Kajewski v Commissioner of Taxation

Federal Court of Australia|2003-03-26|Before: Drummond J

The applicant pay the respondent's costs of and incidental to the proceedings.

Note: Settlement and entry of orders is dealt with in Order 36 of the Federal Court Rules.

The applicant pay the respondent's costs of and incidental to the proceedings.

The applicant pay the respondent's costs of and incidental to the proceedings.

Note: Settlement and entry of orders is dealt with in Order 36 of the Federal Court Rules.

The applicant pay the respondent's costs of and incidental to the proceedings.

Note: Settlement and entry of orders is dealt with in Order 36 of the Federal Court Rules.

The applicant pay the respondent's costs of and incidental to the proceedings.

Note: Settlement and entry of orders is dealt with in Order 36 of the Federal Court Rules.

The applicant pay the respondent's costs of and incidental to the proceedings.

Note: Settlement and entry of orders is dealt with in Order 36 of the Federal Court Rules.

The applicant pay the respondent's costs of and incidental to the proceedings.

Note: Settlement and entry of orders is dealt with in Order 36 of the Federal Court Rules.

The applicant pay the respondent's costs of and incidental to the proceedings.

Note: Settlement and entry of orders is dealt with in Order 36 of the Federal Court Rules.

The applicant pay the respondent's costs of and incidental to the proceedings.

Note: Settlement and entry of orders is dealt with in Order 36 of the Federal Court Rules.

QUEENSLAND DISTRICT REGISTRY Q 107-110 OF 2000

QUEENSLAND DISTRICT REGISTRY Q 111-114 OF 2000

QUEENSLAND DISTRICT REGISTRY Q 115-118 OF 2000

1 Each of the applicants appeals under s 14ZZ(c) the Taxation Administration Act 1953 (Cth) against decisions of the Commissioner disallowing their objections to amended assessments issued in October 1999 for the 1990, 1991, 1993 and 1994 years of income. The three applicants have filed a total of twelve separate appeals, which were all heard together. 2 At all material times, Askena Pty Ltd conducted a motor vehicle and farm machinery sales business at Roma as trustee for the Kajewski Family Discretionary Trust. It was a substantial business, with about a dozen employees, in addition to the three applicants. The applicants were the directors and shareholders in Askena and the beneficiaries of the Family Trust. The Commissioner issued all the amended assessments in reliance on s 170(2)(a) the Income Tax Assessment Act 1936 (Cth) ("the ITAA"). By these assessments, he increased each applicant's taxable income by including in the particular applicant's amended assessment for the relevant year that applicant's entitlement as beneficiary of the Family Trust. It is common ground that resolution of all twelve appeals involves a determination of the following issues:

(a) Whether the Commissioner should have increased the income of the Family Trust in respect of the year ended 30 June 1990 by disallowing the claim for a $200,000 deduction under s 51(1) the ITAA previously allowed.

Determination of this issue will resolve questions as to the Commissioner's entitlement to disallow deductions initially allowed under s 51(1) from the income of the Family Trust for relatively small amounts of interest in each of the 1991, 1993 and 1994 years. Subject to issue (b) below, it will also resolve each of the twelve appeals now before me by resolving whether the Commissioner was entitled to increase each applicant's taxable income by including in their amended assessment for the 1990 year an amount equal to one-third of the $200,000 deduction disallowed to the Family Trust and, in respect of the 1991, 1993 and 1994 years, amounts equal to one-third of the interest disallowed from the Family Trust's assessable income in each of the 1991, 1993 and 1994 years.

(b) Whether the Commissioner's reliance on s 170(2)(a) the ITAA in issuing the amended assessments in October 1999 to the applicants is open to challenge.

(c) Whether each applicant is liable to the penalty tax imposed by the Commissioner and liable to pay interest in respect of the amended assessments.

(d) Whether the Commissioner's refusal to remit these penalties and interest can be challenged.

The nature of the appeal 3 It is necessary to say something about the nature of the appeal conferred on a taxpayer by s 14ZZ(c) the Taxation Administration Act: the applicants submit that the appeal is by way of a re-hearing de novo, while the Commissioner contends that his decision to issue amended assessments in reliance upon s 170(2)(a) the ITAA can only be challenged on what was said to be "administrative law grounds". As I understand this submission, this is said to be the position even if the Commissioner had not put into evidence the certificates under Reg 45 of the Income Tax Regulations to which I later refer. 4 The nature of the appeal to this Court under s 14ZZ is not defined. It must be determined by evaluating the relevant statutory provisions: Builders Licensing Board v Sperway Constructions (Syd) Pty Ltd (1976) 135 CLR 616 at 621 - 622 and Re Coldham; ex parte Brideson (No 2) (1990) 170 CLR 267 at 273 - 274. That this Court is confined to exercising judicial power in contrast to administrative merits review is also relevant. The Full Court, in considering the nature of the right of appeal given by s 14V the Taxation Administration Act against the making by the Commissioner of a departure prohibition order in Poletti v Deputy Federal Commissioner of Taxation (1994) 94 ATC 4,639, said, at 4,641:

Appeals from decisions of Commonwealth officers or federal administrative tribunals, though called appeals, are not appeals in the strict sense. The right of 'appeal' is to a court exercising the judicial power of the Commonwealth, for it is the first occasion on which a court is seized with jurisdiction to consider a matter after it has been dealt with by administrative bodies. Appeals of this kind, of which there are numerous examples … lie to the Federal Court in the exercise of its original, not appellate, jurisdiction.

There is a fundamental distinction between an appeal to a court from the decision of an administrative body, which may necessarily include a rehearing, frequently de novo, and an appeal to a federal court or state or territory court exercising federal jurisdiction, in each case exercising the judicial power of the Commonwealth under Chapter III of the Constitution (a distinction emphasized by Mason J in Sperway at 621). The reason is, of course, that federal courts or other courts exercising federal jurisdiction exercise only the judicial power of the Commonwealth, and do not act administratively or exercise administrative or executive powers by, for example, substituting their own discretion for the discretion of the original decision-maker. This distinction must be kept sharply in mind in this case because it argues powerfully against the appeal from the Commissioners order under s 14S(1) of the [Taxation Administration] Act being a rehearing de novo.

5 Section 14ZZ(c) the Taxation Administration Actdoes not in terms limit a taxpayer dissatisfied with the Commissioner's appealable objection decision to judicial review of that decision on administrative law grounds, such as those set out in s 5 the Administrative Decisions (Judicial Review) Act 1977 (Cth): it gives the taxpayer a right to "appeal to the Federal Court against the decision". The scope of the review opened up by the institution of such an appeal is a wide one. In Federal Commissioner of Taxation v Australia and New Zealand Savings Bank Limited (1994) 181 CLR 466, it was said at p 476 that upon institution of such an appeal, the Court becomes "seized of the [Commissioner's] decision in its entirety", even though the taxpayer may seek to challenge only a part of that decision. Subject only to s 14ZZO(a) the Taxation Administration Act, the Court has power to dispose of the appeal by making such order as it thinks fit under s 14ZZP, a power that is "expressed in the widest terms": ibid. In exercising this right of "appeal", where, as here, the Commissioner's decision rejects a challenge to an assessment, it is implicit in s 177(1) the ITAA that the taxpayer is entitled to challenge the correctness of both the amount of the assessment and any of the particulars of the assessment. Further, s 14ZZO(b) the Taxation Administration Act imposes on a taxpayer, in proceedings on an appeal to the Federal Court under s 14ZZ against an appealable objection decision, the "burden of proving", that "the assessment is excessive" and the burden of proving that, where appropriate, "the taxation decision should not have been made or should have been made differently". As Brennan J observed, in reliance on s 14ZZO(b)(i), in Deputy Commissioner of Taxation v Richard Walter Pty Limited (1995) 183 CLR 168 at 198:

The procedures in Pt IVC of the Administration Act expose an assessment to correction if the application of the general provisions of the Act to the facts as found establishes that the assessment was excessive."

6 See also per Dawson J at 221 and Toohey J at 227. In order to discharge the burden of proof cast on the taxpayer by s 14ZZO(b) the Taxation Administration Act and its statutory precursors, it has long been accepted that it is necessary for the taxpayer to prove, by proper evidence put before the appeal Court, what is the correct amount of the taxpayer's taxable income in respect of which the Commissioner should have made his assessment: see Trautwein v Federal Commissioner of Taxation (1936) 56 CLR 63 at 87 - 88; Danmark Pty Ltd v Federal Commissioner of Taxation (1944) 7 ATD 333 at 336 and McCormack v Federal Commissioner of Taxation (1979) 143 CLR 284 at 303. Subject only to s 14ZZO(a), the taxpayer is, in general, entitled to put before the appeal court evidence that may not have been before the Commissioner and to seek the Court's decision on whether, on all the evidence before it on the appeal, an assessment different in amount from that issued by the Commissioner should issue. Cf Re Coldham at 274. 7 Each of the present appeals is against the Commissioner's objection decisions to disallow the objections of all applicants to all his amended assessments. Institution of each appeal refers to this Court the particular objection decision in its entirety and the Court's wide power under s 14ZZP is thereupon enlivened. The issues which a taxpayer appealing under s 14ZZ(c) in respect of an assessment is entitled to raise show that the appeal is an avenue available to a taxpayer for showing that the assessment in question was wrongly made. As such, it can involve questions of both fact and law: Kolotex Hosiery (Australia) Pty Ltd v Federal Commissioner of Taxation (1975) 132 CLR 535. The right of appeal given by s 14ZZ(c) is of the same nature as the right of appeal given by s 14V against a departure prohibition order made by the Commissioner, which "may involve questions of fact or law or both": Poletti at 4,645. The taxpayer is thus entitled to challenge the entire factual and legal basis upon which the amended assessment was issued, subject only to s 14ZZO(a). 8 Because the taxpayer is entitled, on such an appeal, to lead evidence relevant to the issues for determination that was not before the Commissioner, an appeal under s 14ZZ(c) has some of the characteristics of an appeal by way of a hearing de novo. But s 14ZZO(a) shows that the taxpayer does not have an unqualified right to put before the appeal court all the material which it might contend is relevant to determining the correct amount of the assessment that should be made. Section 14ZZO(b) is also inconsistent with the appeal being by way of hearing de novo, for the reasons referred to in Poletti at 4,644. That the appeal cannot be characterised as an appeal by way of hearing de novo is not inconsistent with a proceeding under s 14ZZ(c) still being an appeal against the factual and legal determinations made by the Commissioner in issuing the particular assessment in which the taxpayer has an extensive right to put additional evidence before the Court. Cf Builders Licensing Board v Sperway Constructions (Syd) Pty Ltd (1976) 135 CLR 616 at 621 - 622 and 628 - 629. The considerations referred to and s 14ZZO(a) and (b) show that the right of appeal under s 14ZZ is not in the nature of a rehearing de novo or of a right to judicial review of the kind provided for by the Administrative Decisions (Judicial Review) Act 1977 (Cth), even though the sole avenue available to a taxpayer for challenging an appealable objection decision is by appeal under s 14ZZ(c). Poletti at 4,643 to 4,645 supports this view of the nature of this appeal. 9 The applicants' right of appeal under s 14ZZ(c) against the appealable objection decisions here in question is a right of appeal against the factual and legal determinations made by the Commissioner in deciding to issue the amended assessments, including his determination on issues raised by s 170(2)(a) the ITAA in the course of arriving at his decision, and in fixing the amount of those amended assessments. 10 The Commissioner's power to issue the amended assessments here in question in reliance on s 170(2)(a) the ITAA is conditioned, firstly, upon there being in fact an avoidance of tax and, secondly, upon the Commissioner being of the opinion that that avoidance is due to fraud or evasion. That the power to issue an amended assessment is conditioned upon the Commissioner first forming his opinion on these matters does not, I think, change the nature of the appeal conferred by s 14ZZ(c) on the taxpayer. However, longstanding authority establishes that there is a limitation on the jurisdiction of the Court on an appeal under provisions of the kind now contained in Pt IVC to interfere with an appealable objection decision in so far as that decision may be based upon the formation of an opinion confided by the statute to the Commissioner. The leading case, constantly followed, is Avon Downs Proprietary Limited v Federal Commissioner of Taxation (1949) 78 CLR 353 at 360. The basis upon which the Court, on an appeal under s 14ZZ(c), can interfere with the formation by the Commissioner of a discretionary opinion confided to him by the legislation was stated by Dixon J in Avon Downs in language similar to that in which his Honour, with Evatt and McTiernan JJ in House v R (1936) 55 CLR 499 at 504 - 505, stated the basis upon which an appeal court with power to conduct a full appeal on law and fact nevertheless has limited authority to interfere with a discretionary judgment by the primary judge. In House v R, their Honours also said that, once the appeal court concludes that the primary judge's discretionary judgment should be set aside:

… the appellate court may exercise its own discretion in substitution for his if it has the materials for doing so.

