refer in the context of the present proceedings. The Commissioner submitted in Brand that the taxpayer had merely proposed to commence, but had never actually commenced, carrying on of business as a prawn farmer, and pointed to the circumstance that although the license fee was paid upon the signing of the license agreement, the taxpayer's right to occupy the ponds was expressed to commence only when the same were ready for the growing and harvesting of prawns. In dismissing the appeal, the joint judgment of Lee and Lindgren JJ formulated the following principle, based on dicta of a Full Court (Northrop, Wilcox and Hill JJ) in Federal Commissioner of Taxation v Riverside Road Lodge Pty Ltd (in liq) (1990) 23 FCR 305 at 313:
"The circumstances and extent of any lapse of time between the incurring of a loss or outgoing and the commencement of the relevant activity directed to the gaining or producing of assessable income constitute a factor relevant to the question whether the statutory description is met. The cogency of that factor will vary from case to case, and depends on more than a mere measuring of the period. The temporal hiatus may suggest that the outgoing was incurred for some purpose other than the gaining or producing of assessable income."
The other judgment of the Court in Brand, delivered by Tamberlin J, expressed agreement with the reasons of the majority, and at 343, his Honour added the following:
"This latter finding as to the subjective purpose which the taxpayer had in mind at the time of payment is, in the circumstances of this case, an important element in characterising the outgoing for the purposes of the subsection. This finding does not resolve the question because the ultimate characterisation of the outgoing also calls for an examination of the objective circumstances in which the outgoing was incurred and on the result which the outgoing is objectively calculated to achieve.
The circumstances in which the present payment is made, indicate in my view, that the outgoing can objectively be described as incidental or relevant to the end of gaining or producing assessable income or as being an activity which would be expected to produce assessable income, although none in fact was produced."
I interpolate here to mention that his Honour's foregoing dictum, concerning the interaction between a taxpayer's subjective purposes and contemporaneous objective circumstances, lends no support to the Applicants' contention that although "[t]he ultimate test is objective, [yet] unchallenged evidence of the taxpayers is conclusively persuasive as to that objective purpose". Moreover I would not accept the Applicants' further contention that on a fair reading of the cross-examination of each of the Applicants, the essence of the Commissioner's case as to the subjective purposes of the Applicants, was not fairly or adequately put, but in any event, it is what the Applicants' outgoings were calculated to achieve, from an objective perspective, which presents the ultimate hurdle for the Applicants to address. After then referring to Goodman Fielder, Tamberlin J added at 344 the following observation which bears directly upon the circumstances of the present proceedings, to an extent potentially adverse to the Applicants:
"The purchase of research expenditure or payment for a feasibility study is firstly to investigate whether a proposed or possible line of business activity is viable and secondly to decide whether to make a commitment to the activity. The third stage is the entry into such a commitment. It does not follow from a favourable research or feasibility study, for example that any commitment or outgoing will be made with a view to producing assessable income. In that sense such studies may be discrete from the relevant business activity and may be "too soon" before the business activity commences to justify classification as an activity expected to produce assessable income. This stands in marked contrast to the present case."
