Millar v Commissioner of Taxation

AND: COMMISSIONER OF TAXATION Respondent

JUDGES: LOGAN, PAGONE AND DAVIES JJ DATE OF ORDER: 4 JULY 2016

1. The appeal be dismissed. Note: Entry of orders is dealt with in Rule 39.32 of the Federal Court Rules 2011.

LOGAN J: 1 "Sham", said the High Court in Equuscorp Pty Ltd v Glengallan Investments Pty Ltd (2004) 218 CLR 471 at 486, [46] (Equuscorp), "is an expression which has a well-understood legal meaning. It refers to steps which take the form of a legally effective transaction but which the parties intend should not have the apparent, or any, legal consequences". 2 In so doing, the High Court cited with evident approval an earlier judgment of a Full Court of this Court, Sharrment Pty Ltd v Official Trustee in Bankruptcy (1988) 18 FCR 449 (Sharrment). In Sharrment, each of the judges constituting the Full Court proceeded on the basis that it was the subjective intention of the parties to the transaction in question which was relevant (see Lockhart J at 456 and Beaumont J at 468-469, with each of whose judgments Foster J, at 473 agreed). 3 Later in time in the High Court was Raftland Pty Ltd v Commissioner of Taxation (2008) 238 CLR 516 (Raftland). In Raftland, in the application of this same understanding of the legal meaning of sham and on the basis of findings of fact made by the primary judge (Kiefel J, then a judge of this Court) as to the intentions of the relevant actors, those who were or controlled the parties to the relevant transactions, the High Court overturned the conclusions reached in the Full Court of this Court. The Full Court had looked to the presumed intentions not of those persons, but to that of their legal adviser (see in particular, as to the Full Court's error, Raftland at 531-532, [33]-[35] and 538-539, [58]-[59] per Gleeson CJ, Gummow and Crennan JJ). 4 In Raftland, at 531-532, [35], Gleeson CJ, Gummow and Crennan JJ referred, with approval, to remarks made by Mustill LJ (as his Lordship then was) in Hadjiloucas v Crean [1988] 1 WLR 1006 at 1019 (Hadjiloucas) as to several situations "where an agreement may be taken otherwise than at its face value". They endorsed the remark there made by Mustill LJ, citing another leading case in this field, Snook v London and West Riding Investments Ltd [1967] 2 QB 786 (Snook), that the term "sham", correctly employed, "denotes an agreement or series of agreements which are deliberately framed with the object of deceiving third parties as to the true nature and effect of the legal relations between the parties" (Hadjiloucas at 1019). As to the objective of deliberate deception present in his Lordship's remark, Gleeson CJ, Gummow and Crennan JJ cautioned in Raftland, at 532, [36], that the reference to such an objective necessitated some care in the employment of the term "sham". For, as their Honours allowed, the term may also be used in a less pejorative way which nonetheless admits of the taking of a transaction otherwise than on its face. Put another way, the presence of a fraudulent intention on the part of the parties to a transaction is not exhaustive of the mental element sufficient to ground a conclusion that a transaction may be treated as a sham. 5 Also to be remembered, and the observation by Gleeson CJ, Gummow and Crennan JJ in Raftland at 531, [33] is a reminder, is that a case where sham is alleged offers an example of an exception to the parole evidence rule in relation to agreements or instruments in writing. In this case, absent sham, the Millars, as the parties who had signed the loan agreement, were bound by its terms unless fraud, misrepresentation or some other circumstance which would move a Court of Equity to intervene was present: Toll (FGCT) Pty Ltd v Alphapharm Pty Ltd (2004) 219 CLR 165. 6 In the circumstances of the present case, my view, as to the disposition of the issue as to sham in this appeal, may be summarised by adapting a turn of phrase employed by Diplock LJ (as his Lordship then was), at 801, in Snook. My sympathy, like that of Deputy President Frost of the Administrative Appeals Tribunal (the Tribunal) and that of the primary judge, Griffiths J, who respectively affirmed the disallowance of the Millars' objections to their amended assessments and dismissed a statutory appeal by them from the Tribunal's decision, is for the Commissioner of Taxation. My judgment on this issue is for the Millars. That disposition is dictated, as it was in Raftland and Snook, by a finding of fact as to the intentions of a party to the material transaction, in this case the finding which the Tribunal made about the intentions of Mr and Mrs Millar, who were the relevant actors, at the time when they entered into the loan transaction in question. 7 The finding of fact is to be found at [69] of the Tribunal's reasons and is expressed thus: I accept that the taxpayers themselves were unaware, at the time, that what was being created around them was a fiction. They believed what Mr Gould told them: that they were putting funds on deposit with HWBB, and that they were borrowing money from HWBB. That is despite the fact that, if they had taken a step back from what was taking place, they may well have realised that what Mr Gould was offering them was too good to be true. In this passage, HWBB is Hua Wang Bank Berhad, an entity incorporated in Samoa and Mr Gould is Mr Vanda Gould, the Millars' longstanding and, as the Tribunal found, trusted accountant. 8 It was not an agent who executed the Loan Facility Agreement with HWBB on behalf of the Millars. They signed that agreement personally. In light of that, and the finding of fact that Mr and Mrs Millar believed, at that time, that they were borrowing money from HWBB, the legal understanding of sham, as explained and applied in Equuscorp, Sharrment, and Raftland in this country and in Snook and Hadjiloucas in the United Kingdom, dictated that the Tribunal should have concluded that the loan agreement was not a sham. The Tribunal's statement (at [59]) that, "In the circumstances, not only is the intention of the taxpayers not determinative, it is probably not even relevant", given the finding as to the Millars' intentions (at [69]), makes it patent that the Tribunal was operating under an error of law. It was this error upon which the Millars relied both before the primary judge and in this appeal. The authorities mentioned dictated, with respect, that the statutory appeal from the Tribunal ought to have been allowed. 9 In this case, the impugned transaction was, in form, a loan from HWBB to Mr and Mrs Millar. Related to and immediately preceding that loan was what was, in form, the placement on deposit with HWBB funds drawn from the superannuation fund controlled by Mr and Mrs Millar. The Commissioner's position was that, when the features of the loan agreement and deposit, the surrounding circumstances and the later behaviour of the parties were examined, it should be concluded that the loan transaction was a sham. What was revealed, so the Commissioner's position went, was just a façade behind which the Millars prematurely accessed their superannuation fund so as to augment funds borrowed from St George Bank to an extent necessary to purchase an apartment on Queensland's Sunshine Coast. The façade, so it was alleged, disguised what was otherwise the adverse fiscal consequence of this premature access. 