11 In Kolotex, the majority said that a court conducting an appeal under a precursor of s 14ZZ(c) the Taxation Administration Act has exactly the same power. In that case, the taxpayer appealed against the Commissioner's assessment. The issue was whether the taxpayer company was wrongly denied a deduction in respect of previous year losses. The taxpayer's entitlement to this deduction depended upon a provision of the ITAA that required it to satisfy the Commissioner of certain matters. The majority each held that, once the Court was satisfied on the material that was before the Commissioner that the Commissioner's opinion was flawed with error of the kind identified in Avon Downs, it was open to the Court in disposing of the appeal to determine, by reference to all the material before the Court, though that may be more extensive than that before the Commissioner, what opinion the Commissioner ought to have formed. See Gibbs J at 567 - 568 and Stephen J at 576 - 577. See also Federal Commissioner of Taxation v Brian Hatch Timber Co (Sales) Pty Limited (1972) 128 CLR 28 at 57 - 58 and 59. Such an approach is consistent with the approach of a court of appeal dealing with an appeal against the exercise of a judicial discretion. It is implicit in what their Honours said in Kolotex that, when the Court exercises the special power to determine the opinion the Commissioner should have formed, the line between judicial and administrative or executive power is nevertheless not transgressed. But consistently with this Court in its original jurisdiction exercising judicial power and not a power of administrative merit review, the Court, in contradistinction to the Tribunal on an appeal to it under s 14ZZ(a) or (b), cannot simply form its own opinion on the materials before it on matters confided by the legislation to the opinion of the Commissioner: it can only exercise such a power if it has first determined that the Commissioner's opinion is vitiated by error of law of the kind described in Avon Downs and House v R and should be interfered with in accordance with the principles stated in Avon Downs. And even where the Court exercises that special power itself, the Court does not engage in the administrative act of issuing the assessment amended to give effect to its judgment: that task remains one for the Commissioner under s 14ZZQ(1). 12 In Amway of Australia Pty Ltd v Federal Commissioner of Taxation (1998) 158 ALR 652, Foster J noted, at 668, that Kolotex was conducted by the parties on the basis that once it had been decided by the Court that relevant error had been shown, then the appeal should be decided by reference to all the material before the Court. But nothing in the judgments of Gibbs and Stephens JJ in Kolotex suggests that their Honours acted on this invitation while reserving the question whether that was the legally correct approach. Both their Honours considered the function of the Court and independently came to the conclusions to which I have referred. 13 Of course, the Court dealing with an appeal under s 14ZZ against an assessment based upon the Commissioner's opinion as to the existence of a particular matter which considers that the opinion is flawed with error of the kind referred to in Avon Downs is not bound to exercise for itself the relevant discretion conferred by the tax statute on the Commissioner. It can do that if it considers it appropriate, but as Foster J noted in Amway at 667, the Court has the option under the wide power in s 14ZZP to "refer the matter back in order that the discretion may be properly exercised according to law". 14 An appeal under s 14ZZ(a) is against the Commissioner's "objection decision". In order to identify the subject matter of the appeal, the relevant "objection decision" needs to be identified. The same issues are raised by each applicant's appeals. It will be sufficient to identify the objection decisions the subject of Mrs Kajewski's appeals. By a document entitled "Notice of Objection Against Assessment" dated 13 April 2000, Mrs Kajewski objected "against the assessments and amended assessments of income tax issued [by the respondent] on 20 October 1999 based on income derived by me during the financial years ended 30 June 1990, 1991, 1993 and 1994". She contended that the assessments should be amended: "to excise the following amounts of income and the consequential amounts of interest, and where applicable, penalties from my assessable income" that were particularised in the document. In support of this contention, Mrs Kajewski relied upon a number of claims, including claims that, for various reasons, the amounts of each assessment were excessive (claims (1) to (4) and (8)); claims that she was not liable to the penalty tax or, if liable, that it should have been remitted in full (claims (5) to (7)) and claims that the Commissioner has sought to amend the assessments beyond the power conferred by s 170(2)(a) the ITAA because there is no evidence of tax avoided and, if there has been an avoidance of tax, that avoidance did not arise or occur as a result of fraud or evasion (claims (9) to (11)). 15 The Commissioner responded to Mrs Kajewski's "Notice of Objection" by a document entitled "Notice of Decision on Objection" dated 9 August 2000. The Commissioner's decision on Mrs Kajewski's objection is precisely identified in p 1 of this document. It was a decision to disallow Mrs Kajewski's objection against the four (amended) assessments that issued on 20 October 1999. Having stated his decision, the Commissioner then went on in his Notice of 9 August 2000 to advise Mrs Kajewski: "Our report 'Reasons for Decision' is attached". This second document, also dated 9 August 2000, contains the delegate's detailed reasons for making this decision, the effect of which was to reject all the claims made by Mrs Kajewski in her "Notice of Objection".

Were the amended assessments excessive? 16 It is convenient to deal first with the question whether the applicants have shown that their various amended assessments were excessive. 17 The case as put by counsel for the applicants is that by late 1989, the applicant, William Kajewski, was contemplating leaving the business for a variety of personal reasons. The other applicants believed his continued involvement was essential to the success of the business. In early 1990, the Kajewskis' accountant, Mr Steve Hart, was in Roma on one of his regular visits to clients. In response to the concerns about William's departure, Hart suggested the setting up of an employee retention plan as an encouragement to William to remain involved. On 26 June 1990, Mr Ian Stevens, a fellow director with Hart in a number of the Hart group of companies, including Harts Fidelity Ltd, called on the Kajewskis at Roma with a number of documents which they then executed. These, it was said, included a deed establishing the Askena Staff Benefit Trust and service agreements between Askena and each of Peter and William Kajewski. Importantly, the applicants' case is that, by various of the documents they then executed, they obtained a loan from which, with some of Askena's own money, contributions totalling $200,000 were made by Askena Pty Ltd to the Askena Staff Benefit Trust; this was the subject of the $200,000 deduction claimed by the Family Trust in respect of its income for the year ending 30 June 1990, but ultimately disallowed. These contributions said to have been made by Askena comprised two amounts, one of $25,400 and another of $174,600. In closing submissions, the applicants put this part of their case in this way:

… On 29 June 1990, a cheque for $25,400 drawn by the employer [Askena Pty Ltd] was deposited to the credit of a bank account conducted by Hartcorp Fidelity Limited, the trustee of the staff benefit trust, with the ANZ Bank at Edward & Charlotte Streets, Brisbane, account no 3686-04873. According to the evidence, the bundle of documents they executed [prior to 30 June 1990] included a loan offer document from Mevton Pty Ltd, loan acceptance documents (minutes and certificate of acceptance) and security documents (guarantees) for a loan from Mevton Pty Ltd to Askena Pty Ltd as trustee of the Kajewski Family Discretionary Trust.

At an early stage it had been contemplated that the contribution to the staff benefit fund would be made [by Askena] with finance provided by Chase-AMP Bank Limited. However, as that could not be arranged in time, Steve Hart made arrangements in June 1990 for Mevton Pty Ltd (and/or Grade Enterprises Limited as its undisclosed principal or equitable assignee) to be inserted as financier and for the contribution by Askena Pty Ltd as trustee for the Kajewski Family Discretionary Trust to be invested in an insurance bond with Security Life Insurance Co Ltd for $174,600. The insurance bond with Security Life Insurance Co Ltd was a whole of lifepolicy and therefore had an investment component upon its redemption.

Mevton Pty Ltd is a company within Mr Hart's "family holdings", but not part of the Hart group of companies. He and Mr Stevens were its directors up to May 1990 and again from 1993; the interim directors were two secretaries employed by the Hart group. Grade Enterprises Pty Ltd (sometimes called Grade Investments) and Security Life are both Vanuatu companies. Counsel's submissions continued:

Nevertheless, it had been intended to continue to proceed with the the [sic] Chase-AMP Bank application for finance for an AMP Policy and replace the interim Mevton structure with finance from Chase-AMP and an AMP Policy. After the Chase-AMP Bank approval for finance had been obtained and security documents signed, it was decided not to proceed with the Chase-AMP Bank finance for the AMP Policy. The interest rate on the Chase-AMP Bank Limited finance was about 16%, which was higher (the interest rate for loans of 10 years around 30 June 1990 was said to have been about 11.2%). Instead, the repayments to Mevton Pty Ltd were used to fund the acquisition of an AMP Investment Linked Policy by Hartcorp Fidelity Limited as trustee of the staff benefit trust, thus providing an accumulating asset.

It was expected that sufficient funds would be available after 10 years in the staff benefit trust to pay out the loan to [sic] Mevton Pty Ltd (and/or Grade Enterprises Ltd) and allow for the proceeds of the [Security Life] insurance bond to be distributed to William Kajewski. Alternatively, as the insurance bond was charged as security for the loan from Grade Enterprises Limited, sufficient funds would be available from the insurance bond to discharge the loan and the value of the AMP Policy would benefit the intended member of the staff benefit trust.

As events transpired, the AMP Policy was less profitable than expected and the policy was redeemed on or about 19 January 1993 for $21,937.05. Sometime after 16 November 1993, further payments to Mevton Pty Ltd were stopped (after 40 payments totalling $97,196). In 1994 the Kajewskis were notified that the funds in the staff benefit trust has been invested elsewhere, and only $100,000 was now expected at the end of 10 years instead of $300,000 - $400,000 …

18 The applicants contend that events occurred prior to 30 June 1990 which entitled the Family Trust to the deduction of $200,000 initially allowed in respect of its income for the year ended 30 June 1990, but subsequently disallowed, so that there was never any avoidance of tax. Their alternative case is that, if there was an avoidance of tax by Askena, that did not result from any conduct capable of justifying the Commissioner's conclusion that that avoidance of tax was due to fraud or evasion within s 170(2)(a). It was also submitted that even if the understatement of taxable income in the trustee's income tax returns and in the beneficiaries' income tax returns was due to fraud or evasion, the consequential avoidance of tax was not due to fraud or evasion by any of the applicants themselves. 19 The Commissioner's case is that Askena never incurred any liability in the year ending 30 June 1990 in respect of the employee retention plan and that such documents as have been put into evidence supporting such a claim have been fabricated by Mr Hart or persons within his organisation working under his direction. Further, the Commissioner contends that no part of the $200,000 was deductible from the Family Trust's 1990 income because there was never any intention on the part of the Kajewskis to set up an inducement for William to remain with the business; it was said that the whole transaction was proposed by Mr Hart to the Kajewskis and accepted by them as a means of generating a $200,000 tax deduction that would be available to Askena in respect of the 1990 year to reduce the very substantial increase in taxable income that the business had generated in that year over the previous year. 20 At the beginning of these reasons, I explained why the critical issue for determination is whether the Commissioner was entitled to increase the Family Trust's income for the 1990 year by disallowing the $200,000 deduction previously allowed. To show that the various amended assessments complained of were excessive, the applicants must show that Askena, as trustee of the Family Trust, incurred an outgoing of $200,000 by 30 June 1990 that was deductible under s 51(1) the ITAA. 21 It was no part of the applicants' case that Askena incurred an outgoing of $200,000 by 30 June 1990 merely by determining to establish its Staff Benefit Trust and by also determining then to make a payment of $200,000 into that trust by that date. Merely by making these determinations Askena could not have "completely subjected or definitively committed" itself to make the $200,000 payment into the Trust so that its entitlement to claim the $200,000 deduction (if a business outgoing) thereupon arose: see Merrill Lynch International (Australia) Ltd v Commissioner of Taxation (2001) 191 ALR 420 at pars [80] and [81]. Askena's decision to make such a payment, though it may have been made before 30 June 1990, was a unilateral and voluntary one that it was free to revoke at any time before it was implemented. Moreover, Askena did not intend to pay $200,000 of its own moneys into the Staff Benefit Trust by 30 June 1990. It intended to borrow $174,600 of that sum in order to make that payment. Counsel for the applicants, in par 46 of his submissions in reply, correctly recognised that Askena could only show that it had incurred an outgoing to the extent of $174,600 in the 1990 year in respect of the Staff Benefit Trust that could satisfy s 51(1) if, by that date, Askena had entered into a legally enforceable agreement to borrow that sum for that purpose. 22 I do not accept that Askena, by 30 June 1990, ever became committed to borrowing the $174,600 for the purpose of being invested for the Staff Benefit Trust. As will appear, not only has Askena failed to show that it incurred an outgoing of $174,600 by 30 June 1990, but it has also failed to show that any part of the $200,000 deduction claimed by the Family Trust from its 1990 income had the character of a business outgoing necessary to attract deductibility under s 51(1). 23 The applicants assert that, in early 1990, Mrs Kajewski and Peter Kajewski were concerned to retain William Kajewski's participation in Askena's business and that, at the suggestion of their accountant, Mr Hart, they set about establishing an employee retention plan. They say that the Askena Staff Benefit Trust was set up to administer this plan and the $200,000 was contributed by Askena for that purpose: as to $25,400 from its own cash and as to $174,600 from borrowings. I will assume that, if such a purpose were established, the payments said to have been made by or on behalf of Askena in respect of the Staff Benefit Trust could be characterised as business outgoings within s 51(1). I am not satisfied, however, either that the Staff Benefit Trust was set up as part of a plan to retain William Kajewski's services in Askena's business or that it was intended that the $200,000 would be paid in implementation of that same plan. 24 The applicants did not lead much evidence that provided ground for thinking that William Kajewski's continued participation in the business was of critical importance to its continued operation. Mrs Kajewski and Peter Kajewski said that shortly before their meeting in early 1990 with Mr Hart, they considered that William Kajewski's continued involvement in the business was essential to ensure its success. They did not explain why. He did train, however, as a motor mechanic and worked as a licensed motor dealer for some years, handling both the sales and servicing side of the Ford dealership business. Peter trained as a watchmaker and, with his mother and William, conducted the Ford dealership in Roma from 1982. Mrs Kajewski struck me as having a better grasp of the financial side of Askena's business than either William or Peter. 25 What is clear from the applicants' evidence is that the suggestion to set up an arrangement involving the establishment of the Staff Benefit Trust came from Mr Hart in the course of his visit to the Kajewskis at their business premises in Roma in early 1990. He had looked after their tax affairs and those of Askena for some years. Each of Mrs Kajewski and Peter and William Kajewski said Mr Hart raised the possibility of an employee retention plan which could be used by Askena's business for the retention of William's services. Each expressed concerns about the plan and each recalls being assured by Mr Hart, upon whom each relied in deciding to go ahead with the arrangement, that the plan he was proposing was legitimate. William Kajewski, eg, said:

Mr Steve Hart assured us that the plan was entirely legitimate. I recall seeking his assurance on this point and remember his reply that "He would not go to jail for anyone". I trusted Mr Hart and relied on his expertise and advice … If he has recommended to the business that we do something, then we have followed his advice and have signed whatever documents Harts have placed in front of us and paid whatever monies Harts have asked us to pay.