107 It becomes appropriate, at this stage of the discussion of authorities upon which the Applicants expressed reliance, to examine closely the decision of Hill J in Goodman Fielder, aspects of which the Applicants have sought to distinguish. The proceedings related to the years of income 1982 to 1985 inclusive. Two categories of deductions were in issue. The first category related to payments made by the taxpayer Goodman Fielder to fund research to be carried out by the Queensland Institute of Technology for the period from September 1981 until approximately October 1982. The second category comprised expenditure incurred thereafter, and was described in the income tax returns of the taxpayer as relating to manufacturing, administration, research and development, or "merely expenditure shown as such in the operating statement of the applicant in respect of its Mabco Division". The area of dispute concerned the characterisation of undisputed facts. On 14 August 1981, Goodman Fielder had committed to funding the Institute to undertake scientific research into monoclonal antibodies, and the potential application thereof in immune reactions, such research being perceived to have "great commercial potential". The commitment was conditional upon Goodman Fielder having the right to review the outlay of further contributions to the research activities at the end of one year, and again at the end of three years. The research centre was set up, a laboratory was equipped and staff were recruited to conduct the research, which did not actually commence until the early months of 1982. By October 1982 it was clear that the first products, albeit of limited commercial value, would be launched by December 1982, and a decision was made to lease separate premises, and for the abovementioned Mabco Division of Goodman Fielder to set up commercial development and production facilities. Issues arose as to deductibility, pursuant to subs 51(1) of the Act, as well as pursuant to subs 73A(1) thereof, in relation to the research expenditure, including the full time salary of the veterinarian engaged as technical manager. It is only necessary for present purposes to consider his Honour's observations concerning the operation of subs 51(1). Sub-section 73A(1) provides for deductibility for income tax purposes in respect to payments made to an approved research institute for scientific research etc in circumstances where the payments have been made by a person already carrying on business for the purpose of gaining or producing assessable income and was not raised as an issue in the present proceedings. It is difficult to fathom how the "Business Overview" of the Prospectus came to refer to the provision by the Australian Government of "taxation and incentives" for research and development (see [9] above), in the context of the establishment of the BPS.
108 The Commissioner disallowed deductibility under subs 51(1) in respect of the contributions made by Goodman Fielder to the Institute for the period of time until November 1982 (the FCR Report head note at 385 mistakenly refers to 1983), upon the footing that the taxpayer had not in fact commenced the relevant business or income-producing activity until the setting up of the separate premises; prior to that time, the contributions to the Centre had been confined to the activity of research and development. After stating that "[a]n intention to carry on a business will not determine that a business is in fact carried on", citing in that regard the dictum of Lord Buckmaster in J & R O'Cain v Inland Revenue Commissioners (1922) 12 TC 303 that "[t]he intention of the man cannot be considered as determining what it is that his acts amount to", but pointing out nevertheless that intention may not be wholly irrelevant to the issues of deductibility arising under subs 51(1), Hill J referred to Ferguson and Walker, and to the dictum of Mason J (as he then was) in Hope v Bathurst City Council (1980) 144 CLR 1 at 8-9 (with which Gibbs, Stephen and Aickin JJ agreed) to the effect that for a business to be carried on, the activities must possess something of a permanent character. His Honour next observed at 386 as follows:
"Critical to the resolution of the present controversy is the characterisation of the business activity itself which is said to have commenced. It was properly conceded by the applicant that if the business claimed to be carried on by it was to be characterised as one of manufacturing and selling monoclonal antibody products, then that business did not commence until around November 1982 when the move to [the new premises] took place."
And after further referring to phraseology adopted by Menzies J in John Fairfax & Sons Pty Ltd v Federal Commissioner of Taxation (1959) (Cth) 101 CLR 30 at 49 descriptive of expenditure within the second limb of subs 51(1), namely "part of the cost of trading operations", Hill J concluded at 387 as follows:
"For the applicant it was submitted that the income-producing activity or business activity in which the applicant was engaged in the relevant period should be characterised as an activity of researching and developing monoconal antibody products for manufacture and sale. The difficulty in the path of the applicant, however, is that during the relevant period the element of commitment was absent. The evidence, which I have summarised above, makes it clear that the applicant was engaging in activities of a provisional kind only. It is true that it was contemplated that, if the research work funded by the Institute proved successful, there would be products to market and that it was hoped (and this hope was reflected in the initial budget with Dr Watson's proposal) that sales could be embarked upon at an early time. However, the funding of the centre in which research was to be carried on was directed at research into such products as the work of the centre might show to be commercially viable. It was research, to quote the proposal of 7 July 1981: "from which a defined range of marketable products will emanate." In fact, the July proposal identified two products, that concerned with Brucella abortus and that concerned with Campylobacter foetus which, in fact, were never marketed at all by the applicant in the period in which it was concerned with monoclonal antibodies.