10 A conclusion that a transaction is a sham is not an objective construct divorced from the particular intentions of the parties to that transaction. Nor, unless the impugned transaction has been entered into via an agent, is the agent's intention to be imputed to the principal. Further, in the absence of evidence admitting of a conclusion that they are coincident, the intention of a professional adviser is not to be ascribed to a client who is or who controls a party to an impugned transaction: Coppleson v Commissioner of Taxation (1981) 52 FLR 95 (Hunt J). Given the affirmative finding made by the Tribunal as to the Millars' intentions when entering into the impugned loan agreement, it was irrelevant that either HWBB or Mr Gould may have had different intentions. To conclude that the agreement was a sham, mutuality of intention that it be but a façade was necessary. In such cases, the relevant inquiry is always as to the intentions of the parties: Allsene Pty Ltd v Commissioner of Taxation (1989) 20 ATR 1688 at 1704. 11 In my view, a helpful description, consistent with the remarks by Gleeson CJ, Gummow and Crennan JJ in Raftland, at 532, [36], with respect to the requisite mental element which must be present in the parties to enable a conclusion that a transaction is a sham, is to be found in Antle v The Queen [2010] DTC 5172 at 7307, [20] (Antle), an appeal in a Canadian tax case, in which Noël JA (with whom Sharlow and Leyden-Stevenson JJA agreed) stated: The required intent or state of mind is not equivalent to mens rea and need not go so far as to give rise to what is known at common law as the tort of deceit (compare MacKinnon v. Regent Trust Company Limited, (2005), J.L.Rev. 198 (CA) at para. 20). It suffices that parties to a transaction present it as being different from what they know it to be. Given concessions by each party in the course of oral submissions on the appeal, I also took it to be common ground between the parties that Antle correctly stated the position on this subject. As found by the Tribunal, the Millars were not presenting the loan from HWBB as being different from what they knew it to be. And the same necessarily follows in relation to the related deposit with HWBB and the later rollover of the loan. 12 The Tribunal's finding as to the Millars' intentions when they entered into the loan agreement was immediately preceded by these statements by the Tribunal (at [67] and [68] of the reasons): The taxpayers have not satisfied me that the documents taken at face value represent the real agreement between the parties. In particular, they have not satisfied me that the loan documents are anything other than a façade to disguise the reality of the arrangements, which is that the $600,000 is a distribution to them of money from their superannuation fund, with HWBB an intermediary. In summary, the taxpayers have not disproved sham. I conclude, therefore, that in 2000 the taxpayers improperly accessed their superannuation funds to purchase the Sunshine Coast apartment. The documents that were created at the time were created for the purpose of providing a smokescreen to disguise the true position. The taxpayers did not truly place the $600,000 on deposit with HWBB and HWBB did not truly lend the $600,000 to the taxpayers. The money was transferred to Samoa to make it look as though it was being put on deposit, in the name of the superannuation fund, for the purpose of earning interest. The subsequent transfer of the identical amount to Australia was not an advance of loan funds but a return of the money sent over only three days before. The purported placing of funds on deposit with HWBB and the loan documentation are mere window dressing. 13 Of course it was, as the Commissioner correctly submitted on the appeal, for the Millars to prove before the Tribunal that the assessments in question were excessive: s 14ZZK of the Taxation Administration Act 1953 (Cth) (TAA). In this case, where a crucial transaction was impugned as a sham, it was for the Millars, in the discharge of the onus of proving that the assessment was excessive, to satisfy the Tribunal that it was not a sham: Richard Walter Pty Ltd v Commissioner of Taxation (1996) 67 FCR 243 at 258[G]-259[C] per Hill J. The error of law which the Tribunal made was in failing to appreciate that, having regard to the authorities mentioned above, Mr and Mrs Millar had done this, given the finding the Tribunal made at [69] as to their intentions at the time of borrowing. There is a disjunct between that finding and the preceding paragraphs quoted but that disjunct appears to me to be the result of a failure on the part of the Tribunal to appreciate that a conclusion that a transaction is a sham is not an objective construct or governed by that of an advisor who is not a "relevant actor". The statements made at [67] and [68] by the Tribunal are readily reconcilable with the finding at [69] by the error of law under which the Tribunal was operating. 14 There were many features of the dealings between the Millars and Mr Gould and their behaviour and that of HWBB after the impugned transaction and of the transaction itself which sounded an interrogative note about whether the transaction was indeed a loan. The Tribunal referred in detail to these in its reasons. I do not repeat them, because that cannot alter the result which must flow from the finding as to Mr and Mrs Millars' contemporaneous transactional intentions. Those features provided an ample basis upon which the Commissioner could responsibly allege that the loan transaction was a sham and assess accordingly; hence the sympathy expressed by me at the outset of these reasons. It was though for the Tribunal, in the whole of the circumstances as revealed by the evidence before it, which included the evidence of Mr and Mrs Millar and the absence of Mr Gould from the witness box, to make findings of fact. This the Tribunal materially did as to the Millars' intentions. 15 The finding made by the Tribunal as to the Millars' intentions is in quite different terms to that made by Windeyer J in concluding in his judgment in another case where sham was alleged by the Commissioner, Scott v Commissioner of Taxation No 2 (1966) 40 ALJR 265 at 279 (Scott No 2): I should add that Mr Scott believed, and may have been advised by accountants, that by doing what he did he could somehow make appearance and pretence into reality. In this he was not dishonest or fraudulent, merely mistaken. Scott No 2 is an example of an intention short of fraud, as later described in Antle, which is sufficient to ground a conclusion that a transaction is a sham. Perhaps more correctly, it is an example of a case where the taxpayer who, on the evidence, was found to have the intention described, failed to discharge the onus of showing that the impugned transaction was not a sham and thus failed to show that the assessment was excessive. That is not this case. 16 On the statutory appeal from the Tribunal under s 44 of the Administrative Appeals Tribunal Act 1975 (Cth), a basis for upholding the Tribunal's decision was found in the relevant intention being that of Mr Gould, described by the Tribunal as the "puppet master". Puppet master or not, he did not, as agent, enter into