26 Each said they did not have much understanding of how the plan proposed by Mr Hart would work. 27 I consider that Mr Hart proposed the plan to the applicants as a means of enabling Askena and, in turn, the three applicants, to avoid the large tax bill that they were facing in respect of the 1990 year and that the applicants accepted and acted on that proposal to achieve that object. 28 Askena had a taxable income of only about $17,000 in the 1989 year. The applicants knew in early 1990 that they could anticipate a very large tax bill for the 1990 year in comparison with the bill for 1989 because of the increased income the business was generating. In its income tax return lodged in February 1991 for the year ending 30 June 1990 signed by Mrs Kajewski, Askena, as trustee for the Kajewski Family Discretionary Trust, declared a net income of $37,723, an amount arrived at after deduction of an "employee retention plan expense" of $200,000. The $200,000 deduction had the effect, until the amended assessments were issued, of reducing Askena's taxable income for the 1990 year from $237,000 to about $37,000. 29 According to the applicants, it was Mr Hart who suggested at the meeting in early 1990 that payment into the employee retention plan he proposed should be a figure of $200,000. They also understood from Mr Hart that such a payment would generate a $200,000 tax deduction for them. Though Askena's plan was structured so as to enable it to be depicted as a device for encouraging William Kajewski's continued participation in the business, that was done, in my opinion, for the purpose of colouring the investment of $200,000 to be made by Askena in respect of the plan with a business, and thus a deductible, character. 30 Mrs Kajewski said that, initially at least, she thought they were going to borrow $200,000 from Chase AMP to take out an insurance policy with Chase AMP, a loan "which was to help us with an employment retention plan". She said that she had never at any time understood the scheme and concluded her evidence in this way:

Well, what is the answer to my question, Mrs Kajewski? You understood as at June 1990 that the scheme provided for you a tax deduction of $200,000?‑‑‑Yes. Yes.

And if you understood nothing else, you understood that?---Yes.

Well, I want to suggest to you that he [Hart] said, look, you know, $17,000 profit last year; you're going to have over $200,000 this year. You're going to have to pay a lot of tax on that 200,000 unless we do something. He said words to that effect, didn't he?‑‑‑Well, he could have done. This - the whole plan, I think, was part of a tax deduction as well as a retention plan for building [sic: Bill].

Yes, we'll come to that in a moment. But it was in that line that he said, well, look, maybe we can do one of these employee retention plans; is that correct?‑‑‑No. We took out the retention plan because Bill was vital to the - at that stage to our dealership and he was crook at the time and he wanted to - I mean, without him the place would have gone down. He was the ideas man and the - had all the ideas and was the leading - he was the dealer principal, I suppose, and that was the ‑ ‑ ‑

But that is because Mr Hart asked you to identify somebody who you could put forward as crucial to the business. That's how it started, isn't it?‑‑‑Well, quite possibly; yes.

And you didn't feel it was necessary to get into the detail of the plan, as long as Mr Hart told you that there was a plan?‑‑‑Mr Hart told us that the plan was okay and correct and we - I questioned him. That is what I've been told. I would believe that.

And you understood that the effect of the plan was to try to provide the business with a tax deduction of $200,000?‑‑‑That's right. There was a plan in place to - that we could get this tax offset and I also - there was a bond in place which, I understand, covered part of that - the insurance in case, I guess, something happened with me, to cover that which - I understand enough about finance insurance that they wanted to be protected and that would cover the plan.

33 Mr Hart denied the scheme he initially proposed was designed as a tax minimisation arrangement. He said he first advised the Kajewskis to put $200,000 into the employee retention plan "back in late 89/early 90", well before he had any idea what Askena's taxable income was likely to be for the 1990 year. I do not accept his evidence. It was Mr Hart who suggested that $200,000 should be put into the plan and a $200,000 tax deduction was recalled by each of the Kajewskis as one of the attractions of the plan suggested by Hart. That particular figure was proposed by Mr Hart because he knew it would serve to obliterate the applicants' large tax problem for the 1990 year. 34 Around about 27 November 1996, Mrs Kajewski had a conversation with Mr Hart. She made a note of it. I accept it accurately records what was said. Mr Hart told her of the Australian Taxation Office ("ATO") investigation into "this whole scheme", ie, the employee retention plans arranged by Harts, but said that Askena and the Kajewskis were not implicated in the investigation. She also noted Mr Hart's advice that he was "destroying evidence as quickly as is permissible". At trial, she claimed she thought Mr Hart was referring only to the fact that records could lawfully be destroyed after five years. But Mr Hart was not giving her a bit of irrelevant legal advice in telling her he was "destroying evidence" in the context of discussing an ATO investigation into the activities of Mr Hart and his clients. She noted too that Askena's scheme was instigated, on her understanding of things, not in June, but in either July or November 1990. She also noted Mr Hart's advice that he had not issued any paperwork to the Kajewskis "purposely". She said that she had frequently asked Mr Hart for paperwork dealing with the scheme, but none was issued. (By this stage they had learned of Mevton and Security Life, though Mr Hart had kept them in the dark about both organisations for a long while after the applicants were supposed to have become involved in commercial arrangements with each.) She queried what Askena had received for the $97,196 paid at Mr Stevens' direction to Mevton month by month from November 1990 until November 1993, when Mr Stevens told her to stop making those payments. Mr Hart's answer was that the payments had ceased "as tax benefit received when scheme winds up in ten years' from inception". She understood the tax benefit he was referring to was the deduction of $200,000 claimed by Askena in respect of the 1990 year. She also said that Mr Hart told her that, when the scheme wound up after the ten years, Askena would receive back only about $100,000 instead of the $400,000 they had originally expected and that they would have to pay tax on that $100,000. She said that when she queried Mr Hart about Askena being able to anticipate only $100,000 at the end of ten years instead of the $400,000, he said words to the effect:

35 This note that Mrs Kajewski made of her conversation with Mr Hart in November 1996 points strongly to the arrangements involving the establishment of the Askena Staff Benefit Trust as having been intended by Mr Hart, and understood by the Kajewskis, as a device for reducing the tax bill that Askena and the Kajewskis were facing as the 1990 financial year came towards its close. 36 Further, the employee retention plan, of which the Askena Staff Benefit Trust arrangements were but an example, was not something devised by anyone in the Harts group as a solution for clients of the group who may have encountered problems in retaining key staff in their business. The evidence before this Court shows that counsel for the applicants correctly acknowledged in his submissions that the employee retention plan entered into by Askena and the applicants was what counsel says is now called a "mass marketed tax avoidance arrangement"; it was one of thirteen similar plans marketed to clients of Mr Hart in which the financier for each plan was said to be Mevton Pty Ltd. It appears, however, that each of these thirteen clients initially applied to Chase AMP before 30 June 1990 for the finance intended to be used to make the investment in the relevant Staff Benefit Trust. Counsel also acknowledged, as the evidence shows, that these thirteen plans were similar to an unstated number of other plans entered into by other clients of Harts in which Chase AMP provided the necessary finance. The Harts organisation generated substantial fees for itself from these plans, which it marketed to a considerable number of its clients. 37 During the late 1980s and early 1990s, the Harts group had a business association with the AMP Society and marketed various AMP products to clients of the group. According to Mr Stevens, in the first half of 1990, the AMP Society introduced the Harts group to one of its new products which it called the "Remuneration Reward plan". The plan, as proposed by the AMP Society, envisaged an employer making a long term investment in an AMP insurance product, such as a bond, to the intent that the proceeds of the investment on maturity would be distributed to loyal employees; further, an employer could borrow funds at attractive rates to make this investment from an AMP subsidiary, Chase AMP. The employer would obtain various tax advantages, including a deduction in respect of interest paid on the borrowed investment funds. It was this AMP plan which Harts in turn marketed to its clients as its "employee retention plan". 38 In the second quarter of 1990, Mr Hart was involved with other members of Harts staff in discussions with AMP staff about this new product. Prior to 30 June 1990, Chase AMP did approve some finance applications, including the one in respect of the Oldvale Pty Ltd Staff Benefit Trust, lodged by Harts on behalf of clients in connection with their employee retention plan arrangements. But some applications to Chase AMP for finance in connection with employee retention plans sold to its clients by Harts were, in early June 1990, being held up because of concerns Chase AMP apparently had about how Harts were representing to clients, who were seeking finance from that bank, the benefits to be obtained from entry into such a plan. Lillis of Chase AMP wrote to the CEO of Hartcorp Finance Pty Ltd on 8 June 1990 requesting "a written explanation of your proposed employee retention plan". The Harts group was keen to satisfy Chase AMP's concerns as a matter of urgency: they had resulted in delays for Harts in implementing a number of these plans for various of their clients. It appears it was Mr Hart personally who provided the information sought by Lillis. In his response of the same day, 8 June 1990, Mr Hart gave details requested by Chase AMP "of the commercial benefit accruing to the client in respect of the Employee Retention Loan Applications". These benefits included substantial tax benefits. Mr Hart concluded:

We trust you will now expedite the approvals pending.

39 His concern for expedition by Chase AMP of approval of the still-pending finance applications by Harts clients to Chase AMP was, I think, dictated by his desire to have the employee retention plans for the clients in question implemented by 30 June 1990, so that the clients could obtain the tax benefits he had promised them in that year. 40 Mr Stevens, a director of Hartcorp Fidelity Limited, the Harts company that acted as trustee of superannuation and other trust funds for clients of the group, was involved, along with Mr Hart, in the April-May 1990 period in discussions with AMP officers in relation to the new employee retention plan product. He said that his involvement "was to introduce the product to clients who had a need to retain crucial staff members and I further coordinated the execution of relevant documentation and liaised with the AMP Society and where relevant, Chase-AMP, the financiers and the solicitors for AMP and Chase AMP being Mullins & Mullins …". He was also involved in preparation of the documentation necessary to establish these plans for Harts clients. He said that if Harts had Chase AMP finance approval, they would prepare a Chase AMP document package made up of documents supplied by Mullins and Mullins, including documents to be executed by the Harts client. He also said that:

There was some delays in negotiations and further delays in June 1990 with Chase-AMP due to some queries regarding the trust deed and a number of applications were put on hold. This therefore involves some clients going via the Mevton/Grade route whilst still going on with their Chase-AMP finance applications …

41 Despite what Mr Stevens says about the Kajewskis' application to Chase AMP not being one of the applications so held up, it is quite clear that the finance application to Chase AMP made by Harts on behalf of Askena on or about 22 June 1990 was held up beyond June and was only approved in mid August of that year. 42 I accept that, as a result of Mr Hart's earlier meeting with them, Mr Stevens met with the Kajewskis in Roma on about 26 June 1990 and that they then executed a number of documents presented to them by Stevens which related to establishing an employee retention plan for Askena. This documentation may have included the Askena Staff Benefit Trust Deed, though neither the original nor a stamped or otherwise verified copy of that Deed showing that it was executed before 30 June 1990 was produced in evidence. This Trust was to be established as part of the setting up of the employee retention plan. Harts had procured from its own solicitors a draft trust deed adapted to that purpose a couple of months earlier. On this occasion at Roma, one of the Kajewskis gave Mr Stevens a cheque drawn by Askena as trustee of the Kajewski Family Discretionary Trust for $25,400 in favour of Hartcorp Fidelity, which was to be trustee of the Askena Staff Benefit Trust. This cheque was duly paid by Askena's bank. 43 I do not, however, accept that the documents presented to the Kajewskis on this occasion by Mr Stevens included the Offer of Loan by Mevton or any of the other documents associated with that purported loan which Stevens said he then presented to the Kajewskis and which they then executed. 44 Mr Stevens gave evidence that he used the Chase AMP documents produced in connection with the employee retention plans as the models for the letters of offer by Mevton and all other Mevton loan documentation to various clients which he drafted. Mr Stevens said he prepared the Mevton letter of offer on instructions from Steve Hart. He said that "the Mevton loan offer and acceptance documents are nearly word-for-word the same as the Chase AMP bank offer and acceptance documents". Mr Stevens acknowledged that he personally collected the Chase AMP model documents only on 22 June 1990. The standard form letter of offer by Mevton to Harts clients Norm Lowe Family Holdings and Rural Aviation which Mr Stevens acknowledged he also drafted are both, however, dated 20 June 1990. He failed to get the chronology right, if his evidence here were to be believable. 45 The applicants, in my opinion, first learned of the existence of Mevton in late 1990. In my opinion, each of the Kajewskis expected in June 1990 that the loan moneys necessary to make up the $200,000 contribution intended to be made by Askena in respect of the employee retention plan would be borrowed from Chase AMP. I consider that that continued to be their expectation in the ensuing months and that it was only late in 1990 that they learned from Stevens that the loan was not to be raised from Chase AMP but instead from Mevton Pty Ltd. 46 The document of 22 June 1990 entitled "employee retention plan" (an internal Hart group pro forma document) indicates that Askena intended to borrow, in respect of a "deduction" of $200,000 shown on that form, moneys from Chase AMP. Consistently with this, Phillips of Hartcorp Fidelity, by memorandum entitled re "employee retention plan" also of 22 June 1990, forwarded to Mrs Kajewski certain forms "to be completed to enable Chase AMP to assess your application". By application signed by Mrs Kajewski and Peter Kajewski on behalf of Askena on or about 22 June 1990 and returned to Phillips, Askena sought from Chase AMP a unit trust investment loan in the amount of $200,000 for a term of five years with periodic repayments of principal plus interest. The application stated that Askena's "equity participation" was $20,000. 47 On 16 August 1990, Lillis of Chase AMP sent a facsimile to Hartcorp setting out the status of the applications made by Harts on behalf of eleven of its clients to Chase AMP for finance in connection with employee retention plans. Lillis then advised Hartcorp that Askena's application to Chase AMP for $174,600 in finance for that purpose had been "formally approved". The evidence did not indicate when the Harts organisation told Chase AMP that Askena was only seeking this amount rather than the $200,000 initially applied for. By letter dated 15 August 1990, Chase AMP notified Hartcorp Fidelity as trustee for Askena Staff Benefits Trust that it was prepared, on the terms set out, to offer finance in an amount of $174,600 for the purpose of enabling the Trust to purchase an insurance bond. On the same day, it gave instructions to its solicitors, Mullins & Mullins, to prepare the necessary documentation and also advised each of the applicants by letter of the loan approval and of the need for each to give a personal guarantee. This Chase AMP offer was then accepted in writing by Hartcorp Fidelity as trustee for the Askena Staff Benefit Trust, with Mr Hart signing through that company's seal as a director and with Mr Stevens as the witness. Each of the applicants also endorsed on this acceptance their own acceptances of the bank's offer. 48 It was a term of this Chase AMP offer that Chase AMP was to control disbursement of the $174,600 advance in purchasing an AMP insurance bond policy and it was a further term that Chase AMP hold that insurance bond as security for repayment of the loan. On 20 September 1990, Mr Stevens and Mr Hart on behalf of Hartcorp Fidelity Limited as trustee for the Askena Staff Benefit Trust undertook to sign a transfer of this insurance policy in favour of Chase AMP "as soon as practicable following the issue of the policy from the AMP Society". The same two gentlemen on the same date, again acting as directors of Hartcorp Fidelity, authorised Chase AMP to pay the full amount of the loan of $174,600 to the AMP Society as the purchase price of the AMP insurance bond. On the same date Messrs Hart and Stevens, on behalf of Hartcorp Fidelity, gave Chase AMP authority to complete the assignment of the AMP insurance policy to Chase AMP. On 4 October 1990, Mr Stevens wrote to the three applicants re "Employee Retention Plan - Chase AMP Loan" enclosing documentation for execution and return. This documentation, executed by the various applicants personally or as directors of Askena on 11 October 1990, included a guarantee by Askena in favour of Chase AMP of repayment by Hartcorp Fidelity as trustee for Askena Staff Benefit Trust of the $174,600 advance and a statutory declaration testifying to Askena's capacity to give this guarantee to Chase AMP "in respect of a loan of $174,600" to be made by Chase AMP Bank Limited to Hartcorp Fidelity. 49 In the meantime, on 18 September 1990, Mullins & Mullins wrote to Mr Stevens of "Hartcorp Fidelity Limited", the trustee of the Askena Staff Benefit Trust, enclosing the documents to be executed in connection with this recently approved loan of $174,600 which Hartcorp Fidelity as trustee had sought from Chase AMP. These included a guarantee to be executed by Askena, itself Trustee of the Kajewski Family Discretionary Trust, of Hartcorp Fidelity's obligations to repay the $174,600 loan then intended to be made by Chase AMP in respect of the Askena Staff Benefit Trust. Mullins & Mullins commented in this letter:

It will be necessary for us to peruse a Trust Deed of the Askena Pty Ltd Staff Benefit Trust to ensure that the Trust has power to guarantee a loan to a third party.

50 Mullins & Mullins' request to sight the Askena Staff Benefit Trust Deed "to ensure that the Trust has power to guarantee a loan to a third party" appears to be confused: it was Hartcorp Fidelity as trustee of that Staff Benefit Trust that was borrowing the money. It was Askena Pty Ltd, the trustee of the Family Trust, that was required to guarantee repayment by Hartcorp Fidelity. But whether or not Mullins & Mullins themselves had a clear understanding of the significance to the performance of their retainer from Chase AMP of the Staff Benefit Trust Deed, on 24 October 1990, Mullins & Mullins persisted in reminding Stevens he had not yet forwarded them a copy of "the Askena Pty Ltd Staff Benefit Trust" Deed. Until they had seen that Deed and were satisfied with it, Mullins & Mullins said they would not be in a position to settle the loan transaction. They sought the Trust Deed as soon as possible because they were anxious to finalise the matter. There is no evidence that Mr Stevens ever arranged to meet Mullins & Mullins' request. 51 Soon after, in about November 1990, for reasons not satisfactorily explained, Messrs Hart and Stevens abandoned the plan to obtain finance of $174,600 in respect of the Askena Staff Benefit Trust from Chase AMP even though the relevant application for finance had been approved some months earlier. They never took out the AMP policy the subject of one of the conditions of the Chase AMP loan approval, which was also the policy contemplated in the Trust Deed as the investment to be made on behalf of the Askena Staff Benefit Trust. 52 On 28 November 1990, Mr Stevens telephoned William Kajewski, who was with Peter Kajewski at the time. Stevens told William that there were four payments overdue in respect of the investment that had been made in the Askena Staff Benefit Trust. He said that the payments were due to Mevton: Peter Kajewski the same day deposited the amount sought by Mr Stevens in the account in the name of Mevton, the details of which Mr Stevens also then gave the Kajewskis. When Mrs Kajewski saw Peter's note of Mr Stevens' request, she wondered whether four payments overdue as at 28 November 1990, with each to be made on the 15th of the month, took the starting date of the scheme only back to July 1990. But neither she nor Peter nor William at that time appear to have queried Mr Stevens about just when the scheme, as she described it, started. On 20 December 1990 Stevens sent a letter to the Kajewskis (and, as appears from the ATO letter of 21 November 1997 to Mr Hart, to other Harts clients who had not obtained approval by 30 June 1990 of finance applications made to Chase AMP in connection with investing in those clients' employee retention plans set up by Harts). It reads:

As you would be aware because of delays in processing documentation through Chase-AMP another lender in MEVTON PTY LTD was substituted.

We have currently received a refund of application fees in regard to the Chase AMP matters.

It would be appreciated if you would deposit that refund to your account and draw a cheque for the same amount payable to the new lender, MEVTON PTY LTD. These fees should be forwarded to this office marked to my attention.