The activity in which the applicant was engaged through until November 1982 can only be described as an activity of funding a research project in which it was an essential collaborator, both as to the provision of funds and as to serving on the management committee. Notwithstanding that the applicant accounted for this activity as a separate division, it is not possible, in my view, to characterise the activity as a business or, for that matter, as an activity of gaining or producing assessable income so as to fall within the first limb of s 51(1)."
109 As I have pointed out in [95-96] above, the Prospectus purported to incorporate or merge into the notion of carrying on the business of manufacturing and distributing TTO products and product packages the activities of the research and development required to successfully bring into existence such products and product packages. Indeed the Appellants' submissions were to similar effect, with their theme as to "commercialisation begins at the outset". During the period of research and development, which the Prospectus forecast to take about two years, it was not envisaged by the Prospectus that any revenue would be derived by the participants from the sale of products the subject of research and development or otherwise, and of course no such revenue was ever subsequently derived. The Prospectus eschewed moreover the existence of any certainty that the contemplated research and development activities would be productive of revenue in favour of the participants: see for instance the references to "the inherent risks" in the material firstly extracted in [12] above, and to "the risk is also high" in the material subsequently extracted in [12(vii)] above, and more emphatically to "[t]here is no guarantee that the revenue expected will be derived…" in [13] above; see also the list of Dr Twomey's "ASSUMPTIONS" in the Prospectus in [16] above, and the passage commencing "[i]n the event research is not proving to be successful…" extracted in [21] above. As in the case of the Goodman Fielder activities described by Hill J in the passage extracted above, and to adopt his Honour's phraseologies, the activities for which the Applicants subscribed during the subsistence of the BPS, and until the exhaustion of the participants' financial resources, were "activities of a provisional kind only", being "research into such products as the work of the centre might show to be commercially viable…", which could "only be described as an activity of funding a research project…".
110 The Applicants submitted that by virtue of the terms of the Prospectus, and their taking up of units or syndicate participations pursuant thereto, their respective commitments to the business of marketing products and product packages was "clear and unequivocal", and crystallised "immediately… [f]rom the time of execution of the Syndicate Deed". Reliance was placed on the Prospectus material extracted in [9], [12], [13], [21] [28], [29] and [31] above. I have made adverse observations earlier on what I would characterise as the contrived endeavours of the Prospectus to converge the activities of research and development into activities by way of manufacturing and marketing of products, in advance of the former activities being first successfully concluded or brought to fruition, whether within the time limits contemplated by the Prospectus, or otherwise. The Applicants further submitted that commitment is not an activity, but is in the nature of decision-making, in the context of their endeavour to circumvent for instance the stipulations of Clause 5.2 of the Syndicate Deed, summarised at [30] above. It was also submitted on their behalf that Clause 5.2 "simply recognises the undoubted speculative nature/risk attached to the business", and that "[w]hat is important is that, notwithstanding this risk, commercialisation begins at the outset". I am unable to accept the substance of those submissions. They ignore the reality that without successful research and development, there can be no feasible manufacture and marketing of the products the subject of the research and development, and it cannot be realistically contended that the Prospectus predicated otherwise.
111 I am unable to accept that the Applicants gain assistance from the authorities to which I have been referred, and which I have summarised, in some instances with lengthy citations, from [98] to [106] above. On the contrary, the Applicants' submissions are inconsistent with the passages cited above from Brand, Goodman Fielder and John Fairfax. The Applicants never reached the stage of carrying on any relevant business activities, much less activities having the permanent character spoken of for instance in Hope. Whilst a Full Federal Court (Lee, Heerey and Merkel JJ) in Esso Australia Resources Ltd v Federal Commissioner of Taxation (1998) 84 FCR 541 made the following observation at 556:
"We accept the nature, scope and extent of exploration activities of the kind engaged in by the appellant might, in some cases, be sufficient to constitute the carrying on of an exploration business"
that was not the situation of the Applicants, any more than was the same found to be true of the taxpayer in that case. Different considerations may apply where a manufacturer is already engaged in making particular products, and in that context expends funds on research in order to improve such products (or where subs 73A(1) in any event is fulfilled). As was subsequently said in Esso at 556:
"Intent of the taxpayer alone in respect of the expenditure is not sufficient to establish deductibility under s 51(1) for outgoings or expenditures that are not themselves productive of income, but are intended to lead in the future to the production of income."