the loan transaction on behalf of the Millars or make the deposit to HWBB from the superannuation fund. The same applies in relation to the subsequent rollover of the loan. If Mr and Mrs Millar were Mr Gould's puppets, they, as the Tribunal found as a fact, thought that the string he pulled meant that they were indeed signing up to a loan, which was the form of the transaction with HWBB. With respect, the error made by the learned primary judge was in assimilating this case with transactions effected via an agent. There, the agent's intention will bind the principal and were this the finding of fact I should agree with his Honour. But that is not this case. 17 The numerous authorities relied on by the Commissioner, be they Midland Bank plc v Wyatt [1995] 1 FLR 696 and others like it in the United Kingdom or, in Australia, Pickersgill v Tsoukalas [2009] SASC 357 about imputing the intention of another, be that on the basis of reckless indifference to the point of just going along with the acts of another or otherwise, are not relevant, given the crucial finding of fact as to the Millars' own intentions made by the Tribunal. 18 It is for the Tribunal to find the facts and, on any subsequent appeal to this Court, (subject to an exception not relevant in this case) those facts are an immutable given. Neither in the original jurisdiction where the statutory appeal was heard nor in an appeal therefrom to the Full Court is the appeal in any sense in the nature of a rehearing on questions of fact. The Commissioner's endeavour before the primary judge and on the further appeal before us to defend the outcome in the Tribunal on the basis that Mr Gould was an agent and it was his intention which was determinative was subversive of the nature of the statutory appeal. What the primary judge could not do in relation to finding facts, we also cannot. Of course the reasons of the Tribunal must be read as a whole and not narrowly and with an eye for error but, in the face of a finding as explicit as that at [69] of the Tribunal's reasons, it is not for this Court, on appeal, to seek to construct otherwise on the basis of some other passages in the Tribunal's reasons. The Commissioner never sought to support the allowance of the statutory appeal on the basis that the Tribunal's reasons were either illogical or inadequately expressed. They are not. It is just, with respect, that they have been influenced by a mistake of law as to the import in a case where sham was alleged of the finding as to the Millars' intentions. 19 On the basis that the loan and its rollover were not shams, no amount fell for inclusion in the Millars' assessable income by virtue of the operation of s 26AFB of the Income Tax Assessment Act 1936 (Cth) (ITAA1936) (which, subject to a discretionary value judgment made in place of the Commissioner by the Tribunal and adversely to the Millars, operated so as to include in their assessable income the "benefit" obtained by them from their Australian superannuation fund). 20 This then leaves for determination the other issue in the appeal dependent upon the absence of sham. This relates to interest withholding tax. 21 The issue arises because the Millars' interest liability under the HWBB loan for the period 2001 to 2008 was capitalised, i.e. progressively added to the loan's principal. 22 In the years in question, a borrower's liability to remit withholding tax to the Commissioner was governed by s 12-245 in Sch 1 to the TAA. That provided: 12-245 Interest payment to overseas person An entity must withhold an amount from interest (within the meaning of Division 11A of Part III of the Income Tax Assessment Act 1936) it pays to an entity, or to entities jointly, if: (a) the recipient or any of the recipients has an address outside Australia according to any record that is in the payer's possession, or is kept or maintained on the payer's behalf, about the transaction to which the interest relates; or (b) the payer is authorised to pay the interest at a place outside Australia (whether to the recipient or any of the recipients or to anyone else). 23 The issue comes down to, "Did Mr and Mrs Millar, in terms of s 12-245, "pay" interest to HWBB in those years on each occasion it was capitalised"? The Commissioner contends for an affirmative answer on the basis that this is the effect of the section. The Millars contend that, where interest is capitalised, payment only occurs when the borrower transfers to the lender a sum in respect of that capitalised interest (or some part thereof). 24 In none of the years in question did the Millars actually pay interest to HWBB. But the meaning to afford the word, "pay" is not just a matter of looking to the text of s 12-245, having regard to statutory context and purpose. That is because of s 11-5 in Sch 1 to the TAA, which provides: 11-5 Constructive payment (1) In working out whether an entity has paid an amount to another entity, and when the payment is made, the amount is taken to have been paid to the other entity when the first entity applies or deals with the amount in any way on the other's behalf or as the other directs. (2) An amount is taken to be payable by an entity to another entity if the first entity is required to apply or deal with it in any way on the other's behalf or as the other directs. The presence of s 11-5 means that, in the circumstances, the question becomes, "Were the Millars, as the 'first entity', applying or dealing with their interest liability under the loan either on behalf of HWBB, as the 'other', or as HWBB directed"? That is because, as a matter of construction, it is the Millars who are "an entity" and "the first entity" in terms of s 11-5 and HWBB is that "other entity" and "other's". 25 The Millars contend that it is a strain to language to say that a borrower applies an amount of interest, or deals with an amount of interest, when nothing occurs. They point, by way of contrast, to the former s 221YK(3)(a) of the ITAA1936, a predecessor to s 12-245 of Sch 1, which expressly deemed interest to be paid at the time when it was capitalised. It provided relevantly: 221YK Interpretation … (3) For the purposes of this Division: (a) interest or a royalty shall be deemed to have been paid by a person to another person although it is not actually paid over to the other person but is reinvested, accumulated, capitalized, carried to any reserve, sinking fund or insurance fund however designated, or otherwise dealt with on behalf of the other person or as the other person directs; 26 The Commissioner also sought to gain comfort from the former s 221YK(3)(a). He embraced the approach of the learned primary judge. His Honour considered that s 11-5, in succession to s 221YK(3)(a), "[omitted] particular instances or matters and simply [relied] upon the more high level expression of the concept of an entity applying or dealing with an amount in any way on another entity's behalf or as the other entity directs. That broader concept encompasses the particular instances which were identified in the earlier legislation" (Millar v Commissioner of Taxation [2015] FCA 1104 at [182]). 