53 In re-examination, Mr Stevens gave this explanation for sending his letter of 20 December 1990: he said the decision not to proceed with the Chase AMP loan was made by Mr Hart for the reason that Chase AMP interest rates on loans made by it were "too high compared to the Mevton rates". Mr Hart said that Mevton was prepared to loan at 11.25%, while the Chase AMP interest rate was "four or five percent higher". This explanation is improbable. On the applicants' case as now put, they, or at least Messrs Hart and Stevens as their advisers, well knew the difference in interest rates prior to 30 June 1990 when those two gentlemen now claim they had committed the applicants to the loan through Mevton. Yet they pursued what they now say was the more expensive Chase AMP finance until it was approved in August 1990 and continued to take action into October 1990 to have that loan finalised. 54 The applicants' evidence includes thirteen credit approval memoranda forms addressed to the directors of Mevton Pty Ltd and all dated between 16 and 25 June 1990. All these credit approval memoranda were signed by either Mr Gagen or Mr Thompson, who both gave evidence. Mr Gagen joined the Harts group in May 1990 as the manager of the Harts financial services section, which was carried on by Hartcorp Finance. He remained with Harts until 1996. Harts financial services section was carrying on business as the finance broking arm of Harts. Mr Thompson was one of Mr Gagen's subordinates in that section in June 1990. He worked for Harts from 1988 to 1992. 55 Each of these memoranda recommends to the directors of Mevton the grant by Mevton of finance sought from it by a Harts client for an investment loan in connection with the entity's Staff Benefit Trust. The thirteen entities whose finance applications to Mevton are recommended for acceptance are the same thirteen employers the subject of the ATO investigation arising out of its audit of Mr Hart's activities in connection with employee retention plans. One of these entities is Askena. As appears from the ATO letter to Mr Hart of 21 November 1997, the ATO focused on these thirteen entities for the reason that each had claimed a deductible contribution to its employee retention plan for the year ended 30 June 1990, which contribution was said to have been funded by a loan from Mevton. 56 Both Messrs Gagen and Thompson said that in May/June 1990, Harts were arranging employee retention plans for some of their clients, with finance to be provided by Chase AMP. Mr Gagen says that towards the end of June 1990, Chase AMP identified the applications for finance made to it on behalf of Harts clients in connection with employee retention plans which they had approved, which they were still considering and which they had declined. Those which Chase AMP were still then considering, Gagen says he was told "wouldn't be through by 30 June". He says that there was some consternation within Harts as a result because some of the larger clients of Harts had not been approved or processed at that time. The only reason for that was the prospect that clients would not get the deductions in the 1990 year in respect of employee retention plans sold to them by Harts in the immediately preceding months. It was in this context that Mr Gagen said he received instructions from Mr Stevens "that arrangements had been made for Mevton Pty Ltd to be substituted for Chase AMP" as the finance provider. 57 Mr Gagen's section then became involved, he says, before 30 June 1990, in conducting a credit approval examination of borrowers he was told by Mr Stevens were to look now to Mevton instead of to Chase AMP. He said that this process was initiated by receipt by his section of what he described as "a letter or memorandum [that] came from Mevton Pty Ltd saying these people have applied for a loan and needed finance". He then exhibits a Harts internal document entitled "employee retention plan" as an example of such a communication from Mevton. This example is a document prepared in respect of Askena and dated 22 June 1990. Mr Gagen says he did not himself process the Kajewski/Askena application and added that he could not recall having anything to do with the Kajewskis in connection with his work of credit approval. But he says this document "is the same as the ones processed by me", ie, the same as the other memoranda he says he received on behalf of Mevton identifying persons who had applied to Mevton in place of Chase AMP for loan finance in connection with employee retention plans. Though Gagen describes this sample document as one generated on behalf of Mevton advising that the entity identified therein as the employer had applied for a loan to Mevton, there is, on the Askena form, no mention at all of Mevton. Under the heading "Finance Required", the words "Chase AMP", which are in the same printing as the rest of this pro forma documentation, are circled and, though there is provision for identifying another lender, that part of the form is left blank. This document which Mr Gagen exhibits as a typical sample of the advice his section received from Mevton of receipt by it of a loan application from a particular Harts client is manifestly in conflict with Gagen's description of the document: not only does it contain no mention of Mevton at all, but the handwritten circle around "Chase AMP" in the section of the form identifying the lender from whom Askena was seeking finance is consistent only with it being a form generated in connection with an application by Askena to Chase AMP alone. I do not accept that Mr Gagen ever saw any forms of application for finance made on behalf of any Harts clients to Mevton. In my view, Mr Gagen's only involvement in transactions between Harts clients and Mevton is confined to the three of the thirteen credit approval memoranda addressed to Mevton which he signed. 58 The form exhibited by Mr Gagen does not state the amount of loan finance required by Askena. Instead, there is a pro forma item on the form, "Amount of Deduction", and the figure $200,000 is here written in by hand. Mr Gagen says that, though the pro forma nowhere identifies the amount of the loan finance sought by the particular client to whom the form relates, only the "amount of deduction", Harts had a formula which he says he used to work out the amount of the loan required from the amount of the deduction noted on the form. This is a further bit of circumstantial evidence that obtaining a tax deduction in a particular amount by an employer in respect of an investment in an employee retention plan funded with borrowed moneys was the main object of the exercise. 59 Mr Thompson says he signed the credit approval memorandum addressed to the directors of Mevton and dated 25 June 1990 in respect of a finance application in an amount of $174,600 on behalf of Askena on that date, though he has no recollection of the matter. 60 Mr Gagen said he knew that the credit approval memoranda he processed, he says in June 1990, in respect of finance applications to Mevton were only for Harts clients who had not been able to get finance from Chase AMP or whose applications to Chase AMP were being delayed within Chase AMP and would not be finalised by 30 June. He said that these finance applications were all in respect of employee retention plans. He also said he never processed a finance application to Mevton when the borrowing client was also continuing to seek the same finance from Chase AMP. 61 Yet it is clear that applications by all these clients (and others) originally made to Chase AMP were pursued by Harts after 30 June with Chase AMP, ie, for a long while after that was, on the face of things, wholly unnecessary because the necessary finance had already been obtained from Mevton. On 16 August 1990, Lillis of Chase AMP faxed Harts Financial Services to say that Chase AMP had approved loan applications by six entities, one of which was Askena in respect of a $174,600 facility; that re-submitted applications for Queensland Mushrooms and Asbog Veterinary Services were declined and that the balance of the loan applications - by Boettcher, Rural Aviation and Lowe - were still under consideration. Messrs Gagen and Thompson had prepared credit approval memoranda dated late June 1990 and addressed to Mevton for all eleven. Mr Gagen agreed that it did not make sense for the loan applications to be pursued with Chase AMP after, as he understood from Mr Stevens, Mevton had been substituted for Chase AMP as the source of finance for all these clients. He added: "You'd think the loans [the loan applications initially made to Chase AMP] would have been withdrawn". 62 Even if Messrs Gagen and Thompson did, between them, prepare a number of credit approval memoranda addressed to Mevton, including one in respect of Askena, before 30 June 1990, I do not think that Mr Hart or Mr Stevens, who had the carriage of the matter to the exclusion of Mr Gagen's section, took any action at that time to actually seek the finance from Mevton the subject of these credit approval memoranda. It is clear that no loans to any of these thirteen Harts clients, including Askena, were made by Mevton or by anyone else by 30 June 1990. Despite what Mr Gagen says Mr Stevens told him in June 1990, Mevton never lent any money to anyone: so far as Askena is concerned, Mr Hart very belatedly claimed that Mevton acted only as agent for an undisclosed principal in Vanuatu, Grade Enterprises, who he claimed provided $174,600 in loan finance in respect of the Askena Staff Benefit Trust Fund before 30 June 1990. But Messrs Hart and Stevens persisted with the applications made on behalf of these clients, including Askena, to Chase AMP well beyond 30 June 1990. It may be that the delay in June 1990 caused by Chase AMP led Mr Hart and Mr Stevens to take action then to create evidence suggesting the grant of finance by Mevton prior to 30 June 1990, should the Chase AMP loans ultimately not be forthcoming. 63 It may, however, be that, despite the denials of back-dating made by Messrs Gagen and Thompson, these credit approval memoranda addressed to Mevton signed by them were not, in fact, prepared until well after 30 June 1990, ie, about the time in late November/early December 1990 when Mr Stevens contacted a number of clients, including Askena, and then wrote the letter advising that Mevton had been substituted as the new lender in place of Chase AMP. Neither Mr Gagen nor Mr Thompson has any reason for being sure that the Mevton credit approval memoranda that each signed was signed on the date the document bears other than the claim by each not to have been involved in back-dating documents. Despite the different but quite narrow spread of dates of these documents, the fact that each is in exactly the same words is, to an extent, inconsistent with the proposition that each involves a credit evaluation of an individual client; rather does the identicality of the text suggest that the memoranda were all prepared by one author on one occasion though some were signed by Mr Gagen and the rest by Mr Thompson. Mr Gagen's willingness to quite radically misdescribe what he refers to as "a loan application form" to Mevton does not suggest a person who is overly careful in reading documents put before him. Nor does Thompson's inconsistent use of his legible and illegible signatures on the memoranda he signed suggest an administrative worker of careful habits. 64 Mrs Kajewski refers in her affidavit to being shown "a document dated 26 June 1990 which appears to be a loan agreement between Mevton and Askena". The document is an unsigned copy; it is one of the documents that Mr Hart says he obtained from Grade Enterprises in Vanuatu in December 1997 in order to deal with the ATO investigation into his activities involving the sale to clients of employee retention plans. The document purports to be an offer by Mevton to Askena of a loan of $174,600 for ten years. In her affidavit, Mrs Kajewski says she believes that she saw "that document" for the first time in or about late June 1990. Peter and William Kajewski say the same. Although Mrs Kajewski said this in her first affidavit, in a later affidavit she referred to speaking with William Kajewski in November 1990 and then paying four instalments of $2,429.90 each into Mevton's bank account at Stevens' request "because Ian Stevens claimed we were four payments behind". She added that at that stage: "We still thought we were proceeding with the Chase AMP loan". William Kajewski said, of the payments they made to Mevton, that they: "were made at the request of Harts and ceased when Harts advised us not to make any further payments". Peter Kajewski said the same, adding that: "I have no current recollection of what those amounts [paid by Askena in favour of Mevton [and Hartcorp Fidelity]] represented". 65 The applicants initially sought finance from Chase AMP. The Harts organisation, on their behalf, pursued that application and, in August 1990, obtained approval from Chase AMP; into at least late October 1990, Messrs Stevens and Hart thereafter were personally involved in taking the action required by Chase AMP to enable the applicants' access to these loan moneys. Neither Mr Hart nor Mr Stevens offered any satisfactory explanation why they continued to pursue finance applications with Chase AMP after 30 June 1990 to raise moneys to invest in the particular client's employee retention plan, though, in each case, both now claim the necessary moneys had already been raised from, or rather via, Mevton long before, viz, by the all important 30 June date. 66 Neither Mr Hart, Mr Stevens nor anyone else on behalf of the Harts organisation asked the applicants to make any periodic repayment in respect of the finance which the applicants intended to obtain to make the investment for Askena Staff Benefit Trust: this is consistent with there being no loan in place and with the Harts organisation looking only to Chase AMP until well into 1990 for these loan moneys. On 28 November 1990, soon after it can be inferred that Messrs Hart and Stevens took it upon themselves, without reference to the applicants, to abandon Askena's already approved finance application to Chase AMP, Mr Stevens contacted the applicants to ask them to pay to Mevton what he described as "four overdue monthly instalments" of $2,429 each in respect of the loan which he indicated had been obtained to fund the investment in respect of the Askena Staff Benefit Trust. On 20 December 1990, Mr Stevens advised the applicants by letter that Mevton was "the new lender". 67 I do not accept the qualified statements of belief made by each applicant in his or her affidavit as showing that they were aware that a finance application was made on behalf of Askena to, and approved by, Mevton prior to 30 June 1990. In my opinion, the Kajewskis first became aware of the existence of Mevton only at the end of 1990 when Stevens contacted William Kajewski about allegedly overdue instalments and then sent the letter referring to "the new lender", Mevton, which had been substituted for Chase AMP. It is also clear they knew nothing about the existence of Grade Enterprises which Mr Hart claims was the actual source of the loan moneys until they learned of it in the course of preparation for the trial. Yet they attack the Commissioner's disallowance of their objections to the amended assessments on the basis that there was in place by 30 June 1990, a loan from an entity they were ignorant of for years, via an intermediary they were also ignorant of until late November/early December 1990. 68 It was at the same time the applicants commenced, at the request of Mr Stevens, to make monthly payments which they were led to believe were to Mevton, that Mr Stevens through Hartcorp Fidelity took out on behalf of the Askena Staff Benefit Trust an AMP policy which commenced on 7 December 1990. It appears that the monthly premiums that Hartcorp Fidelity paid to AMP in respect of this policy were paid, to the extent they were in fact kept up, from the monthly payments which the applicants were told were required as monthly repayments to Mevton in respect of the loan made by Mevton to Askena. Mrs Kajewski said that altogether Askena made forty payments to Mevton in respect of the employee retention plan set up by Harts commencing on 28 November 1990, after Stevens spoke with William Kajewski in November 1990, through to 16 November 1993, when Stevens told her to stop making these payments. She added that, "by that time we had paid $97,196 to Mevton Pty Ltd, which we understood had been invested in an AMP Life Insurance Policy. I did not understand the intricacies of it, but this is how we thought about it. I was told by Steve Hart that the AMP policy would be surrendered and that we could expect to get 80% of our money back, and the money would be invested elsewhere". She was left by Mr Hart with the impression that the AMP policy taken out in December 1990 was the investment contemplated by the Staff Benefit Trust Deed. She was not then told about any Security Life policy that is now said to have been taken out by Mr Hart personally in June 1990 and to have been the policy that constituted the investment by the Askena Staff Benefit Trust in respect of the employee retention plan. 69 The AMP policy that Messrs Stevens or Hart arranged for Hartcorp Fidelity as trustee for the Askena Staff Benefit Trust to take out that commenced on 7 December 1990 was for a term of ten years, with the lives insured being Peter and William Kajewski. The benefit was to be payable only on the death of the survivor of Peter and William. This policy, though issued by AMP as the only insurer approved under the Trust Deed, could not satisfy the investment requirements of the Deed. Premiums of $2,560 were payable each month for the ten year term of the policy. By late 1992, AMP was writing to Hartcorp Fidelity to advise that the premiums due in respect of this policy were very substantially in arrears (even though it seems that the Kajewskis faithfully made the monthly payments of $2,429 to Harts). As at 7 December 1992, the cash value of this policy was only $21,328, while unpaid premiums amounted to $35,375. On redemption in late 1993 of this AMP policy, Askena received only $21,937. 70 It is likely that someone in Harts, certainly Mr Hart and probably Mr Stevens also, realised in about November/December 1990 that the tax benefits the applicants had been promised from entry by 30 June 1990 into the employee retention plan might not be available because Chase AMP finance was only approved months after the end of the 1990 financial year so that the investment upon which the $200,000 deduction depended had not then been made. It was only in December 1990 that they commenced, at the request of Mr Stevens, to make monthly payments which they were led to believe were to Mevton. It was at this same time that Harts Fidelity took out the AMP policy on behalf of the Askena Staff Benefit Trust. It appears that the monthly premiums that Hart Fidelity paid to AMP in respect of this policy were paid, to the extent they were in fact kept up, from the monthly payments which the applicants were told were required as monthly repayments to Mevton in respect of the loan made by Mevton to Askena. 71 Mr Hart said it was he who personally arranged for the Grade Enterprises loan to be made through his company, Mevton, and it was he who personally arranged for the issue of the Security Life policy. He was closely involved in getting up the case upon which the applicants now rely in attacking the Commissioner's disallowance of their objections. At trial, Mr Hart claimed that a deduction, if otherwise available in respect of the loan, could not be claimed in the year in which the application was made, though it was not approved until the next financial year. Whether or not that truly reflects his belief, I think the only rational explanation for the quite bizarre activities in which he and Mr Stevens engaged at the end of 1990 is that Mr Hart had by then become concerned at whether the clients to whom he had promised large tax deductions in respect of their 1990 year tax liabilities, might not be able to claim them because of the delay in obtaining finance from the lender who had been approached by the Harts organisation on behalf of a number of clients, including Askena. The AMP policy which Messrs Hart and Stevens arranged for Hartcorp Fidelity to take out with AMP only in December 1990 may well have been obtained so that Askena would have in existence a policy of the kind provided for by the Staff Benefit Trust Deed. 72 The respondent submits that the documents obtained by Mr Hart in late 1997 from Vanuatu in response to ATO queries that purport to evidence a loan not by Mevton, but by Grade Enterprises of Vanuatu to Askena of $174,600, and the application of those loan moneys to the purchase of an insurance policy from Security Life Insurance, also of Vanuatu, all before 30 June 1990, are concocted. 73 Mr Hart said that it was in response to the ATO query of 21 November 1997 that he arranged for Grade Enterprises to forward to him documentation relating to loans to employee retention plan clients of Harts, including Askena, because he did not have any copies of any of those documents on Harts' own files. Notwithstanding the troubles the Harts organisation has had with office moves and the execution of search warrants by the Australian Federal Police and seizure of much documentation, it is extraordinary that nowhere in Harts' or the applicants' files is there any documentation corroborative of the implementation by 30 June 1990 of a loan by Grade Enterprises in respect of the Askena Staff Benefit Trust and an investment on behalf of that Trust in a Security Life policy. It is also a singular feature of the case that, though Mr Stevens said he has made extensive searches, he has not been able to find any signed originals or even copies of signed originals of the Mevton loan finance and security documents in respect of Askena and the Kajewskis (although the day before the trial started, the photocopy of the credit approval memorandum of the loan by Mevton to Askena as "borrower" dated 25 June 1990 signed by the witness Thompson emerged as an exhibit to his affidavit sworn that day). Mr Stevens says he believes all had been lost over the years. 74 The applicants' case as developed by Messrs Stevens and Hart is full of improbabilities. 75 The applicants have only the vaguest understanding of the activities of Mr Hart in connection with their employee retention plan. They first learned of the existence of Mevton as their financier, in place of Chase AMP, in late November 1990. Both Mrs Kajewski and William Kajewski believed, up until shortly before the trial, that they themselves actually owned Mevton. Again, it was only very recently indeed - probably in the telephone conversation between Mrs Kajewski and Stevens round about 21 October 2000 - that they first learned of the existence of Grade Enterprises. That they remained in ignorance of what is now said to be the source of the finance upon which they claim to be entitled to the deduction of $200,000 back in 1990 is not surprising: Mr Hart said he never felt the need to tell them of that. He gave this extraordinary evidence:

… So your position was that Grade was going to lend money to the Kajewskis and you can't recall telling the Kajewskis that they were going to borrow money from Grade?‑‑‑Kajewskis knew they were borrowing money at the time, yes.

But not from Grade?‑‑‑No, they knew it was through Mevton.

So the Grade Mevton transaction really was something between Grade and Mevton as far as the Kajewskis were concerned?‑‑‑Yes, they didn't know about Grade at all.

77 The applicants first learned that they were supposed to have a Security Life policy, rather than an AMP policy, as the Staff Benefit Trust investment only long after June 1990. It appears clear enough that they believed, probably up until December 1993 when Mr Stevens told them of the recent surrender of the AMP policy he arranged for Hartcorp Fidelity to take out only on 7 December 1990, that an AMP policy had in fact been procured by Harts to meet the requirements of the investment provisions of the Staff Benefit Trust Deed. Mrs Kajewski was certainly told by Mr Stevens about a Security Life policy having been taken out on 26 June 1990 in the conversation she had with him around about 21 October 2000. Again, it is not surprising that the applicants were, for a long time after June 1990, ignorant of what is now suggested to have been the investment in Security Life policy then made by Mr Hart on behalf of the Askena Staff Benefit Trust. Mr Hart gave this evidence:

Mr Hart, you felt yourself completely at liberty, that's what you say, to change the insurer from a well-known company, AMP, to an unknown company in Vanuatu without the consent of the Kajewskis?‑‑‑Yes, I did.

78 He claims he did not consider it necessary to obtain their instructions to take out this policy with an unknown company in Vanuatu in place of the AMP policy provided for by the Trust Deed. That Mr Hart claims he long kept the Kajewskis in ignorance of the action of importance he took for their benefit, when there is no rational explanation for doing that, points to his story about Grade Enterprises having lent the applicants $174,600 in June 1990 with which he immediately bought for them a policy from Security Life being a late concoction. 79 On the evidence before the Court, the first mention of Grade Enterprises as a financier in respect of employee retention plans arranged by Mr Hart for his organisation's clients, including Askena, was in late 1997. The ATO, in its detailed query of 21 November 1997 with respect to employee retention plans arranged by Mr Hart, challenged assertions earlier made on behalf of Mr Hart that finance had been obtained from Mevton Pty Ltd for thirteen Harts clients, including Askena, to make investments in employee retention plans arranged by Harts in respect of the year ended 30 June 1990. The ATO pointed out that Mevton's own records in many respects contradicted this assertion. The ATO called on Mr Hart to "provide a detailed explanation as to how this inconsistent treatment has come about given that your practice, in almost all instances, has prepared all relevant accounts and income tax returns". Between the ATO query of 21 November and the 22 December 1997 reply, the ATO were apparently advised by or on behalf of Mr Hart that Mevton was not, after all, a lender to any of these thirteen clients despite the deductions claimed in the 1990 year by each on the basis that they had borrowed from Mevton. Instead, the ATO was told that Mevton was only an intermediary between the clients and "the actual lender", Grade Enterprises of Vanuatu. Mr Powrie, Harts' solicitor, confirmed this in his reply of 22 December 1997 to the ATO letter of 21 November 1997. 80 The ATO, in its letter of 21 November 1997, also asked questions about the insurance policies purchased in connection with these thirteen clients' employee retention plans:

The balance sheets [for Harts Fidelity Ltd as trustee for eleven of the thirteen associated Staff Benefit Trusts as at 30 June 1990, including Askena Staff Benefit Trust] reveal that, for the entities which dealt with Mevton P/L rather than Chase AMP Bank, the description of the insurance bond asset is "Security Life Insurance Bond Policy No …". In contrast, those trusts where the employer entity received funding from Chase AMP describe the investment as "AMP Capital Guaranteed Bond Policy No: A …"

On what basis do you contend that HFL had acquired an investment in the thirteen Security Life Insurance Bond Policies on or before 30 June 1990? Please provide any documentation or other information that you rely on in making this assertion.

