Interest claim - CVC IN - 2006 income year
159 I set out in the QUD 512 judgment my understanding of what constitutes a "loan" and "interest". I do not repeat what is there stated.
160 The contest between the parties in relation to the GF Trust and CVC IN interest claims raises three questions upon which Melbourne Corporation carries the onus of proof:
(a) Were there loans at all?
(b) Were the proceeds of the loans used for the purposes of gaining or producing assessable income by Melbourne Corporation or in the course of its carrying on a business to that end?
(c) Was interest incurred by Melbourne Corporation in respect of these loans in the amounts claimed?
As part of discharging its onus of proving the assessments concerned to be excessive, Melbourne Corporation must prove, on the balance of probabilities, and on the whole of the evidence, that each of these questions should be answered in the affirmative.
161 Melbourne Corporation's alleged indebtedness to the Gould FT was contended by it to have commenced in the 2001 income year with advances totalling $855,815.82 (see GL 2-8500). On closer examination, these alleged advances comprise "reallocations" on 30 June 2001 of $67,942.77; $200,000; $50,000; $130,000; $2,000 and $290,873.05, and a "management fee" of $115,000.
162 Mr Gould's evidence is that the origins of all advances from the GF Trust to Melbourne Corporation lie in the 1980s, when Melbourne Corporation entered into a loan facility agreement with the Commonwealth Bank to secure funds advanced to it from time to time, secured by a mortgage over a strata title property owned by it in BMA House, Macquarie Street, Sydney. The initial use to which this loan facility was put, Mr Gould stated, was in advances of funds for the purchase for investment purposes of shares listed on the Australian Stock Exchange. A copy of the mortgage concerned is in evidence. However, for reasons stated below, I am not persuaded, on the balance of probabilities, that the Commonwealth Bank loan was used for such investment purposes.
163 Mr Gould also stated that, in late 1992, he decided the loan facility with the Commonwealth Bank should be paid out via a borrowing from Cheung Wah Bank. The amount owing under the facility was then $352,678.39. A repayment of the loan from the Commonwealth Bank to Melbourne Corporation in 1992 is evidenced by a discharge in that year of the mortgage which secured that loan.
164 Although the Commonwealth Bank loan was repaid in 1992, evidence as to the use of funds borrowed from that bank in the decade between 1982 and 1992 is, at best, equivocal. In making that observation and in assessing Mr Gould's credibility concerning the origins of alleged advances from the GF Trust, I record that I have expressly taken into account that, initially in his cross-examination on this subject, some questions by senior counsel for the Commissioner were put to Mr Gould on a mistaken factual premise as to the identity of the borrower from the Commonwealth Bank whose loan debt was secured by mortgage security. Mr Gould's answers reflected his difficulty in accepting the premise, relative to his recollection. While that error was unfortunate, it was truly an aberration in what, to my observation, was an otherwise obviously meticulously prepared appearance for the Commissioner. Fortunately, the error was detected and an apology appropriately tendered both to the Court and to Mr Gould personally before the cross-examination was concluded.
165 Mr Gould's evidence is that the loan proceeds were used for share acquisitions. Such documentary evidence as there is in relation to this decade consists of the minutes of the GF Trust and the accounts of Melbourne Corporation. As the Commissioner submitted, an analysis of this evidence does not support a conclusion that the funds borrowed from the Commonwealth Bank were used for the purpose of share acquisitions during this period.
166 The 1983 income year minutes of the GF Trust record that, towards the end of that income year, it was resolved that Yale Investments was to be used merely "for the purpose of funnelling substantial borrowings which had been arranged in London to the Group." Yale Investments is yet another company controlled by Mr Gould. The minutes for the GF Trust for the following income year refer to "extensive borrowings" and that Yale Investments "had acquired the prime position within the Group to be the external source of finance for the Trust's group of companies". Mr Gould stated in his evidence that the reference in these 1984 income year minutes to "extensive borrowings" was a reference to the borrowings from the Commonwealth Bank. Of course Mr Gould was a pervasive, controlling influence but he was under the burden of trying to recall events up to the better part of four decades prior to his giving evidence. The 1985 income year minutes state that Yale Investments continued to be the principal borrowing vehicle from overseas.