27 The correct approach to statutory construction is not to begin with the past but rather to begin with the text of the present, see: Military Rehabilitation and Compensation Commission v May [2016] HCA 19 at [10], citing Project Blue Sky Inc v Australian Broadcasting Authority (1998) 194 CLR 355 at 381-382, [69]-[71] and Alcan (NT) Alumina Pty Ltd v Commissioner of Territory Revenue (2009) 239 CLR 27 at 46-47, [47], being a recent reminder in that regard. To begin with the text of s 221YK(3)(a) is fraught with the risk of colouring the construction of the present text of s 11-5 with a priori assumptions based on the past text of s 221YK(3)(a). 28 Approaching the task of construing s 11-5 in this way, it strikes me as distinctly odd to regard Mr and Mrs Millar as having applied or dealt with any amount in any way either on behalf of HWBB or as HWBB directed. As a matter of ordinary language, s 11-5 looks to some act by one entity, be that an "application" or "dealing", of an amount on behalf or as directed by another entity so as to deem the latter entity to have been paid. As the Tribunal found, at [22], cl 5.4 of the Loan Facility Agreement permitted HWBB to capitalise any part of the interest which became due but was not paid by the due date. That this circumstance arose, whereby HWBB became contractually entitled, as a matter of discretion, to capitalise particular interest liabilities of the Millars, entails no act by them other than not making the interest payment by the due date. By no stretch of language could their failure to make the payment by the due date be regarded as either an application of, or a dealing with, an amount of interest. Such application or dealing with an amount of interest as occurred at all was by HWBB when it chose to capitalise a due amount of interest. 29 This result, derived from textual analysis of s 11-5, is supported by the approach to the meaning of "otherwise dealt with" in the former s 19 of the ITAA1936 by Sir Harry Gibbs in Brent v Commissioner of Taxation (1971) 125 CLR 418 (Brent), upon which the Millars relied. As that phrase appeared in that section, it was as part of a genus which included, inter alia, "capitalised", posited as alternatives to "actually paid", in application of which income would be deemed to have been derived. The case arose against the background of an arrangement between Mrs Charmaine Brent, the then wife of a fugitive from British justice, Ronald Biggs of the Great Train Robbery infamy, and a media company for payments to her in respect of information. So far as the s 19 issue in that case was concerned, the relevant facts were that Mrs Brent had not asked for the payment in question and the media company had refrained from making that payment. Having recited these facts, Sir Harry Gibbs observed, at 430: However, even if the company had deferred payment at the request of the appellant, s. 19 would not have applied. Income is not "dealt with", under s. 19, when all that happens is that a debtor refrains from paying his debt at the request of the borrower. 30 When referring, at [22], to cl 5.4 of the Loan Facility Agreement, the Tribunal did not make a finding as to whether the Millars made any request of HWBB to capitalise the interest due. Be this as it may, the analogy with Brent is that an amount is not "dealt with" by a borrower when all that happens is that that borrower refrains from paying interest which is due. 31 The case cited by Sir Harry Gibbs in Brent in support of his conclusion, Permanent Trustee Co. of New South Wales Ltd v Commissioner of Taxation [1940] 2 AITR 109, at 110-111, was also relied upon by analogy by the Millars. That was another s 19, ITAA1936 case and Rich J held the section not to be applicable to circumstances where a person "got nothing except a new obligation to pay in exchange for an existing obligation to pay". It was submitted on behalf of the Millars that HWBB had, on the capitalisation of the interest, got nothing except a new liability to pay. The Commissioner's response to this, citing in support remarks made in Bank of New South Wales v Brown (1983) 151 CLR 514 at 523, coincidentally also by Sir Harry Gibbs, was that the mere fact that interest is added to principal and interest does not, in the ordinary course, create an entirely new debt. So much may be accepted but the point for present purposes really is that a person does not deal with an amount by doing nothing in respect of that amount. 32 The Millars also submitted that s 11-5 ought to be construed in their favour because s 12-245 had a penal operation, because, where applicable, it operated to block tax deductions to which they as a borrower would otherwise have been entitled. I am not at all sure that I should characterise a provision which added a qualification to a provision for a deduction as a penal provision. Even if it could be so characterised, if that were its unambiguous meaning having regard to text, context and purpose, that it had this character could not alter that meaning. 33 The Commissioner also cited his public ruling TD1993/146. Such pronouncements by an officer of the executive branch of government do not bind those charged with exercising the judicial power of the Commonwealth, a fortiori, for constitutional reasons, when that officer is the Crown's chief revenue officer and the Court is seized with a controversy about a person's liability to tax: Deputy Commissioner of Taxation v Brown (1958) 100 CLR 32 at 40; Giris Pty Ltd v Commissioner of Taxation (1969) 119 CLR 365 at 378-379; MacCormick v Commissioner of Taxation (1984) 158 CLR 622 at 628; Commissioner of Taxation v Futuris Corporation Ltd (2008) 237 CLR 146 at 153, [8]. These rulings have a role to play in public administration in the public signification of the Commissioner's views on a given subject but reference to them in the present context is but a distraction. That is not to say that propositions in such rulings might not, subject to the making of a responsible, independent value judgment by counsel, inspire the making of particular submissions on behalf of the Commissioner. If so, the Court must deal with those submissions. 34 The learned primary judge also observed (at [183]) of the relevant Explanatory Memorandum that it contained "nothing … to suggest an intention to change the substance of s 221YK(3)". With this I agree but, for reasons already given, that does not, with respect, mean that one construes s 11-5 through the prism of the now repealed s 221YK(3) of the ITAA1936. HWBB has capitalised the interest liabilities of the Millars and this would have been within the embrace of the text of s 221YK(3)(a). It is not within the embrace of the text of s 11-5. On this ground also, the Millars must succeed. 35 It may perhaps be that the omission from s 11-5 of particular examples such as "capitalised" has left a gap which would otherwise have not been present had the wording of the former s 221YK(3)(a) been retained. The result may be inconvenient to the Commissioner but there is no absurdity in the text of s 11-5. The courts are duty bound to look and give meaning to the text approved by parliament. If some other outcome is desired than that resultant from that text, it is the constitutional function of parliament, not the courts, further to legislate: see, for example, Gauntlett v Repatriation Commission (1991) 32 FCR 73 at 76-77 per Pincus J. 36 The conclusion reached by the Tribunal in relation to sham not only meant that it found it unnecessary to consider the withholding tax question but also an issue arising under Part IVA of the ITAA1936. Only the former emerged as an issue in the statutory appeal (because of a notice of contention by the Commissioner). That means that the Part IVA issue remains unresolved. 