Why did HFL effect policies in December 1990 [with AMP] when policies had apparently already been effected by Security Life in relation to the Staff Benefit Trust?

(34) I refer you to documentation supplied pursuant to 8(i) and 8(ii) above. …

[In par 8(i), Powrie referred to the complete file for each Staff Benefit Trust as having been provided to the ATO pursuant to its s 263 notice served upon Harts on 11 December 1997. By par 8(ii), Powrie advised that copies of correspondence and documentation requested "have been accessed as per your s 263 Notice". He added: "However, in the spirit of co-operation, we have further enclosed investments held by the Staff Benefit Trusts (SBT) in AMP Regular Premium Bonds". These Bonds were surrendered at a large loss in 1993.]

(41) I am advised that you have the wrong concept. The surplus funds from the Grants made by the employers' where (sic) initially loaned to Mevton. It was decided to take an investment in AMP Capital Guaranteed Bonds when and as Mevton repaid these funds on a monthly basis. As per answer 18 above.

82 This appears to be a wholly new suggestion from Mr Hart. Apart from this statement, there is no suggestion in this case that Askena ever entered into any arrangement to loan any money at all to Mevton and there is no evidence that the AMP policy taken out by Hartcorp Fidelity on behalf of Askena on 7 December 1990 was paid for, instalment by instalment, by Mevton with moneys Mevton had borrowed from Askena. If Hartcorp Fidelity did use some of the monthly payments of $2,429 which Askena commenced to pay at Mr Stevens' request to Mevton in November 1990 through to November 1993 to pay the premiums due in respect of this AMP policy it took out on 7 December 1990, it did not so use all the instalments Askena paid: by 7 December 1992, unpaid premiums in respect of this AMP policy amounted to $35,375, ie, nearly fourteen monthly instalments of $2,560 were then unpaid. 83 So far as the loan allegedly made by Grade Enterprises of $174,600 to Askena at the end of June 1990 is concerned, the applicants called no person as a witness who was involved in that transaction, apart from Mr Hart. They did seek to call a Mr Batty. He is a director of Equity Investment Bank Ltd of Vanuatu, which, in December 1998, acquired ownership of Grade Enterprises. Given the substantial challenge to the authenticity of the documentation relied on by the applicants as evidencing this loan transaction, I declined to admit in evidence records of Grade Enterprises apparently relating to this loan which Mr Batty said were now in the possession of Equity Investment Bank Ltd, but about which it was not suggested he had any personal knowledge. 84 The Grade Enterprises copy letter of 24 June 1990 to Mr Hart which purports to offer finance to Harts clients in connection with employee retention plan arrangements offers those loans at "an 8% pa interest rate capitalised to completion of the loan or the redemption of the bond". Mr Hart said that meant that Grade Enterprises was prepared to lend, in respect of these plans, on the basis that no repayments of capital or interest would have to be paid during the period of the loans. Notwithstanding this, between 28 November 1990, when the applicants were told of the new lender Mevton, and 16 November 1993, Askena paid forty monthly instalments to Mevton totalling $97,196. 85 Thompson's credit approval memorandum recommending to the directors of Mevton a loan by it of $174,600 to Askena contains the following details:

Repayments: $2,429.90 - principal and interest repayments, monthly in arrears.

86 Mr Hart said the 8% capitalised over ten years was "pretty close" to being equal to 11.25% payable monthly in arrears. One of the documents Mr Hart said he obtained from Grade Enterprises in Vanuatu in December 1997 is, what appears on its face to be, the loan account statement for the Askena account kept by Grade Investments. It is consistent with a loan where interest is capitalised and no repayments of capital or interest are required during the life of the loan. This loan account statement shows Askena's indebtedness to Grade Enterprises increasing from the $174,600 advanced in 1990 to $614,221 by the end of the ten years of the loan. However, this accumulation of indebtedness by Askena to Grade Enterprises is the result of Grade Enterprises charging not the 8% referred to in its letter of 24 June 1990 produced by Mr Hart, but a rate of 15%. This suggests that Mr Hart was happy to commit the applicants to what, on the face of it, looks like a ruinous borrowing from Grade Enterprises: Askena would have this liability to Grade Enterprises at the end of the ten year period and could not, of course, touch the Security Life policy, a trust asset, to assist in meeting that liability. When this was drawn to Mr Hart's attention, the following exchange occurred:

That suggests that as at 1999 the borrower, whoever that was, owed over $614,000 to Grade?‑‑‑It was incorrect.

I see. You didn't seek to correct that when my learned friend asked you if there were any corrections in your affidavit?‑‑‑I was, but I thought it was struck out. You told me on that paragraph 17 which stated 15 per cent was struck out.

Thank you. So the error is 15 per cent, isn't it?‑‑‑Yes, it is.

It should be 8 per cent calculation?‑‑‑That's right.

And that would produce quite a different result?‑‑‑Yes, it does.

(Even so, Askena would at the end of the ten years still face a substantial debt liability to Grade Enterprises, something approaching double the $174,600 Grade Enterprises is said to have lent Askena.)

87 When Mr Hart's affidavit was tendered, the respondent objected to a number of paragraphs, including par 17, which reads:

The interest rate on the loan with Grade was 15% and was to be capitalised each year.

88 Mr Hart did not, in his affidavit, qualify this clear statement. He now says he would have qualified it, if only I had not ruled par 17 inadmissible. Though par 17 was struck out, the Grade Investments loan account statement in question exhibited to Mr Hart's affidavit was not excluded. It is obviously the source of par 17 of Hart's affidavit. It demanded correction by Mr Hart as much as did his unqualified assertion in par 17. He appears ready to make things up as he goes. 89 Understandably, that Askena may have to repay a debt of over $600,000 by 2000 came as a surprise to the applicants when they learned of this document only very recently. William Kajewski had this to say:

If I were to suggest to you that at the moment the business has a debt of some $600,000 outstanding to that company, Grade, that you mentioned, does that sound right to you?‑‑‑I've noticed this in recent - just very recently - which is certainly an eye-opener to me, I can tell you that. It's something that I can't believe. I don't know how this is about, no.

90 Mrs Kajewski says that Askena's accounts and tax returns for the 1990 and subsequent years were prepared by Harts and "I signed these tax returns in the belief that they were true and correct". The return for the 1990 year for the Kajewski Family Discretionary Trust prepared by Mr Hart and Associates and lodged on 4 February 1991 disclosed a net income of $37,723, an amount arrived at after bringing into account expenses, which included $200,000 in respect of "employee retention plan". The balance sheet for the trust for that year, also prepared by Harts, records as a current liability $174,600 owing to Chase AMP. The Kajewski Family Discretionary Trust balance sheet for the 1991 year, also prepared by Harts, continued to show that the trust was indebted to Chase AMP. There is no mention in these balance sheets or the other accounts of any liability to Mevton or to Grade Enterprises. When Mr Hart's attention was directed to the entry in the 1990 balance sheet, he gave this evidence:

It was a mistake?‑‑‑And I corrected it, I think, in either '91 or '92.

I see. How did that mistake come to be made?‑‑‑Because we were mainly going to be working with Chase-AMP when we were informing all the accountants. It was only when we - I think it was late May or beginning of June, I can't quite remember when, we made the decision to do some with them because they weren't going to process all the work.

And it was the case that it wasn't until some time in 1991 that you had Chase-AMP reversed into Mevton. Is that right?‑‑‑I can't quite remember when I did it, but it was some time later, yes.

I think you nominated 1991 a moment ago, didn't you?‑‑‑No, I'm saying around '91, sorry. I'm just saying it was a fair time later.

Yes, well ‑ ‑ ‑?‑‑‑It came about because of an audit by the ATO.

I see. Because there was no liability at the end of the day to Chase-AMP, was there?‑‑‑No, it was to Mevton.

But I suppose that - you say there was to Mevton?‑‑‑Yes.

91 What is clear is that by December 1990, Mr Hart made the decision not to commit Askena to borrow the $174,600 from Chase AMP, but instead to proceed on the basis that Mevton was the lender even though it had no money to lend to anyone. As Mr Hart said, alterations were made to Askena's accounts some time after the end of the 1992 financial year to show Mevton, rather than Chase AMP, as a lender to Askena, because of an audit by the ATO. He first mentions Grade Enterprises' involvement only later, in 1997, again in response to ATO queries of his activities when he can no longer maintain the fiction that the money for Askena and his other twelve clients came from Mevton. 92 The only explanation proffered for Mr Hart's apparently irrational conduct in continuing to pursue the finance application lodged with Chase AMP after 30 June 1990 and after it is claimed all the necessary finance had already been obtained through Mevton at substantially lower rates and expended by 30 June in buying the Security Life policy was this: Mr Hart suggested that "you'd feel better" with a bond from AMP rather than a bond from Security Life. He appears to be prepared at this point to say anything: on his version of things, Askena had arranged for a Security Life policy to be purchased by 30 June 1990 for $174,600 that was paid over to Security Life by 30 June 1990. If, as is now the applicants' case, Security Life issued a policy in respect of the Askena Staff Benefit Trust after receiving $174,600 from Grade Enterprises on account of Askena on 26 June 1990, the continued and ultimately successful pursuit by Harts of the same amount of finance from Chase AMP into late 1990 for exactly the same purpose - investing in an insurance policy for the benefit of the Askena Staff Benefit Trust - only serves to underline the incredible story put before the Court on behalf of the applicants by Stevens and Hart. 93 Moreover, as the respondent points out, if the loan of $174,600 had truly been obtained from Mevton by 30 June 1990, there is nothing in the Mevton loan documentation or in the conditions of the agreement said to have been entered into between Mevton and Grade Enterprises which could have stood in the way of the applicants purchasing with the Mevton/Grade Enterprises finance what Mr Hart said he thought was the more comforting AMP bond than the bond actually purchased with the unknown Vanuatu company, Security Life Insurance. Yet it was Mr Hart personally who elected to make the application in respect of the Askena employee retention plan to Security Life rather than to AMP, if the documents he has put before the Court are genuine. 94 No funds were ever advanced by Grade Enterprises for the benefit of Askena. 95 The Security Life policy documents produced by Mr Hart show the marks of having been cobbled together late in the day in an attempt to create evidence to support the applicants' case. 96 Under cl 7.4 of the Askena Staff Benefit Trust Deed, investment by the trustee in an insurance policy constituted the only benefit provided for by the Deed for members, ie, employees of Askena; the Deed, by cl 3.1, permitted the trustee to take out a policy of life insurance on the life of each employee intended to be benefited only with AMP - cll 3.1 and 1.1. Investment by Hartcorp Fidelity as trustee in the policy with Security Life was not authorised under the Deed. 97 The proposal for this Security Life policy is signed by Mr Hart. It is dated 1 June 1990. That is long before the applicants made the application to Chase AMP for finance to buy the investment policy contemplated by the Trust Deed and long before the first indication, dated 24 June 1990, that Grade Enterprises might be prepared to provide the finance necessary to purchase the policy the subject of Hart's proposal. The proposal, as does the policy, identifies the "life insured" as William Kajewski. But it is Mr Hart as the applicant for the life policy who alone, but pointlessly, undertakes to undergo such medical examination as Security Life might require. The purchase price of the policy is described in the policy document as a "single premium" of $174,600 "received on 26 June 1990". The "sum insured" under the policy is the same amount, $174,600. An integral part of the benefit provided for by the Trust Deed, however, was to be the payment by the trustee of "a cash sum being the whole or any part of the surrender value of the policy" (cl 7.4) - the trustee having full power to surrender the policy at any time. (cl 3.2) The benefit provided for by the policy is "sum insured and bonuses payable on death of life insured", ie, William Kajewski, and upon that event alone. As appears from Mr Hart's letter to Grade Enterprises of 23 June 1990, the loan said to have been made to Askena was sought by Mr Hart in order to purchase an insurance bond capable of providing benefits to employees "in ten (10) years' time". There is no provision in the policy which would enable Hartcorp as trustee of the Askena Staff Benefit Trust to do what the Trust Deed contemplated, viz, to surrender the policy before William's death. Further, there is nothing in the policy or in any of the documentation procured by Mr Hart to show the terms on which bonuses were payable in respect of the policy. 98 Not only was the purchase of the policy from Security Life for the benefit of Askena Staff Benefit Trust not a purchase authorised by the Trust Deed, but the Security Life policy Mr Hart claims he procured in June 1990 simply does not fit with the stated objects of the Staff Benefit Trust. 99 The applicants said early in the trial that they intended to rely upon a Mr RF Agius as a witness. What purports to be the copy of the Security Life Insurance policy relating to the applicants' case obtained by Steve Hart in early December 1997 from Vanuatu bears a signature "RF Agius" as the officer of Security Life who issued the policy on 26 June 1990. Agius was said to still be a director of Security Life Insurance in Vanuatu. The evidence before me was that at various times in the lead up to the trial, Mr Agius was co-operating with Mr Stevens and the applicants' solicitors. At one stage, it was intended to take his evidence by video link between Brisbane and Vanuatu. But that was abandoned. At another stage, he indicated his willingness to attend in Brisbane to give evidence at the trial. Later again, he was actually served with a subpoena on a visit to Australia between the two phases of the trial in early August and early September. Counsel for the applicants expressed on several occasions during the trial an expectation that Mr Agius would appear the following day or the day after. But he never showed up. 100 The belated emergence of the Security Life policy documents, the respects in which they fail to meet the requirements of the policy provided for by the Askena Staff Benefit Trust Deed and the ultimate non-appearance of Agius (the man who it appears from the policy document was the official of Security Life who issued it on 26 June 1990) in the witness box to confirm the issue of the policy, all support the conclusion that the policy documentation has been concocted late in the day. 101 For the reasons given, the applicants have failed to show that, by 30 June 1990, they incurred an outgoing within the meaning of that expression in s 51(1) of $174,600. Even if it be assumed that they had incurred that outgoing by that date, it would not have the necessary business character to make it deductible under s 51(1). They have failed to discharge the onus of proving that the amended assessments were excessive in so far as they disallowed that part of the $174,600 that was attributed to each applicant. 102 As to the balance of the $200,000, Mrs Kajewski said no payments were made after the initial payment of $25,400 to Hartcorp Fidelity, which was to be trustee of the Staff Benefit Trust, until Mr Stevens telephoned at the end of November 1990 to request payment to Mevton of the four instalments he then said were overdue; she said she thought that initial payment was, in effect, part of the $200,000 investment on behalf of the Askena Staff Benefit Trust. By trial, however, she believed it to have been fees or charges taken by Mr Hart's organisation. 103 The final version of the balance sheet for the Askena Staff Benefit Trust as at 30 June 1990 prepared by Harts records that the amount of $25,400 was applied to the payment of fees and the amount of $174,600 was applied to an investment in a Security Life insurance bond. Powrie, in the response he sent on behalf of Mr Hart to the ATO query of 21 November 1997, said, so far as I understand his comment, that what this balance sheet recorded as a $25,400 payment of fees to an unspecified service provider was incorrect: this amount should have been recorded as a $25,400 investment, which he did not, however, identify. Mr Hart, in his evidence, denied that the $25,400 had been taken by one or other of the Harts companies as fees, but said "I don't know what happened to the $25,400". He claimed he did not know what "our fee was on the transaction". 104 I accept the respondent's submission that the applicants have failed to lead evidence necessary to characterise the payment of $25,400. They have, for that reason, not discharged the onus of proving the amended assessment was excessive, in so far as it disallowed $25,400 of the $200,000 as a deduction.