167 Looking beyond the minutes to the accounts of Melbourne Corporation in the mid to late 1980s as lodged with its income tax returns gives no support for the source of funds for share acquisitions having been or being the borrowing from the Commonwealth Bank. Most of the loans recorded in its accounts for the 1985, 1986 and 1987 income years are "Loans Secured" with related interest being paid to Yale Investments, rather than to the Commonwealth Bank. In contrast, and at odds with the recorded preponderance of interest, Mr Gould stated that the reference to "Loans Secured" in Melbourne Corporation's 1985 income year was a reference to the Commonwealth Bank loan facility. Also at odds with this recollection is that, by the end of the 1987 income year, the "Loans Secured" to Melbourne Corporation had increased to $627,824, whereas its recorded Commonwealth Bank overdraft debt was $27,028.13. It is true that, after the 1987 income year, the loan debt to the Commonwealth Bank increased but there is no documentary evidence as to the use of this increased drawdown from that bank.
168 After such a lengthy passage of time, contemporaneous documentary evidence, where it is not contradicted by other such evidence, and where there is not otherwise reason to question its reliability, carries with it a particular persuasive force, relative to the frailties of human memory. It is possible that the proceeds of the borrowings from the Commonwealth Bank were used for share acquisitions but that use is not, as just detailed, supported by the minutes of the GF Trust and Melbourne Corporation. It does not follow from this that Mr Gould gave false evidence on this subject, only that, for the reasons given, his evidence was not persuasive. I am just not persuaded on the balance of probabilities that the borrowing from the Commonwealth Bank was used for a share acquisition purpose. As it happens, that is just one reason why Melbourne Corporation has not discharged its onus of proof.
169 Contemporaneous documentary evidence to support Mr Gould's statement that the loan facility with the Commonwealth Bank was paid out via a borrowing from Cheung Wah Bank is also, at best, equivocal. He stated that he recalled a loan agreement between Cheung Wah Bank and Melbourne Corporation dated October 1992. A written loan agreement of this date between these parties was not in evidence. However, there is in evidence a transfer of mortgage signed on behalf of the Commonwealth Bank.
170 The debt of $350,000 owing to Cheung Wah Bank by Melbourne Corporation was stated by Mr Gould to have been novated to CVC Fund Managers.
171 Melbourne Corporation tendered a copy of a deed of novation (referred to in Mr Gould's evidence) which, on its face, purports to novate a debt of $350,000 owing to Cheung Wah Bank by Melbourne Corporation to CVC Fund Managers. However, the copy tendered is not executed. Further, at odds with Mr Gould's recollection that the agreement was in writing, the copy tendered does not identify a related written loan agreement between Cheung Wah Bank and Melbourne Corporation (nor, for that matter, one for the "Philadelphia Investments debt" in the same amount). That is so even though it identifies written agreements for all other purportedly novated debts - see clause 1.1 definitions of "the transferred Darlington McCarthur Loan" and "Darlington McCarthur Loan Agreement" dated 18 February 1993; "the Penalton Loan Agreement" dated 15 November 1992; "the CVC Loan Agreement" dated 12 May 1993. Clause 3 of this copy does not refer to a written loan agreement for the Melbourne Corporation debt (or the Philadelphia Investments debt). The only other "loan agreement" referred to in this copy is in the schedule but this is a reference to a loan agreement dated 19 March 1990 (separately in evidence). The references to November 1992 and 1993 dated agreements in this copy raise an interrogative note about how it could relate to a novation to CVC Fund Managers in October 1992 of a debt owed by Melbourne Corporation to Cheung Wah Bank. Once again, Mr Gould's recollection is not, I find, reliable.
172 There is, in later year documentary evidence, some support for a novation to CVC Fund Managers of a debt owed by Melbourne Corporation to Cheung Wah Bank. That evidence comprises:
(a) A deed dated 27 March 1995, affixed with the common seal of Cheung Wah Bank. [Mr Gould stated that this deed was executed on behalf of his Australian entities.]
(b) A letter dated 19 June 1995, sent by Cheung Wah Bank to CVC Fund Managers, which records the amalgamation of various debts.