37 It follows that, while the appeal must be allowed, the judgment below set aside and the decision of the Tribunal quashed, the matter must be remitted to the Tribunal for the hearing and determination of the remaining issue. So much was accepted by the Millars. They submitted that, on that remission, the Tribunal ought to be differently constituted. Ordinarily, the constitution of the Tribunal on a remitter is a matter for the President of the Tribunal in his administration of that body. The point made for the Millars is that Deputy President Frost made very particular findings about what had occurred, which included findings about credit. As it transpired, one of these, relating to their intentions when signing the loan, was not unhelpful to them but there were others. Even though what flawed the outcome in the Tribunal was an error of law, this is, in my view, one of those exceptional cases in which it would be preferable to condition the remitter on the Tribunal being differently constituted. Lest it be thought otherwise, I add that this condition in no way is a personal reflection on the Deputy President, only a recognition that there ought to be no appearance of pre-determination in respect of the hearing and determination of the remaining issue. That will have to be conducted on the footing that the loan from HWBB was not a sham but otherwise it will be for the Tribunal as differently constituted to make its own findings of fact. I certify that the preceding thirty-seven (37) numbered paragraphs are a true copy of the Reasons for Judgment herein of the Honourable Justice Logan.

PAGONE J: 38 The principal issue in this appeal concerns the finding of the Tribunal, upheld on appeal by a judge of the Court, that Mr and Mrs Millar had failed to discharge their burden of proof that a transaction entered into by them was not a sham. The underlying facts were not otherwise in dispute. 39 Mr and Mrs Millar wished to buy an apartment on the Queensland Sunshine Coast and made an offer, which was accepted by the vendor, to purchase the apartment for $1.1 million. The purchase was financed in part by a loan of $600,000 from St George Bank and the balance from what purported to be a loan facility between Mr and Mrs Millar and an entity incorporated in Samoa ("the Samoan entity") which was called the Hua Wang Bank Berhad. The Millars had not had previous dealings with the Samoan entity but they did have money in their superannuation fund. Their long-term accountant and financial adviser, Mr Vanda Gould, advised Mr and Mrs Millar that they could borrow $600,000 from the Samoan entity on condition that an equivalent amount of $600,000 was placed on deposit with the Samoan entity. On 11 October 2000 $600,000 was transferred from the Millar's superannuation fund to the Samoan entity. On 14 October 2000 the Samoan entity transferred $600,000 to the solicitors for the Millars consistently with the terms of a document purporting to be a loan facility agreement between them and the Samoan entity which they had entered into shortly before the transaction but which was expressed to be with effect from 1 July 2000. The Commissioner treated the arrangement between the taxpayers and the Samoan entity as a sham to disguise Mr and Mrs Millar accessing funds from their superannuation fund contrary to the payment standards contained in Part 6 of the Superannuation Industry (Supervision) Regulations 1994 (Cth) ("the 1994 Regulations"). 40 It can be assumed that the Millars wished the deposit of $600,000 by the superannuation fund with the Samoan entity, and their loan of $600,000 from the Samoan entity, to have the legal effect which had been represented to them by Mr Gould, and which the documents purported to have, because it would otherwise adversely affect their fiscal position. The Commissioner, however, treated the transactions as a sham and assessed the Millars to tax under s 26AFB of the Income Tax Assessment Act 1936 (Cth) ("the 1936 Act") treating the $600,000 purportedly received from the Samoan entity as a benefit to the Millars from their superannuation fund. 41 The Tribunal's acceptance of the Commissioner's contention depended upon a rejection of the subjective evidence of Mr and Mrs Millar, based upon what Mr Gould had told them, as sufficient to establish that they had the necessary legal intention that the documents had the effect which the documents purported to have. The Tribunal's conclusions depended also upon the absence of evidence from Mr Gould who had been instrumental in setting up the transactions for the Millars with the Samoan entity. The Tribunal recorded the relevant submissions for the Millars at [56], and summarised their essential proposition at [57], as follows: 56 The taxpayers submit as follows: [33] A legal document or transaction will only be a sham if the parties to the document or transaction intend it to be something other than what it appears to be, and intend that it will not give rise to the legal rights it appears to comprise. Moreover, it is clear that this intention must not only be present, the intention must be common to both parties if the transaction is to be a sham: Faucilles v FCT [1989] FCA 387 at [57], Richard Walter Pty Ltd v Commissioner of Taxation (1996) 67 FCR 243 per Hill J at 257-258; Snook v London and West Riding Investments [1967] 2 QB 786 at 802; Fitzroy Services v Commissioner of Taxation [2013] FCA 471 at [29]-[34]. [34] In the present case this means the Applicants succeed in showing that the loan was not a sham if the AAT accepts that [they] signed the loan agreements in the belief the loan agreements were binding legal documents that could be enforced against them. A contract does not cease to be binding simply because the signatories fail to read it carefully, or have an imperfect understanding of its effect; nor does it become a sham. Pagone J, writing extra-curially, has said: 'A sham must not only deceive, it must be intended to deceive' ('Sham Trusts', 9 March 2012 at 2). [35] The AAT does not need to be satisfied that the person who signed the loan documents on behalf of Hua Wang Bank intended and expected the documents would be binding. If it is accepted that [the taxpayers] had the intention to create a valid loan, the Applicants have shown there was no common intention of sham and the allegation of sham has been successfully rebutted by the Applicants. Self -evidently, also, the threshold for excluding sham is one that is comparatively easy to satisfy because of normal Briginshaw considerations. 