In any event, even if the Applicants had committed to carrying on the manufacture and sale of the products, the subject of research and development, in line with the sometimes equivocal or elusive terms of the Prospectus, the requirements of the second limb of subs 52(1) were in my opinion plainly not satisfied. As was observed by Brennan J (with whom St John J agreed) in Inglis v Federal Commissioner of Taxation (1979) 40 FLR 191 at 195:
"Whether any of the outgoings qualify for deduction under the second limb of s 51(1) depends upon whether a pastoral business was being carried on during the relevant years, 'the outlay must have been incurred in the carrying on of a business, that is, it must be part of the cost of trading operations' (per Menzies J in John Fairfax & Sons Pty Ltd v Federal Commissioner of Taxation (1959) 101 CLR 30 at 49)."
112 The Applicants' purported emphatic reliance upon Lau, Emmakell and Brand cannot therefore in my opinion be justified from a correct understanding of the circumstances and reasons for judgment in each case. The subscribers to the schemes in those cases were not depending on the viability of the proposed growing activities being first established by research and development, but instead committed themselves from the outset to the growing activities of businesses immediately being launched as ongoing concerns, and to production from growing activities, in contrast to activities of research into the feasibility of developing products required to meet external standards of safety, efficiency etc, being research undertaken in advance of any manufacture and marketing which might never occur.
113 It must therefore follow that the expenditures of the Applicants, which were outlaid in the acquisition of syndicate participations in the BPS, did not qualify for deductibility under the second limb of subs 51(1) of the ITAA. The disqualifying principles cited in the judgment of Hill J in Goodman Fielder in [108] above apply to the circumstances of the subject expenditures, and as I have already indicated, the circumstances in Lau, Emmakell and Brand are in contrast and distinguishable. The expenditures of the Applicants were in the nature of and related to steps anterior to carrying on business, as I think the Commissioner rightly submitted.
114 I have made reference in [106] above to Obsorne, being a decision of a Full Federal Court (Spender, Pincus and French JJ) upon which the Commissioner relied. I should refer to the same for completeness. The taxpayer was denied deductibility by the Court for outgoings incurred in preparing land for planting chestnut trees, in relation to a year of income involving a nil return from primary production. The project was subsequently abandoned, but had abandonment not occurred, about six years would have passed between planting and the first harvest. The earlier decision in Lau was not cited in Osborne, and understandably so, because the taxpayer in Osborne was not committed to an income producing venture, whether contractually or at all. The circumstances in Osborne were similar to those in Southern Estates Pty Ltd v Federal Commissioner of Taxation (1967) 117 CLR 481, where the High Court (though not unanimously) disallowed scrub clearing and fencing expenditures undertaken in advance of any grazing activity by a farmer on his own land. Doubtless for that reason, Osborne was not cited in Emmakell or Brand.