(c) A 1996 general ledger worksheet of Cheung Wah Bank, which records an increment to the debt owed by CVC Fund Managers to Cheung Wah of $700,000. This entry is annotated, "Transfer from M Corp / Phil". Melbourne Corporation submitted, and I accept, that the reference to "M Corp" is a reference to Melbourne Corporation [I likewise accept that the reference to "Phil" is a reference to Philadelphia Investments].
(d) CVC Fund Managers' financial statements show an increased debt to Cheung Wah Bank and a $350,000 receivable owed by Melbourne Corporation.
173 Mr Gould stated that, in or about 1999, he decided to replace CVC Fund Managers in the role as private banking entity within the group of private companies he controlled with CVC Investment Nominees. He stated that the debts such companies previously owed to CVC Fund Managers were novated to CVC IN. This statement is not supported either by a formal deed of novation or by any other written agreement in evidence. Once again, especially within a private group of companies where, as here, all transactional actors are tightly controlled (here, by Mr Gould), the absence of such formality is not necessarily fatal to a conclusion that a novation as related by Mr Gould having occurred.
174 The evidence tendered in proceeding QUD 512 of 2018 has, as noted at the outset of these reasons for judgment, been tendered in the present proceeding. One aspect of that evidence concerned other asserted novations of debt from alleged other lenders successively via CVC Fund Managers and CVC IN to the trustee of the Gould FT. Also as mentioned above, the conclusion reached in the QUD 512 judgment about these particular alleged novations is nothing to the point in this proceeding. But the parties incorporated by reference in the present proceeding the submissions which they had made in proceeding QUD 512 of 2018 about what to make in this proceeding about the evidence tendered anew. Looking at that evidence in conjunction with the further evidence tendered in the present proceeding, I am just not satisfied, on the whole of the evidence, that Mr Gould is a reliable historian about the asserted novations now in question. My absence of satisfaction as to Mr Gould's reliability also extends to the reliability of the accounts prepared under his control or direction.
175 This absence of reliability extends to the documentary evidence I have mentioned which supports a subject loan novation from Cheung Wah Bank to CVC Fund Managers. I accept, as was put on behalf of Melbourne Corporation, that the 1999 year financial statements of the relevant entities are consistent with Melbourne Corporation's indebtedness to CVC Funds Manager having been novated to CVC IN. Melbourne Corporation is not obliged to prove its case to demonstration, only on the balance of probabilities. However, such are the reservations I have about the reliability of these financial accounts and about Mr Gould's reliability as an historian, I am not satisfied that there was a novation of Melbourne Corporation's indebtedness from CVC Fund Managers to CVC IN.
176 The next and last novation is alleged to have occurred in June 2001, from CVC Investment Nominees to Southsea Nominees as trustee for the Gould FT. It is likewise unsupported by any formal agreement. Prima facie, the occurrence of such a novation is consistent with entries in the financial statements of the entities concerned. As at June 2001, Mr Gould was a director of both Melbourne Corporation and the trustee of Gould FT. The sole director of CVC IN was Mr Gould's colleague, Mr Warwick Davies. Although I did not have the benefit of evidence from Mr Davies, it seems inherently likely on the whole of the evidence that CVC IN was operated in accordance with Mr Gould's wishes. Mr Gould stated that there was a novation. But, as I have stated, Mr Gould is not a reliable historian and neither are accounts prepared under his supervision reliable.
177 On the face of the accounts in evidence, on 30 June 2001 a loan account debt to CVC IN of $290,873.05 was reallocated from general ledger account 2-8100 to the Gould FT.
178 It is then Melbourne Corporation's case that, as between the 2001 and 2014 income years, there were 118 transfers to Melbourne Corporation, which totalled in all $8,209,538, increasing the amount it owed to the Gould FT. It is also Melbourne Corporation's case that there were 300 separate transfers by it totalling $5,171,616 as loan repayments. That there were movements of funds in Melbourne Corporation's bank account is evident from its bank statements. What is not evident from those statements is to what end those transfers occurred.
179 In support of its contended conclusion, Melbourne Corporation relied upon an analysis by Mr Jones (the same Mr Jones mentioned in the evidence tendered from proceeding QUD 512 of 2018). He sought to summarise in a table, entries in Melbourne Corporation's bank account statements and entries in the ledger accounts of various entities. I do not doubt that Mr Jones did his honest best in this analysis but its worth was dependent upon the reliability of these ledgers and the entries in these, in turn, were ultimately dependent upon the reliability of Mr Gould.