57 In other words, all the taxpayers need to do is present evidence of their subjective intention - even though they really know nothing about the detail of the documents - and if I accept it they have disproved sham. At [59] the Tribunal rejected the submission for the taxpayers that evidence of their subjective intention was determinative of their legal intentions to create the legally binding documents they purported to have created. The Tribunal there said: I do not accept the taxpayers' submission. In the circumstances, not only is the intention of the taxpayers not determinative, it is probably not even relevant. The relevant intention is that of the puppet master, not the puppets. And I have no idea what that intention was. Griffiths J upheld the approach taken by the Tribunal and concluded at [133]: It seems to me that the core of this appeal essentially relates to the applicants' burden under s 14ZZK of the TAA 1953. To discharge this burden the applicants had to defeat the Commissioner's claim that the loan was a sham. In the particular circumstances of this case it was insufficient for them simply to persuade the AAT (as they did) that they genuinely believed and intended that the transaction was a loan. The difficulty the applicants faced was that, as the AAT found, they placed their total trust and faith in Mr Gould ([83] of the AAT's reasons for decision), such that Mr Gould's actions were "properly imputed to the taxpayers" (at [84]). Once that point was reached, and given all the unanswered questions regarding the transaction which the AAT found Mr Gould could probably answer because of his prominent role in implementing and administering the arrangements (see [46]-[50]), it was a short and legitimate further step for the AAT to find that, because the evidence left unclear what Mr Gould's intention was, the applicants failed to discharge their burden of demonstrating that the assessments were excessive. It may well be that, in a different set of circumstances, the taxpayers' subjective intentions would carry more if not decisive weight. In my view, however, the applicants have failed to establish any legal error in the AAT's approach in the particular circumstances here. Fundamental to these conclusions is the extent to which the existence of a sham is rebutted by subjective intentions of the parties to the transaction which is impugned as a sham. 42 It is fundamental to a finding of sham that the parties to the alleged sham intended a sham. In Snook v London and West Riding Investments Ltd [1967] 2 QB 786 Diplock LJ said at 802 in a passage that has frequently been cited: I apprehend that, if it has any meaning in law, it means acts done or documents executed by the parties to the "sham" which are intended by them to give to third parties or to the court the appearance of creating between the parties legal rights and obligations different from the actual legal rights and obligations (if any) which the parties intend to create. Sham in law may thus be distinguished by the presence of a shamming intention from other mismatches between actual intentions and legal outcomes. Parties may, for example, be found to have contracted upon terms they did not actually intend, or to have caused the existence of a constructive trust which they did not intend, but, for there to be a sham, the relevant parties must have had an intention to create a sham; that is, the parties creating the sham must have intended to create a disguise for the true position. The factual inquiry into whether the parties intended a sham, however, is necessarily linked to the factual inquiry into whether the parties had the requisite intention to create the legal consequences which the impugned transaction purported to have. The factual inquiry into whether the parties intended a sham is, in other words, linked to the factual inquiry into whether they had the intentions required by law to create that which is otherwise impugned. In each case the basal question is whether or not the impugned document, instrument or transaction has its purported legal effect and it is in answer to that question that an inquiry arises about what the parties intended. The factual inquiries into those aspects of the intentions of Mr and Mrs Millar arose in this proceeding in the context of Part IVC of the Taxation Administration Act 1953 (Cth) ("the 1953 Act") in which they bore the burden of proof. They needed to prove that the purported dealings with the Samoan entity were as they were purported to be and, therefore, that they were not a sham for the means by which they obtained a benefit from their superannuation fund contrary to the payment standards in the 1994 Regulations. The Millars contended that they could discharge their burden of proof by their evidence that they believed what they had been told by Mr Gould. The Tribunal correctly concluded that that was not enough. 43 A similar case was considered by the High Court in Raftland Pty Ltd v Commissioner of Taxation (2008) 238 CLR 516 in which it upheld a finding of sham in relation to transactions through which the parties wished create the legal, and fiscal, effects that the transactions purported to have. In that case a trust deed had created the Raftland Trust as a discretionary trust, and the directors of Raftland Pty Ltd ("Raftland"), as trustee of that trust, had made resolutions purporting to distribute income from the Raftland Trust to the trustee of the E & M Unit Trust. The apparent discrepancy, however, between the entitlements purportedly created and the way in which the funds were applied "gave rise to a question" of whether the documents were to be taken at face value and that question was not answered by application of the parol evidence rule: see Raftland at [33]. It was significant to the outcome in that case, and it is relevant to the present case, that the impugned transactions needed to have their purported legal effect to bring about the fiscal outcomes which the parties intended to achieve and which the transactions purported to have. In other words it is significant that the taxpayers in Raftland intended the fiscal consequences which could only be achieved if the creation of the Raftland Trust, and the subsequent resolutions by the directors, were not shams. It may also be relevant to note that in Raftland the control of the E & M Unit Trust was altered after the impugned transactions were entered into in a way that ensured that the economic benefits from the purported legal effect of the impugned transactions could not be enjoyed by those who had previously controlled the E & M Unit Trust and had been its beneficiaries. In other words the parties in Raftland took steps after entering into the impugned transactions which were consistent with the impugned transactions not being shams and which would have been unnecessary if the impugned transactions were shams. A fundamental issue considered in Raftland was, therefore, whether there could be a finding of sham in circumstances in which the parties to the impugned transactions intended the consequences which could only be achieved if they lacked the shamming intention for the fiscal outcomes to be achieved. The parties to the impugned transactions had contended that their transactions were not shams, and their ability to enjoy the fiscal consequences flowing from the impugned transactions depended upon their effective intention being that the transactions were not shams. To that may be added the circumstance of the change of control of the receiving trust which was a change that was only necessary if they had not created shams. It was nonetheless held that the appearance created by the transactions did not reflect the intentions of the parties. 