115 I have also made reference in [106] above to Griffin Coal, to which the Commissioner also referred, the reason for which I should explain, whilst still discussing the issue arising under the second limb of subs 51(1). The issue involved was whether a company engaged in a substantial coal mining going concern was entitled to deductibility in respect of certain aluminium smelter feasibility study costs. At first instance, Lee J found that the costs related to a planned new source of income, and were not deductible under either limb of subs 51(1), and his conclusion was upheld by the majority of a Full Federal Court (Wilcox and French JJ) on the same basis. Davies J dissented in the Full Court on the basis that the expenditures were essentially devoted to the improvement of the taxpayer's existing coalmining operations and business objectives, the same arising out of and being reflected in the taxpayer's need to obtain an enhanced market which would enable it to exploit the coal reserves contained within its existing mining leases, and were in his opinion related to revenue-type activities. Unlike the circumstances of each of the present Applicants, the Griffin Coal company was already engaged in the business of marketing its coal production at the time of its research expenditure in question, whereas the Applicants were not engaged in the business of marketing TTO product packages or products at the time of their outlay of research and development expenditure, and as I have earlier pointed out, the later ad hoc selling activities of the BPS detailed in [69] above were unconnected to any products the subject of that research and development. I should record for completeness that special leave to appeal to the High Court was refused in Griffin Coal (22 ATR 404), the High Court holding that because an argument directed to a relationship between income and expenditure, based on the converse approach taken by the High Court earlier in relation to subs 25(1) of the ITAA in Federal Commissioner of Taxation v Myer Emporium Ltd (1987) 163 CLR 199, had not been raised on the preceding appeal of Griffin Coal to the Full Federal Court, the grant of leave to appeal in relation to that issue was inappropriate, notwithstanding that the point involved a question of importance. The Applicants made the formal submission to me that the Full Federal Court minority approach in Griffin Coal should be applied, and the majority view repudiated, for at least the reason so ventilated on the special leave to appeal application, and the Applicants reserved the opportunity to argue the point, in the event of an appeal to a Full Federal Court being brought in the present proceedings. I would merely observe that the circumstances in Griffin Coal were in any event significantly at variance with those of the Applicants here, for reasons already made apparent.
116 An alternative subs 51(1) submission was pursued by the Applicants, based upon the first limb thereof, which must next be addressed. An alternative issue referrable to the first limb was raised by the taxpayer in Goodman Fielder (but rejected by Hill J at 387) upon the basis that the activity of funding the research project in which that taxpayer was "an essential collaborator" could not be characterised "…as an activity of gaining or producing assessable income so as to fall within the first limb of s 51(1)". There have been a number of statements made by the High Court as to the scope of operation of the first limb of subs 51(1). It may be observed that the first limb tends to provide a narrower base to which a taxpayer might seek recourse, in contrast to the wider base of the second limb. In the respected work of the late Professor Parsons, Income Taxation in Australia 1985, the following appears at par 5.49 in the context of his comprehensive discussion of the first limb:
"The view of the framework of s 51(1)… has the consequence that, to be deductible, an expense must be relevant to the derivation of assessable income, and must be a working expense. These two elements tend to run together in much of the judicial elaboration of the operation of s 51(1). It is summed up in the phrase 'incidental and relevant'. The phrase is unhelpful, to the extent that it places the two elements out of their logical order. The first issue must always be whether the expense is relevant. If it is not, it is not deductible…. If the expense is relevant, it will be deductible if it is a 'working expense' - a phrase which is more expressive of the criterion than 'incidental'. Other expressions of the criterion are 'constant demand', 'operating' or 'maintenance'. If a relevant expense is not a working expense, it may be described as 'capital'."
And in the same context at par 5.52 the learned author added:
"Where questions of relevance and working character are run together, it is generally because there can be no question of relevance and the issue is simply whether the expense is a working as distinct from a capital expense…."
Expenditure upon research and development would not normally meet the operation of the first limb of subs 51(1), according to the foregoing criteria.
117 Subsequently to the publication of Professor Parsons work, the High Court in Fletcher v Federal Commissioner of Taxation (1991) 173 CLR 1 (Mason CJ, Brennan, Deane, Dawson, Toohey, Gaudron and McHugh JJ) undertook a review of the authorities relating to the first limb of subs 51(1). I have cited below certain passages from the joint judgment (commencing from 18), which was preceded by observations inter alia that for an outgoing to qualify for deductibility under the first limb involves a question of characterisation, and that the subjective motivation of a taxpayer in making an outgoing is sometimes a relevant factor in the task of characterisation, though not ordinarily so where the outgoing gives rise to the receipt of a larger amount of assessable income. The present circumstances involve of course the outlay of $12,000 (or multiples thereof) per annum in advance for each of two successive years of income by a participant individually upon research and development work, which outlays, in the events which have happened, have not been productive of any assessable income whatsoever. In relation to situations of that kind, the judgment in Fletcher proceeded as follows:
"The position may, however, well be different in a case where no relevant assessable income can be identified or where the relevant assessable income is less than the amount of the outgoing. Even in a case where some assessable income is derived as a result of the outgoing, the disproportion between the detriment of the outgoing and the benefit of the income may give rise to a need to resolve the problem of characterisation of the outgoing for the purposes of the sub-section by a weighing of the various aspects of the whole set of circumstances, including direct and indirect objects and advantages which the taxpayer sought in making the outgoing. Where that is so, it is a "commonsense" or "practical" weighing of all the factors which must provide the ultimate answer. If, upon consideration of all those factors, it appears that, notwithstanding the disproportion between outgoing and income, the whole outgoing is properly to be characterised as genuinely and not colourably incurred in gaining or producing assessable income, the entire outgoing will fall within the first limb of s 51(1) unless it is either somehow excluded by the exception of "outgoings of capital, or of a capital, private or domestic nature" or "incurred in relation to the gaining or production of exempt income". If, however, that consideration reveals that the disproportion between outgoing and relevant assessable income is essentially to be explained by reference to the independent pursuit of some other objective and that part only of the outgoing can be characterised by reference to the actual or expected production of assessable income, apportionment of the outgoing between the pursuit of assessable income and the pursuit of that other objective will be necessary."