Power to issue the amended assessments in question 105 The Commissioner, in fact, formed the opinion that each applicant had avoided tax in each of the four years in question because the assessments originally issued were based on the understatement of each applicant's income in each of those years and that that avoidance of tax was due to fraud or evasion because of facts known to each applicant and known to their tax agent, Mr Hart. That is apparent from the Commissioner's letter of 30 September 1999 to each of the applicants, in which he explained why he intended to amend each of the twelve assessments which, by the notices of amended assessment he issued soon after, and from the Commissioner's reasons accompanying the Notice of Decision on Objection of 9 August 2000, he gave to each of the applicants. The applicants put this material into evidence in their case without any qualification and did not contend to the contrary. 106 The Commissioner also put into evidence, under reg 45 the Income Tax Regulations 1936, certificates in respect of each of the amended assessments for each of the applicants that he was of the opinion that there was an avoidance of tax due to fraud or evasion. The applicants objected to the tender of these certificates on the ground that reg 45 was constitutionally invalid. Notices under s 78B the Judiciary Act 1903 (Cth) were subsequently served. However, it is unnecessary for me to deal with the constitutional question in view of the evidence as to the Commissioner's opinion contained in the documents put in evidence by the applicants themselves and in view of the conclusion to which I have come to the effect that, even in the absence of the certificates, the applicants' challenge to the Commissioner's reliance on s 170(2)(a) in issuing the amended assessments must fail. 107 The applicants have sought to show that the Commissioner erred in forming the opinion that there was an avoidance of tax due to fraud or evasion because the applicants, their advisers and other witnesses have given evidence in this Court to the effect that there was no such fraud or evasion, evidence it is said which this Court should accept. In rejecting the applicants' attack on the amended assessments because they are excessive, I have explained why this part of the applicants' case is, on the evidence before me, unfounded. But, in any event, for the reasons given, the issue of fraud and evasion is not at large for this Court. In accordance with Avon Downs and Kolotex, the Commissioner's opinion that there was fraud or evasion involved must stand unless the applicants can show that the Commissioner, in forming that opinion, fell into the kind of error therein referred to. Only if the applicants can establish, by reference only to the material that was before the Commissioner, that his opinion was vitiated by some such deficiency in the approach he took in reaching that opinion will it be open to this Court to form its own view on the question of fraud or evasion. Consistently with their submissions that the appeal to this Court is by way of hearing de novo, the applicants did not seek to mount the kind of attack on the Commissioner's determination that there was fraud or evasion involved that must be made before this Court can consider that issue for itself. No challenge to the formation by the Commissioner of the opinion necessary to enliven his power under s 170(2) to issue the amended assessments here in question within the principle in Avon Downs was raised by the applicants, let alone made out at trial. 108 Moreover, there is every reason to think, on the evidence which was before the Commissioner when he decided to issue the amended assessments, that the Commissioner was correct, for the reasons he gave supporting his decision to disallow the applicants' objections to his amended assessments for the 1990, 1991, 1993 and 1994 years, that the original assessments involved an avoidance of tax due to fraud or evasion at least on the part of the applicants' tax agent. See, eg, his reasons under the heading "Power to amend the beneficiary assessments" accompanying his decision of 9 August 2000 in respect of Mrs Kajewski's objections to her amended assessments. 109 The Kajewskis also contend that even if their original assessments were affected by fraud or evasion within s 170(2)(a), it was not fraud or evasion in which they personally engaged and that s 170(2)(a) did not therefore empower the Commissioner to issue the amended assessments in October 1999. 110 Section 170(2)(a) provides:

… where there has been an avoidance of tax, the Commissioner may:

(a) if the Commissioner is of the opinion that the avoidance of tax is due to fraud or evasion - at any time; and

111 There will be "an avoidance of tax" within this provision where, without any active or passive fault on the part of the taxpayer, less tax has been paid than ought to have been paid. See, eg, Australasian Jam Company Proprietary Limited v Federal Commissioner of Taxation (1953) 88 CLR 23 at 34. Fraud within s 170(2)(a) involves something in the nature of fraud at common law, ie, the making of a statement to the Commissioner relevant to the taxpayer's liability to tax which the maker believes to be false or is recklessly careless whether it be true or false. In Denver Chemical Manufacturing Company v Commissioner of Taxation (New South Wales) (1949) 79 CLR 296, Dixon J, at 313, said of the word "evasion" in a statute not materially different from s 170(2) in words applicable to this provision:

I think it is unwise to attempt to define the word "evasion". The context of s 210(2) shows that it means more than avoid and also more than a mere withholding of information or the mere furnishing of misleading information. It is probably safe to say that some blameworthy act or omission on the part of the taxpayer or those for whom he is responsible is contemplated. An intention to withhold information lest the commissioner should consider the taxpayer liable to a greater extent than the taxpayer is prepared to concede, is conduct which if the result is to avoid tax would justify finding evasion.

112 At trial, the Kajewskis were at pains to stress how none of them really understood how the employee retention plan, proposed by Mr Hart and to which they committed Askena, worked. Each was also at pains to stress how ignorant they were of just what steps Messrs Hart and Stevens took in implementing this plan for them and how, over a long period of time, they trusted Mr Hart implicitly to look after their interests, particularly so far as their tax obligations were concerned. It may well be that the Kajewskis have accurately stated the way things were in these regards, at least from the time Hart first proposed the plan until late 1990. 113 Mr Hart or those working under his direction procured the $200,000 tax deduction for Askena in the 1990 year and, in consequence, the deductions in subsequent years for Askena and the reductions in their taxable income in the four years in question for each of the applicants when Mr Hart knew there was no basis for doing that. He was involved in concocting documents long after 30 June of that year to give the appearance that Askena had procured a loan from Grade Enterprises as undisclosed principal of Mevton by that date. The applicants were led by Messrs Hart and Stevens to believe Mevton was the lender, at least from December 1990. The applicants were also led by turn to believe that that loan had been applied in the purchase of an insurance policy initially from AMP but later on, from Security Life by way of the investment contemplated by the Askena Staff Benefit Trust Deed. All the tax so avoided by Askena and the applicants was the result of fraud or evasion within the meaning of those terms in s 170(2)(a) by Mr Hart as the applicants' tax agent or by those working at his direction. But that the Kajewskis may themselves have been ignorant of Mr Hart's activities does not immunise the applicants' assessments from being reopened by the Commissioner in reliance on s 170(2)(a). 114 To enliven the power to amend an assessment under s 170(2)(a), the Commissioner only has to be of the opinion that an avoidance of tax is due to fraud or evasion. There is no justification for implying a limitation on these clear words to restrict the Commissioner's power under the provision to amend an assessment only where the avoidance of tax is due to fraud or evasion by the taxpayer personally. The wording of s 170(2)(a) is apt to empower the Commissioner to issue an amended assessment where an avoidance of tax is due to the fraud or evasion of the taxpayer's agent engaged to prepare returns signed by the taxpayer and to lodge those returns on the taxpayer's behalf, as Hart did here for Askena and the applicants. Tax agents whose registration as such is controlled by Pt VIIA the ITAA 1936 are recognised by the Act as entitled to perform a range of functions on behalf of their taxpayer principals in respect of their tax affairs, including the preparation and lodging of taxpayers' returns. For example, by s 251L, a registered tax agent is entitled to charge fees for a wide range of services rendered to taxpayers in connection with their tax affairs. This legislative recognition of the role of tax agents is an additional reason for giving the words of s 170(2)(a) their ordinary meaning. Nor can it be said there is any absurdity involved in so construing the sub-section. The notion that a principal may be held responsible for the fraudulent conduct of an agent, even though ignorant of the agent's fraudulent behaviour is not a novel one: it is well established at common law. It is not necessary that the principal should authorise or even know of the fraudulent act of the agent to be liable for it. "It is enough that the agent has been put by the principal in a position to do the class of acts complained of": see Colonial Mutual Life Assurance Society Limited v The Producers and Citizens Co-Operative Assurance Company of Australia Limited (1931) 46 CLR 41 at 46. If this were a common law fraud case, it could be said that, as between the applicants and the Commissioner, the applicants put Mr Hart in a position to do the class of fraudulent acts complained of by accepting his advice about the employee retention plan arrangements, leaving it to him to implement those arrangements in circumstances where they expected the arrangements to generate a tax benefit and retaining Mr Hart as their tax agent. 115 Even if the applicants had successfully challenged the Commissioner's opinion upon which he relied to issue the amended assessments in question so that it would be open to me to determine on the materials before the Court whether there was an avoidance of tax in the relevant years due to fraud or evasion, I would, for the reasons given, find against the applicants on that issue. But he refused to exercise it in the applicants' favour.

Additional Tax 116 Each of the applicants was assessed to additional tax by way of penalty in respect of their 1990 and 1991 year returns under s 223(1) the ITAA and, in respect of their 1993 and 1994 returns, under the new s 226J of that Act. Under s 227(3), the Commissioner has a discretion to remit the whole or any part of such additional tax. 117 The Commissioner disallowed each applicant's objections to his assessment of additional tax in respect of each of the four years. The appeals challenge the Commissioner's refusal to set aside his amended assessments for the four years in question in so far as additional tax was included in each and in so far as he refused to remit any of the additional tax. In an appeal under s 14ZZ(c), it is open to the taxpayer to contend that, on the evidence put before the appeal court, the statutory pre-conditions to the existence of the taxpayer's liability to additional tax under both ss 223(1) and 226J have not been satisfied. In contrast, the power conferred on the Commissioner by s 227(3) to remit additional tax imposed by the operation of the statute is a power conferred on the Commissioner to be exercised at his discretion. In my opinion, it follows from this that the Commissioner's decision to refuse to exercise that discretionary power, the subject of complaint by each applicant, can only be challenged in such an appeal in accordance with the principles stated in Avon Downs at 360. As already explained, each applicant has the burden of proving that each assessment is excessive in so far as it includes the additional tax, none of which the Commissioner was prepared to remit. 118 Section 223(1)(a) provides:

(i) makes a statement to a taxation officer, or to a person other than a taxation officer for a purpose in connection with the operation of this Act or the regulations, that is false or misleading in a material particular; or

(b) the tax properly payable by the taxpayer exceeds the tax that would have been payable by the taxpayer if it were assessed on the basis that the statement were not false or misleading, as the case may be,

the taxpayer is liable to pay, by way of penalty, additional tax equal to double the amount of the excess.

(b) the shortfall or part of it was caused by the intentional disregard by the taxpayer or by a registered tax agent of this Act or the regulations;

the taxpayer is liable to pay, by way of penalty, additional tax equal to 75% of the amount of the shortfall or part.