44 The trial judge in Raftland had concluded that the provisions of the deed of the Raftland Trust, and the resolutions made pursuant to the trust deed, were shams. The factual inquiry into whether what was created was a sham was not determined by the inference that the parties could not have had the shamming intention in view of their undoubted intention to achieve fiscal outcomes which could only be achieved if they had not intended a sham. The Raftland Trust had been settled by Ms Sommerville, and the resolutions by Raftland were made by its directors being two of the Heran brothers. The factual inquiry into whether a sham had been intended, however, included consideration of the role of the adviser to those creating the impugned documents, and the inquiry was not confined to the evidence of the state of mind of those whose intention was in issue. It was the intention of Ms Sommerville that was relevant to whether the Raftland Trust was a sham, and it was the intention of the directors of the Raftland Trust that was relevant to whether the resolutions were shams. However, it was said in the reasons in the joint judgment that Ms Sommerville "had no intention separate from" that of the directors of Raftland and that the intention of the Heran brothers were part of the pretence. At [47] in the joint judgment of Gleeson CJ, Gummow and Crennan JJ their Honours said: As has been noted, the settlor of the Raftland Trust, Ms Sommerville, had no intention separate from that of Raftland. The directors of Raftland were the Heran brothers, and two of them were the shareholders. It is the intention of the Heran brothers that is specifically relevant to a question whether the trusts apparently created by the Raftland Trust deed were wholly or partly a pretence. The creation of such an express trust depends upon the intention of the person alleged to have created it. A part of an instrument may be a pretence. The respondent argued that in this case the pretence was that part of the trust instrument which made the E & M Unit Trust a tertiary beneficiary. The corollary of that argument was that the document signed by Mr Carey as trustee of the E & M Unit Trust, in so far as it accepted appointment as a beneficiary of the Raftland Trust, also was a pretence. As has been noted, Mr Carey had no intention independent of Mr and Mrs Thomasz, and it was their intention that was relevant to that question. (footnotes omitted) The finding that the Heran brothers had the relevant shamming intention was a question of fact based upon a consideration of all of the evidence, including factual inferences, and also the significance of the role of Mr Tobin who was the adviser to the participants to the transaction and had prepared the documents. At [48] of the joint judgment their Honours said: The Heran brothers, and Mr and Mrs Thomasz, were business people, not lawyers. It is unlikely that they applied their minds with care to the detail of the documents that were prepared by Mr Tobin. That does not mean, however, that their intentions were irrelevant. It may mean, as a matter of factual inference, that they had no intentions inconsistent with the documents prepared by Mr Tobin and that, therefore, there is no reason to take those documents other than at face value. It may mean (as the Full Court, in substance, found) that they intended to do whatever was regarded by Mr Tobin as necessary to secure the fiscal objective of the exercise. On the other hand, the respondent argued, and Kiefel J held, that the Heran brothers and Mr and Mrs Thomasz had a common intention that was inconsistent with the creation and the enforcement of the entitlement of the E & M Unit Trust as a beneficiary of the Raftland Trust. It is, therefore, necessary to examine the findings of fact made by Kiefel J. Central to her Honour's reasoning was the $250,000 paid to the Thomasz interests as the "price" for the E & M Unit Trust. It was, her Honour held, the intention of the Herans, and Mr and Mrs Thomasz, that the Thomasz interests were to receive that amount and no more. Following such receipt, they were to make no further claim on the Raftland Trust. (emphasis in original) Their Honours returned at [57] to the complexity of Mr Tobin's position as a factor relevant to determining the intention "of the Heran brothers, and Mr and Mrs Thomasz". 45 The Tribunal in the present case was not obliged to accept as sufficient the evidence of the Millars of a belief that their superannuation fund had made a deposit with the Samoan entity and that they had obtained a separate legally effective loan from the Samoan entity on the terms of the loan agreement rather than to have accessed their superannuation money by pretence. The evidence before the Tribunal gave rise to the question, as it did in Raftland, of whether the documents were to be taken at face value. I have had the benefit of reading the reasons of Davies J in draft before publishing our reasons and respectfully agree with her Honour's conclusions and reasons that the approach taken by the Tribunal was correct. The Millars may well not have had a positive intention to create a pretence, as the Tribunal found, but whether they had discharged their burden of proving that the transactions with the Samoan entity were not shams depended also upon establishing that they had created that which the impugned transactions purported to create. To discharge that burden it was necessary to look more broadly at the impugned transactions and at the complexity of Mr Gould's position. Mr and Mrs Millar, like the taxpayers considered in Raftland, were not lawyers and relied upon what they had been told by Mr Gould. The Tribunal recorded at [12] that the Millars had asked Mr Gould to recommend any further funding sources to obtain the balance needed to cover the purchase price, stamp duty and incidentals and that Mr Gould had explained that they could obtain the funds needed through a dealing with the Samoan entity. The evidence given by Mrs Millar of the advice from Mr Gould was recorded by the Tribunal at [12] as being in her words to the following effect: […] I have explored possible ways of financing the purchase of this property. You should be able to borrow a total of $600,000 from the Hua Wang Bank Berhad, and at a lower interest rate than is on offer from the local Australian banks. There is a condition though. You will need to place an equivalent amount of $600,000 on deposit with the Hua Wang Bank. It will be an interest-bearing deposit, with 5% simple interest per annum, and you can make the deposit using money held by your Australian superannuation fund. This means the deposit will ultimately increase the retirement nest egg in your Australian superannuation fund. Another advantage of getting the finance from the Hua Wang Bank is that they will not require a mortgage over any specific asset. You and [your husband] will have to personally guarantee the loan, but that is all. If your super fund has placed $600,000 on deposit that and the personal guarantee will give the Bank sufficient comfort that you are in a position to repay. Mr and Mrs Millar, like the Heran brothers and Mr and Mrs Thomasz in Raftland, may not have turned their minds to the complexity of the documents and transactions presented to them by their adviser, and may have had no reason to take them other than at face value. Mr and Mrs