180 As the Commissioner submitted, and I find, Mr Jones' tabulation does not accurately reflect the basis of increases in a loan debt of Melbourne Corporation allegedly novated to the Gould FT. Mr Jones related that his tabulation was based on transfers into Melbourne Corporation's bank account by various entities other than the Gould FT. These were said to have been "reallocated" at the end of each income year via journal entries and transferred to a loan account from the Gould FT. Such indebtedness as there was from the Gould FT or South Sea Nominees (where its trustee capacity is not explicitly shown) to Melbourne Corporation is set out in entries set out in general ledger account 2-8500, which is in evidence.
181 For reasons which I detailed above by reference to management fee claims, these "reallocations" between 30 June 2001 and 30 June 2014, on the whole of the evidence, more likely than not occurred after the close of the income year concerned as part of Mr Gould's overall "closing adjustments". What is revealed is, as the Commissioner submitted, a complex reallocation of what were, nominally, loan accounts between Mr Gould's private entities whereby, in respect of each income year, Mr Gould gave a semblance of advances and repayments of loans which were, in turn, then used as the basis of charging what purported to be interest between his private entities as he thought fit in order to minimise taxation. There is a qualitative difference between, on the one hand, an informal understanding during an income year, or perhaps a standing understanding the origins of which precede a given income year, that funds transfers to and fro between members of a group of companies will always be by way of loan or, as the case may be, reduction of an existing loan balance and the formal recording of this when annual accounts are prepared and, on the other, there being no such understanding during or prior to a given income year and the fiscally advantageous creation in accounts of the appearance of such dealings.
182 In the course of Mr Jones' cross-examination, it became apparent that what he had described as "the individual credits and debits to the [Gould FT] Loan Facility" incorporated amounts advanced prior to "reallocation" to the Gould FT on "what the arrangement may have been between the entities". The tabulation is not reliable but that, in turn, is a reflection of ledger entries the reliability of which is, for reasons given above, are to be approached with caution.
183 An analysis offered by the Commissioner in submissions of what purports to be an overall increase in Melbourne Corporation's indebtedness to the Gould FT at the end of the 2001 income year, as a sequel to the alleged novation to the Gould FT of the debt allegedly previously owed to CVC IN by Melbourne Corporation, illustrates the type of fiscally advantageous, accounting creativity present. It also highlights, if the conclusion on this subject already reached were not enough, an additional reason why Melbourne Corporation has failed to discharge its onus of proving that these purported loans, even if not shams, were not deployed for any income producing purpose.
184 I have already mentioned the alleged "reallocation" of a loan debt of $290,873.05 on 30 June 2001. Also on the face of the accounts, on 30 June 2001 a debt of $130,000 was reallocated from GL account 2-8300 for Darlington McCarthur. It purportedly reflects a payment of $130,000 to Melbourne Corporation from Darlington McCarthur on 8 November 2001. The evidence discloses that, as to $115,000 thereof, Darlington McCarthur funded this payment by a receipt from Gould Ralph Services on 13 October 2000, which it returned as "Consulting fees" from Gould Ralph Services.
185 However, as the Commissioner submitted, there was at the time no apparent reason for Darlington McCarthur to derive consulting fees from Gould Ralph Services. At the time, it was Gould Ralph Services which conducted an accountancy practice. Further, Melbourne Corporation undertook some consulting work. Darlington McCarthur, on the other hand, if one accepts Mr Gould's description, was a provider of nominee services. The Commissioner submitted that it should be inferred that these were fees derived by Melbourne Corporation, paid by direction to Darlington McCarthur. The Commissioner further submitted that an explanation for this was that income derived by Melbourne Corporation had been diverted to Darlington McCarthur and then purportedly loaned back to it through the Gould FT, thereby giving rise to a purported loan on which interest could subsequently be charged. This was put to Mr Gould in cross-examination. He acknowledged that "the argument you've put has some plausibility". It is not necessary in a proceeding such as the present to go as far as drawing the inference the Commissioner invites, although I acknowledge that it is indeed "plausible". As it is, I am not satisfied, on the balance of probabilities, that Melbourne Corporation has established that this sum of $130,000 was a loan debt owed by it to the Gould FT. Rather, it looks like another of Mr Gould's "closing adjustments".