118 The principles which I have extracted lead to the inevitable conclusion, in my opinion, that the outlays of the Applicants referred in the preceding paragraph must fail to qualify within the first limb of subs 51(1), since the same were wholly related to the cost of research and development, and are not capable of being identified with the derivation of any assessable income by any participant in the BPS, in the sense of assessable income derived as a result of those outlays, much less some disproportionate amount of income in the sense described in Fletcher. Research and development is normally undertaken upon the footing that if fruitful, steps will thereafter be taken to produce or manufacture or otherwise acquire, and to market, the successfully researched and developed product. To repeat again the description of Hill J in Goodman Fielder extracted in [108] above, "the activity of funding a research project" is not an activity which gains or produces assessable income for or on behalf of the principal. In my opinion, the Applicants have no entitlement of recourse to the first limb of subs 51(1) for deductibility of their funds subscribed to ATTORI and BARM for research and development.
119 I should add for completeness that the conclusion I have reached as to the absence of entitlement of the Applicants to deductibility pursuant to either limb of subs 51(1) inherently carries the consequence that the loan application fee outlaid by each Applicant (see again the table at [17] above) was not deductible in the hands of participants, in light of the text of subs 67(1) of the ITAA reading as follows:
"Subject to this section, so much of the expenditure incurred by the taxpayer in borrowing money used by him for the purpose of producing assessable income as bears to the whole of that expenditure the same proportion as the part of the period for which the money was borrowed that is in the year of income bears to the whole of that period shall be an allowable deduction."
120 The conclusions I have reached above in relation to the unavailability of deductions based upon either limb of subs 51(1) renders strictly unnecessary the need for deciding upon the viability of the project discussed at length within [49-93] above. Nevertheless, having regard to the time and expense devoted by the parties to the resolution of this complex factual issue, it is appropriate that I should determine the same, whilst bearing in mind that the test for resolving the kind of evidentiary issue which the Commissioner has raised is no higher than that postulated by Beaumont J as a member of a Full Federal Court in Lau at 218, in terms of "real and genuine commercial purpose" of a taxpayer, as set out in the passage extracted in [104] above. That test does not necessarily require a taxpayer to establish that the venture he or she determines relevantly to pursue or become involved in would necessarily have been productive of assessable income, based on the information available at the time of financial commitment (such as contained in a prospectus). Obviously enough there are graduations of risk of loss in any business venture, in relation to events which may subsequently happen, and reliance upon the benefit of hindsight will often be questionable.
121 The starting point in favour of the Applicants upon this area of controversy is the judicially recognised measure of legitimacy, from an evidentiary perspective, of the subjective purposes of the Applicants to which I have earlier referred in the context of the second limb of subs 51(1): see the passage cited from Radnor in [99] above), and also the discussion of the High Court in Fletcher at 17-18, only part of which I have extracted in [117] above. The respective testimonies of the Applicants summarised in [33-41] above, to the effect that they identified from the Prospectus the existence of prospects of success for the BPS venture, and thus of derivation of future income therefrom, are entitled to some evidentiary weight in the ultimate objective analysis. That is not to overlook my earlier finding that the Commissioner's submission made in [42(i)] above, to the effect that each of the Applicants was aware that the income projections in the Prospectus were based upon the series of assumptions, and further that there was a risk that those assumptions would not be fulfilled.