120 Under both ss 223(1) and the new provision 226J, additional tax, whose quantum is fixed by the relevant section and which must be included in the taxpayer's assessment, is imposed by the operation of the section upon the facts; additional tax is not imposed by the exercise of any discretion by the Commissioner upon the facts as they exist or upon the Commissioner's opinion as to what the relevant facts may be. It is apparent from the individual tax and penalty calculations sheets prepared by the Commissioner for each applicant for each of the four years in question that, in respect of the 1990 and 1991 years, the Commissioner correctly treated s 223(1) as operating to impose additional tax at the statutory rate on each applicant and, in respect of the 1993 and 1994 years, the Commissioner also correctly treated s 226J as similarly operating to impose additional tax at the different rate prescribed on each applicant. 121 A taxpayer makes a false or misleading statement in a return within s 223(1)(a)(i) if a return which the taxpayer furnishes to the Commissioner in obedience to s 161(1) contains a statement that is erroneous or incorrect: no element of deceitful or dishonest conduct on the part of the taxpayer or anyone else needs to be established. This is the position where the return containing the false statement is prepared by the taxpayer's agent and the taxpayer is not aware of the falsity. See Federal Commissioner of Taxation v Turner (1984) 73 FLR 24 at 26 - 27 and Zeta Force Pty Ltd v Commissioner of Taxation (1998) 84 FCR 70 at 85. Even if none of the applicants was aware of the actions of Mr Hart, which I have discussed above, and which resulted in their income for each of the four years in question being understated in the returns they made, which were prepared and lodged by Mr Hart, the Commissioner was entitled to assess each applicant to the additional tax in question for each of the 1990 and 1991 years. 122 So far as s 226J is concerned, whether or not any applicant was aware of the conduct of their tax agent in claiming deductions and reducing the income returned, based upon the proposition that the trustee, Askena, had incurred an outgoing of $200,000 in the 1990 year when the tax agent knew that to be untrue, each applicant again fails to discharge the burden of proving that the 1993 and 1994 amended assessments were excessive in so far as they included the additional tax. 123 The applicants further submitted that s 223(4) of the old provision operates to exempt persons who are beneficiaries of a trust whose trustee is subject to additional tax under sub-section (4) from additional tax that would otherwise be imposed by s 223(1) on the beneficiary as a taxpayer. As I understand it, the applicants contend that s 226R has a similar operation in exempting a taxpayer, who is a beneficiary under a trust whose trustee is subject to additional tax under s 226R, from the liability to pay additional tax which would otherwise be imposed by s 226J on the beneficiary as a taxpayer. I respectfully agree with Sundberg J's reasons in Zeta Force at 85 - 86 in rejecting this argument.

Remission of additional tax 124 In his written submissions in reply, counsel for the applicants made a detailed attack upon the Commissioner's decisions to refuse to remit any of the additional tax imposed on each of the applicants. In these submissions, counsel submitted that "the only reasons for the respondent deciding to remit no additional tax" were the briefly stated reasons appearing at pp 34 and 35 of the Commissioner's reasons accompanying his decision of 9 August 2000 to disallow, by way of example, Mrs Kajewski's objections to her four amended assessments. The Commissioner here recorded his opinion, among others, that the applicants were aware of their tax agent's misconduct. But this brief passage is, in truth, the statement by the Commissioner of his conclusions in the longer passage at pp 32 to 34 of the reasons. Moreover, the brief passage upon which counsel for the applicants here focuses cannot be read in isolation from the detailed review of the material to which the Commissioner referred in the whole of his reasons for arriving at his decision to disallow the objection, much of which inform and explain the conclusions he stated at pp 34 and 35 for refusing to remit additional tax. 125 Counsel did not, however, seek to analyse the mass of information, reviewed by the Commissioner in his very detailed reasons, that was before the Commissioner at the time he made the decisions to refuse to remit penalties to make good the challenge. It is difficult, in the absence of such analysis of the information before the Commissioner, to assess the validity of counsel's submission that the Commissioner was not entitled to conclude that each applicant had personal knowledge that the return furnished for Askena in the 1990 year contained the claim for a deduction for expenditure that had never been incurred and that, in consequence, each applicant's share in the net income of the trust was understated. Given the range of this information reviewed by the Commissioner in his Reasons for Decision, it is not apparent that he was not entitled to come to the conclusion he did that is now attacked. 126 Counsel submitted in particular that the non-remission decisions, based in part as they were on the Commissioner's conclusion that the applicants were personally aware of the tax agent's misconduct, are flawed with error within the Avon Downs principle because "there was no cogent and probative evidence that any of the applicants personally knew or alternatively understood" what the Commissioner took to be the tax agent's misconduct. Counsel did not, however, attempt the task of analysing the information before the Commissioner to make good this submission. Without taking up that burden, that optimistically sounding argument cannot be sustained. 127 In any event, I would not interfere with the Commissioner's decision not to remit any additional tax, if it were open to me to do that in conformity with Avon Downs. The evidence before me, which is more extensive than that available to the Commissioner, suggest that none of the applicants had actual knowledge, at least for some months after June 1990, that Askena had not, in fact, incurred a $200,000 outgoing in that year for which it claimed a deduction to which it was not entitled. But the evidence before me shows that they were experienced business people, having for about a decade conducted a business which, by 1990, was a substantial one. The evidence also shows that they intended to obtain a substantial tax benefit by acting on Mr Hart's advice to commit Askena to the employee retention plan and they understood that this required a $200,000 investment to be made in respect of the Askena Staff Benefit Trust by 30 June 1990. They were content to abdicate responsibility for implementing that plan to Mr Hart. After Chase AMP approved their loan application in mid August 1990, they received documentation from Harts that they completed in the expectation that the finance they needed to make the investment in question would come from Chase AMP soon after. As a result of the discussions they had with Mr Stevens in late November/early December 1990, they well knew that, though up to that time they had believed that they were borrowing the $200,000 referred to from Chase AMP, a company they had not previously heard of, Mevton, had been substituted by Harts as the lender in place of Chase AMP; moreover, it is clear that they turned their minds to the significance of this information given them in December 1990. They expressly noted that if, in December 1990, there were four monthly instalments due to Mevton but not yet paid, the scheme may only have been implemented in July, ie, after 30 June 1990. Notwithstanding that they must have known by about August 1990 that the Chase AMP loan and thus the investment that had to be made by 30 June had not been made by that date, and notwithstanding the radical change in the lending arrangements that Mr Stevens told them about in December 1990, they were content to lodge their returns for the 1990 year in February 1991. They signed their 1990 returns in February 1991 well knowing that the income stated in those returns reflected consequences that could only flow if Askena had, in fact, incurred the $200,000 outgoing by 30 June 1990. On the face of their evidence, each appears to have deliberately avoided informing themselves about the steps that had been taken by Mr Hart to implement the plan, when they had good reason to be concerned about whether he had done what he promised to do by the critical 30 June date. For them to lodge their own returns in February 1991, which they understood gave each of them the benefit of a low taxable income, only justifiable if Askena had borrowed the $200,000 applied for before 30 June by that date, and also by that date had invested those loan moneys in respect of the Askena Staff Benefit Trust, shows, at best for them, a reckless indifference to whether the events which had to occur by 30 June 1990 at the latest, if they were honestly entitled to return the low taxable income each did in their 1990 year return, had in fact occurred. For these reasons, they are not entitled to any remission of additional tax. 128 If the Commissioner's discretion with respect to the remission of tax in respect of the 1990 year did miscarry because he concluded that each applicant was personally aware that Askena had not incurred any outgoing of $200,000 by 30 June 1990, when it was not fairly open to him on the information then available to him, in view of the extent to which each abdicated responsibility for monitoring the transaction, I would therefore, in the exercise of my power under s 14ZZP, not set aside the Commissioner's decision refusing to remit any of the additional tax for the 1990 year. 129 So far as the 1991 year is concerned, the Commissioner refused to remit the additional tax imposed by the statute in respect of that year for the same reasons he took that course in relation to the 1990 year. For the 1993 year, the Commissioner, in explaining why he considered each applicant was liable to additional tax under s 226J, recorded his views as to the conduct of their tax agent and their own knowledge of the absence of any loan by Grade Enterprises or Mevton to Askena which it was asserted had, in fact, been made. The Commissioner, however, did not deal with the issue of remission of the modest amount of penalty tax imposed on each applicant in respect of the 1993 year. Nor did he deal with that in relation to the 1994 year. Even if it should be taken that the Commissioner's discretion with respect to the remission of penalties in respect of the 1991, 1993 and 1994 years has miscarried, I would not interfere with any of the decisions of the Commissioner not to remit additional tax in respect of the 1991, 1993 and 1994 years for the same reasons that I would refuse to interfere with the Commissioner's decision with respect to remission of additional tax for the 1990 year, even if grounds for challenging the Commissioner's non-remission determinations were made out. 130 Counsel submitted that, in determining to refuse to remit any of the additional tax in respect of the 1990 and 1991 years, the Commissioner, in effect, failed to apply the policy contained in "former IT2517". This ruling is not in evidence and I do not consider it appropriate to determine whether the discretion reposed in the Commissioner to remit additional tax is flawed with error within the Avon Downs principle because, by determining not to remit additional tax for the reasons summarised in par 68 of counsel's submissions in reply, the Commissioner impermissibly departed from or failed to apply the policy contained in what counsel described as "former IT2517" in respect of the 1990 and 1991 years. 131 Counsel for the applicants also submitted, without any further elaboration, that the Commissioner's exercise of the discretion not to remit any of the additional tax involved error on his part "in failing to extend or in now failing to extend to the applicants the benefit of the Commissioner's current penalty policy in respect of mass marketing (sic) tax schemes under which the Commissioner has been waiving penalties and interest". The assumption in this submission is that the employee retention plan which the applicants agreed that Askena should enter into on the advice of Mr Hart was part of a mass marketed tax scheme. What that "current penalty policy" may be is not the subject of any evidence. Nor did counsel disclose in submissions how that policy might have been expected to operate upon the facts of this case, as known to the Commissioner in October 1999. It is unnecessary, in view of the failure by counsel to develop this argument, to deal with it further. 132 Counsel also submitted that the Commissioner's non-remission decisions were flawed with error because he gave "no weight to relevant factors or little weight to the following important factors", twenty-four factors then being listed. Many of the attacks mounted on the non-remission decisions are rolled up in par 70 of counsel's reply, which reads:

Further or alternatively, even on the information and material before the respondent at the time of the amended assessments or the objection decision, the only conclusions reasonably open to the respondent acting with reason and justice and according to law, and not from private opinion, the respondent should have found that the applicants were ordinary business people and not sophisticated in respect of tax matters, who trusted and relied on their registered tax agent with an apparently popular reputation as a sophisticated tax accountant, who were neither careless nor reckless but were duped into entering into a mass marketed tax avoidance scheme (if the respondent's finding in that regard remain) and were themselves substantially mislead (sic) about the nature and effectiveness of that scheme, and in which they invested more than $120,000 up to the time that the AMP insurance policy was surrendered at a substantial loss and the payments under the scheme suspended or terminated, in December 1993, who were further mislead (sic) that the trustee of the employee retention fund had reinvested the proceeds in other investments so that funds would be available at the end of the 10 years, but whose money has been completely lost.

133 No attempt was made by counsel to analyse the information before the Commissioner, a task necessary to make good this challenge. Most of counsel's submissions, though couched as challenges to the non-remission decision on the basis of Wednesbury unreasonableness, acting on irrelevant considerations or failing to take into account relevant considerations, suffer from this defect. 134 Further, counsel is not here, in par 69(c) of his reply, in truth seeking to show that the discretion miscarried because the Commissioner ignored relevant considerations. In my opinion, counsel is here seeking to attack the non-remission decisions on the basis that the Commissioner came to the wrong factual conclusion as revealed by all the evidence now available to this Court. Instead of analysing the information before the Commissioner to make good these submissions, counsel frequently supports them with references to evidence put before this Court. The submissions in par 69(a), (b), (c), (d), (h), (l) and par 70 of his submissions in reply suffer from this defect. 135 Paragraph 69(j) misunderstands the way ss 223(1) and 226J operate to impose additional tax. Paragraph 69(k), an allegation of improper purpose by the Commissioner in exercising the power of remission against the applicants, is a long bow drawn by counsel without any evidentiary support being identified. 136 Paragraph 69(i) of the submissions seems to suggest that the Commissioner was negligent in not disallowing the deduction of $200,000 disclosed in Askena's tax return for the 1990 year at the time that return was assessed by the Commissioner and he should have remitted some of the penalty tax because of this ancient negligence on his part. The proposition that if the true facts were as falsely stated by the taxpayer, the deduction claimed on the basis of the false statement should nevertheless not have been allowed does not provide any ground for ameliorating additional tax imposed by the statute because of the false statement. 137 I do not accept that a taxpayer who enters into a tax minimisation arrangement on the advice of his tax agent is entitled to any remission of penalty tax because he turns out to be only one of a number of people who have entered into a scheme marketed by the tax agent to a number of taxpayers, as submitted in par 69(f). So far as pars 69(e) and (g) are concerned, the information provided by the applicants' tax agent to the ATO referred to was provided specifically in relation to the affairs of Askena and the other twelve clients of the tax agent, who were each said to have borrowed from Mevton, rather than Chase AMP, to make investments in their employee retention plans. What the tax agent had to say to the ATO is of direct relevance to Askena. 138 It does not appear that any interest was imposed in the amended assessments for the 1990 and 1991 years. As I understand counsel's submission, he does not challenge the application of interest under s 170AA the ITAA in respect of the amended assessments of the applicants for the 1993 and 1994 years or the quantum of that interest. In a brief submission, he appears, as I understand it, not to complain about any interest included in the amended assessments for these two years, but to say that there should have been such a remission of additional tax in respect of the earlier 1990 and 1991 years as would leave the applicants in the position of having to pay, by way of additional tax, an amount which did not exceed the rate of interest sufficient to compensate the Commonwealth, such as the long term bond rate or the treasury note rate, for having been kept out of the tax properly due for a time in those two years. This, at most, is a complaint about the merits of how the Commissioner should have exercised his remission discretion. This Court cannot consider the argument until error within Avon Downs has first been shown. 139 For these reasons, each appeal is dismissed with costs. I certify that the preceding one hundred and thirty-nine (139) numbered paragraphs are a true copy of the Reasons for Judgment herein of the Honourable Justice Drummond.

Counsel for the Respondent: DH Bloom QC and NJ Williams

Solicitor for the Respondent: Australian Government Solicitor

Dates of Hearing: 1 and 2 August and 4, 5, 6 and 7 September 2001

Submissions: 3 and 12 October and 6 December 2001

At a glance

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Judgment (118 paragraphs)

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Legislation Cited (4)

Cases Cited (17)

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