186 Also on 30 June 2001, and as the Commissioner submitted, a similar arrangement occurred with the purported reallocation of $200,000 in the Gould FT loan account. On 31 May 2001, Gould Ralph paid $266,400 to Darlington Macarthur's by way of payment of what purported to be accrued consulting fees (see GL accounts 1-1110 and 1-1130). Thereafter, on 13 June 2001, Darlington McCarthur paid $270,000 to the Gould FT by way of purported interest (see GL 1-1110 and GL 6-1020), thereby giving Darlington McCarthur a tax deduction, which eliminated its tax liability by giving it a tax loss of $18,748. This was notwithstanding that it had no loan from Southsea Nominees. Thereafter, on 21 June 2001, the Gould FT paid $40,000 and then another $50,000 to Melbourne Corporation, and a further $50,000 on 29 June 2001. These were treated as a loan from the Gould FT to Melbourne Corporation (see GL account 1-255). These amounts made up $150,000 of the $200,000 reallocated to loan account 2-8500 on 30 June 2001.
187 Also on 30 June 2001, the accounts disclose a purported management fee of $115,000 charged by Darlington McCarthur to Melbourne Corporation (and accrued to the Gould FT loan to Melbourne Corporation). I accept the Commissioner's submission that, given that Darlington McCarthur had already received income directly from Gould Ralph Services (see above), no basis for the charging of this purported management fee is apparent. It is, I find, just another fiscally convenient "closing adjustment".
188 Yet further, on 30 June 2001, the accounts disclose that the sum of $50,000 reallocated to GL account 2-8500 originated in a management fee charged by Anglo American to Melbourne Corporation, which was purportedly accrued as at 30 June 2001 (Account 2-6950) and then reallocated to the Gould FT (Account 206950; Account 2-8500). This, I find, is also just another fiscally convenient "closing adjustment".
189 So it is that, of the initial purported advance from Gould FT to Melbourne Corporation of $855,815.82, a total of $720,873 arose from nothing more than Mr Gould's manipulation of arrangements between entities he controlled, rather than actually arising in the course of or for the purposes of any income-producing activities or business.
190 Assuming, however, that Melbourne Corporation has proved on the balance of probabilities progressive increases in Melbourne Corporation's indebtedness to the Gould FT, and that this entailed a purpose giving rise to a deduction under s 8-1 of the ITAA 1997, it must also prove on the balance of probabilities that it did indeed incur a liability to pay interest on the sums borrowed.
191 I am just not satisfied on the balance of probabilities that any of the claimed interest deductions were in the nature of interest incurred at all. Although this is a conclusion reached on the whole of the evidence, one influential evidentiary contributor to this absence of satisfaction was the already detailed absence of satisfaction that Melbourne Corporation incurred management fees as claimed. A general pattern of "closing adjustments" is evident. However, there are also some particular features of the evidence in relation to the interest deduction claims which, while supporting a conclusion as to the existence of such a general pattern, also separately highlight why Melbourne Corporation has not discharged its onus of proof in relation to its interest deduction claims.
192 These particular features were highlighted by the Commissioner in submissions which were, on my own review of the evidence concerned, well-grounded in that evidence. What follows therefore owes much to those submissions and to my acceptance of them.
193 As a matter of initial impression of the accounts, the purported interest liabilities are truly fantastic, relative to the alleged loan indebtedness from time to time. Of course such an impression must defer to explanatory evidence which proves on the balance of probabilities that the amounts claimed were indeed interest. But such explanatory evidence was wanting.
194 Mr Gould's evidence was that the charging of interest and the amounts charged were part of "tax planning" and a matter for the director. The particular excerpts are set out above, as is what I have made of this evidence in the context of the evidence as a whole. I am well satisfied that the amounts claimed are not interest at all, just fiscally advantageous, after the event balancing charges, "closing adjustments".