122 My perception of the testimonies of such of the promoters of the BPS venture who gave evidence in the proceedings, namely Messrs Stotter, Priest and Lucas, and also Dr Twomey who was involved in a consultancy capacity to the promoters from 1989, and further Dr Bell, whose involvement with ATTORI commenced in 1997, was that they had genuinely believed that the BPS venture would be successful and ultimately financially viable. Indeed they continue to harbour a significant measure of that belief. Having had the opportunity of seeing and listening to each of them in the course of lengthy and searching cross-examination, my view is that they did not intentionally or carelessly engage in a process of misleading and deceiving potential participants to subscribe moneys to a venture which, with the benefit of hindsight, possessed no prospect of financial success achievable at least within the timeframes set by the Prospectus. Each of these persons, to my observation, have remained enthusiastic about, if not also dedicated to, the future development prospects of TTO products and product packages. There can be little doubt that their original enthusiasm evolved into misplaced optimism, as set-backs unfolded. With the exception perhaps of Mr Stotter, they were prepared as a general rule to face up to the need to make realistic concessions in cross-examination. The searching cross-examination conducted by the Commissioner demonstrated in a number of instances that in the events which have happened, the forecasts and predictions of the Prospectus were significantly short on justification or fulfilment as at the time the Prospectus issued, but that is not to say that the promoters caused to be published in the Prospectus anything which they knew at the time of issue to be untrue and unattainable. There is little doubt in my mind that each of the promoters whom I have identified above, and in addition Dr Twomey and Dr Bell, who had been for a material period of time associated with them, and who gave expert as well as historical evidence in the proceedings, were enthusiastically committed from the outset to the ventures portrayed in the Prospectus, and believed that the BPS venture would be financially rewarding for the participants as well as themselves. Where they were plainly lacking in the kind of conservative and restrained judgment which was required from the outset, related to estimations of the time and the cost required to achieve successful research and development of the planned TTO products and product packages, such as was reasonably to have been expected to obtain necessary recognition in the European Community, the United States of America and Japan. As has been seen, in the events which happened, the BPS research and development projects, as portrayed by the Prospectus, evolved literally into financial disaster, not being productive of any return to participants. It appears that one contributor to the ultimate financial collapse of the project may well have been the high proportion of the funds raised which were expended upon BARM's administration, being a factor which would have inherently depleted the financial resources otherwise available for better and more effective advancement of research and development, but that is a matter which is unnecessary for me to further explore, no detailed enquiry having been undertaken, nor having been essential to the issues arising, as to the justification for the amount of expenditure in that direction.
123 In support of the conclusions which I have expressed in the last paragraph, which must be understood as formulated only in the context of the resolution of taxation issues, I would mention the following matters to which I have earlier referred in the course of any evidentiary summaries:
(i) The extent of progress in development of products still achieved by ATTORI by the year 2000 (see [50] above);
(ii) The expert view of Professor Brown as to the probable or possible sufficiency of $8 million "…to do as much as they were trying to do", though not for research and development of products in the vicinity of 70 in number (see [51] above); however I should add that Mr Priest had thought that approximately $12 million would be needed for the research for the initial period of two years, and $24 million for the remainder of the 15 year term of the BPS, though he was speaking in that regard of a greater number of product packages than did Professor Brown;
(iii) The far from pessimistic view of Mr Coupe concerning the extent of research and development results achieved by ATTORI in relation to certain products (see [52 above);
(iv) The summary of Mr Priest as to progress achieved based on product briefs and research protocols (see [57] above);
(v) The 7 folders of "Data Packages", which were achieved by ATTORI, presented in Mr Collins' view the possibility of creating some "Product Packages", but apparently did not contain "the finished product"; Mr Collins appeared to lend support to Professor Brown's thesis as to the sufficiency of $8 million expenditure (see [59] above).