195 Mr Gould also stated that, "[If] you were to calculate back, it's roughly about a 10 per cent interest rate". But this, with respect, was just an ex post facto rationalisation. He did not state that he had undertaken such a rough calculation either at the time of determining the rate or since or that the rate of 10 per cent formed any part of the rationale for the entries in the accounts which purported to record interest liabilities. Neither did he state, and there is no other evidence to this effect, that contemporaneous consultation of experts or some reference work informed the amount, if any, of interest to charge on the alleged loan liabilities from time to time.
196 Melbourne Corporation did lead expert evidence in an endeavour to provide a rationale for the amounts of the interest deductions claimed - from Mr Paul Hyde Page and from Mr Goode. I do not doubt that each of these gentlemen also did their honest best in proffering their opinions. But there was, with respect, an air of unreality about this body of evidence. Neither had been a source of advice to Mr Gould about the fixing of the amounts of claimed interest on the alleged loans in any of the income years in question. Their evidence really amounted to a retrospective calculation, divorced from contemporaneous events including alleged decisions, of an implicit interest rate over a confined period. Further, their opinions were based Mr Jones' tabulation, the flaws in which I have already highlighted. Mr Jones agreed under cross-examination that his tabulation and related calculation did not reflect the loan account as it appeared in the general ledger. As the Commissioner put in submissions, each of Mr Jones, Mr Paul Hyde Page and Mr Goode agreed that such an error would change the interest rate calculated, and upon which their opinion was based. Mr Paul Hyde Page agreed that the interest rate would be higher although the extent to which it would be higher was not quantified. Further, as the Commissioner accurately put in his submissions, evidence given under re-examination by Mr Paul Hyde Page was concerned with a change in interest periods, rather than a change in timing of advances.
197 It bears repeating that I do not accept Mr Gould's evidence that the interest liabilities claimed were incurred in the years in which they were claimed. For reasons already given, I reject his statements that that he determined the charging and amount of interest before 30 June in the income years in question.
198 In relation to the interest deduction claims, what is revealed is just an endeavour, income year after income year, to ensure that the most tax-effective amounts were included in particular entity's tax returns. Apart from reasons already given, this conclusion is supported by the following inconsistencies:
(a) Interest was paid to entities to which there was, even purportedly, no loan debt. Mr Gould was expressly questioned about this in relation to the claimed interest deduction of $435,000 in the 2006 income year. Melbourne Corporation's original appeal statement put that this amount was paid to CVC IN. This statement was subsequently amended. Mr Gould's related affidavit evidence asserted that there had been a payment by direction of the Gould FT. I accept, as did the Commissioner in submissions, that a payment by direction can be effective at law. However, the changed explanation leaves me unpersuaded that it is accurate, as opposed to an endeavour later to explain a revealed discrepancy.
(b) Mr Gould's stated that Melbourne Corporation's interest liabilities to the Gould FT were grounded in the liability of the Gould FT to meet its own onwards interest liabilities. Yet, according to Melbourne Corporation's Amended Appeal Statement (necessarily filed on Mr Gould's instructions), all of its alleged interest liabilities with respect to the Gould FT are accruals, save for the 2006 year, when an actual payment was made to CVC IN (not to the Gould FT). That is not, as the Commissioner submitted, consistent with an accrual being based upon the need to satisfy further interest liabilities. Further, as the Commissioner accurately submitted, an examination of the accounting evidence in respect of the 2004 income year discloses that in fact the interest liability said to accrue, in turn, from the Gould FT to CVC IN was accounted for only as an accrual, i.e. no money was transferred. This is not consistent with the position that interest accruals were based upon either the cash position of Mr Gould's various private entities, or a need to provide money to CVC IN to satisfy its own apparent onward liabilities.
(c) In relation to the 2006 year and in response to a question from me in the course of his oral evidence, Mr Gould stated that this was payment was as a result of a direction from the Gould FT. In contrast, in 2019, Mr Gould stated that it was not until 2007 that the Gould FT was the principal borrowing vehicle of the his private group of companies. In the original Appeal Statement filed in these proceedings in 2018 (filed on Mr Gould's instructions), the sum payable in 2006 was included not under the heading of interest payable to the Gould FT but instead under a separate heading "CVC Investment Nominees Pty Ltd" with the interest being described as "payable" to CVC IN.
199 For these reasons, these particular interest deduction claims fail.