(vi) Dr Twomey's defence of the projections for market share estimates, and the value thereof contained in his segment of the Prospectus (see [60] above).
(vii) The positive opinion of Mr Collins as to the progress made towards achieving the creation of entire product packages, and the potential for future income to be derived therefrom, particularly in the light of efficacy and safety data discernible in relation to some products (see [88] above).
(viii) The opinion of Professor Brown as to the nature and objectives of the ATTORI project, and the considerable amount of good quality pharmaceutical research and development work apparent from the 7 folders (see [89] above).
(ix) The positive opinion of Professor Brown relating to product packages and other data to similar effect as that of Mr Collins (see [91] above).
However my conclusion at the bottom line must I think inevitably be, based upon the substantial amount of testimony which has been placed before me in the course of many hearing days, preceded by many comprehensive affidavits, that at the time the participants subscribed for their respective units or syndicate participations, it could not have been safely or prudently postulated that the projections of the Prospectus as to the length of time sufficient to achieve the productivity objectives were capable of fulfilment, given that the financial accommodation available for research and development would be limited to levels which, in the events which happened, were actually available for the research and development required. That of course is a judgment I have made with the benefit of hindsight, and is not intended to gainsay what the four Applicants, for instance, claim to have genuinely believed, from reading the Prospectus, as to the prospects of financial return in accordance with the forecasts thereof (as to which see again [20] above).
124 There remains for conclusion the related factor of achievability of the financial returns estimated and forecast in the Prospectus, which I have summarised in [20] above, or indeed any financial returns, having regard to the other terms of the Prospectus, and the documentation put in place as stipulated in the Prospectus. Mr Lonergan made formidable inroads in support of his thesis that based on the information disclosed in the Prospectus, and putting aside the benefit of hindsight, the prospects of the participants ever achieving a financial return were extremely remote from the outset: I refer in particular to what I have already recorded of Mr Lonergan's views set out in [71(i)], [72(xii)] and [72(xiii)] of his first affidavit. The respective testimonies proffered by the Applicants, in response to Mr Lonergan's thesis, from Mr Weeks (see [74-76] above) and Mr Collins (see [77] above) have nevertheless left me with sufficient conviction that I should not accede to the radical conclusion put forward by Mr Lonergan to the effect that at the time the Applicants subscribed for their respective units, there was in substance and reality no prospect, or else only an extremely remote prospect, that they would ever derive any financial returns, whether commencing in the third year of activity of the BPS, or at all. Mr Weeks was careful and conservative in his approach as an expert chartered accountant to possible future profitability of the BPS (as set out in [76] above), as was Mr Collins in his capacity as an expert in the marketing of pharmaceutical products (as set out in [77] above). Mr Lonergan's affidavit in reply to Mr Weeks and Mr Collins, in pursuit of his prognosis of an "extremely remote" prospect of BPS ever deriving a commercial return, put the Commissioner's case marginally too high, and was guided largely with the benefit of hindsight. Mr Weeks in his affidavit in reply asserted that if the Prospectus forecasts had been achieved, the likely return to participants in the long term would have been significant, and considerably greater than the income tax benefits (see [74(ii)] above). I do not think that in the context of resolving taxation issues, it is appropriate for the Court to resolve what I think boil down to largely conjectural, albeit bona fide, professional opinions. The Court should not, in circumstances such as the present, venture beyond enquiry as to fulfilment or otherwise of the kind of evidentiary test exemplified by Beaumont J in Lau at 218 (see [102] above), namely whether moneys have been outlaid by a taxpayer for a real and commercial purpose. If the evidentiary test is to be expanded to the point where enquiry may be made as to whether, independently of satisfaction of that "real and genuine commercial test", deductibility is to be denied in circumstances where it is established objectively by experts that the prospect of derivation of assessable income was from the outset non-existent or remote, the cost of resolution of tax deductibility disputes may become prohibitive.