Millar, like the Heran brothers in Raftland, may have believed that their superannuation fund was making a legally effective deposit and that they were entering into a legally effective loan transaction which would have the legal effects they wished it to have, but the Tribunal was not bound to find, as his Honour observed at [133] on appeal, that they had discharged their burden of proof by their evidence of that belief. The evidence of Mrs Millar was little more than that she intended to effect whatever Mr Gould had advised and, to that extent, is of the same kind as that described in Raftland at [48] of an intention to do whatever their advisor regarded "as necessary to secure the fiscal objective of the exercise". Mr and Mrs Millar did not deal directly with anyone at the Samoan entity in respect of the transactions but dealt only through Mr Gould. The Millars needed to establish that they had entered into the transactions with the legal effects which the impugned transactions purported to have. They could not establish that only by their evidence that they believed Mr Gould when he informed them that the superannuation fund would be making a legally effective deposit and that they would be entering into a legally effective loan by contracting with the Samoan entity in the context in which they purported to do so. To rebut the shamming intention they needed, at least, to establish that they had entered into a legally effective loan with the Samoan entity and not merely that they believed Mr Gould that they had done so by accepting the arrangement he had put to them. They needed, in other words, to prove what the true position actually was and not only that they believed Mr Gould's representation of it. The evidence which the Millars were able to give fell short of disproving sham because they could not prove without further evidence that the transactions were as they purported to be. 46 The importance of evidence from Mr Gould to a consideration of whether the intentions of Mr and Mrs Millar were to create a façade was explained in some detail in the Tribunal's reasons at [37] to [53]. The inquiry for the Tribunal, as it described at [36], was whether there was ever an intention to be bound by the loan documents. An examination of subsequent behaviour was relevant to see how the behaviour aligned with the terms of the documents but the evidence of the Millars, without that of Mr Gould, failed to provide the explanation needed to discharge their burden. Mr and Mrs Millar were "passive, compliant participants to an arrangement presented to them by their trusted advisor, Vanda Gould". He was not called to give evidence to explain matters bearing upon whether what Mr and Mrs Millar did was to create a deposit by the superannuation fund and a genuine loan rather than to have accessed their superannuation funds to facilitate the purchase of the Sunshine Coast apartment. The Tribunal listed 14 issues in its reasons at [49] which Mr Gould, but not the Millars, might have been able to explain which bore upon whether the transaction was a sham. They may well have believed, as the Tribunal observed at [69], and as Mr Gould apparently informed them, that the superannuation fund was putting funds on deposit with the Samoan entity and that they were borrowing money from the Samoan entity, but that belief was insufficient to determine the inquiry. The fundamental factual inquiry was whether the $600,000 purportedly going to Mr and Mrs Millar from the Samoan entity was a pretence for their superannuation fund giving them a benefit of that amount. That factual inquiry depended upon whether the superannuation fund had made a legally effective deposit and whether Mr and Mrs Millar had thereafter entered into a legally effective loan with the Samoan entity. An inquiry into whether a sham was intended was only partly informed by what they had been told by Mr Gould in the same way as the intention of the Heran brothers in Raftland was said at [48] not to be irrelevant. An intention or desire by the Millars to achieve an outcome, however, is not sufficient to have achieved it. It may be true, as the Tribunal accepted, that Mr and Mrs Millar intended to effect what Mr Gould represented that they would effect by entering into the transactions, but what they intended by doing so could not rise above that which Mr Gould had placed before them. Mr and Mrs Millar did not act independently of Mr Gould to create a legally effective deposit by the superannuation fund and a legally effective loan to them. The finding of a legally effective deposit by the superannuation fund and a legally effective loan to Mr and Mrs Millar from the Samoan entity required evidence from which the Tribunal could confidently decide that a legally effective deposit and a legally effective loan had been created rather than being a disguise to enable Mr and Mrs Millar to access the money in their superannuation fund. It was the absence of that evidence that led the Tribunal to conclude that Mr and Mrs Millar had not discharged their burden of proof in light of the other evidence, including inferences, and the lack of evidence from Mr Gould, that the impugned documents and transactions were created for the purpose of providing a smokescreen to disguise the true position. Accordingly, I would dismiss the appeal. 47 It is only necessary to decide the Commissioner's notice of contention if the appeal is allowed. The Commissioner's notice of contention was that interest payable by the Millars to the Samoan entity was not deductible pursuant to s 26-25 of the Income Tax Assessment Act 1997 (Cth) ("the 1997 Act") because they had not paid interest withholding tax on interest deemed to have been paid pursuant to s 12-245 when read in conjunction with s 11-5 of Schedule 1 to the 1953 Act. The issues raised by the notice of contention were considered by Griffiths J in favour of the Commissioner at [176] to [183] although, as his Honour observed, it was strictly unnecessary for his Honour to determine the issues in the notice of contention. 48 Section 26-25 of the 1997 Act denies a deduction to a taxpayer who fails to withhold an amount required to be withheld under Subdivision 12-F in Schedule 1 to the 1953 Act. Section 12-245 in Subdivision 12-F to Schedule 1 to the 1953 Act obliged a borrower to remit withholding tax for interest payments made to an overseas person. The obligation to withhold an amount under that section arises when an amount is paid. Section 11-5 in Schedule 1 of the 1953 Act, however, extends the operation of s 12-245 to constructive payments. Section 11-5 provides: (1) In working out whether an entity has paid an amount to another entity, and when the payment is made, the amount is taken to have been paid to the other entity when the first entity applies or deals with the amount in any way on the other's behalf or as the other directs. (2) An amount is taken to be payable by an entity to another entity if the first entity is required to apply or deal with it in any way on the other's behalf or as the other directs. The predecessor to these provisions was in the former s 221YK of the 1936 Act. 49 The Commissioner contended that the Millars had paid interest to the Samoan entity within the meaning of s 11-5 pursuant to the terms of the loan facility agreement. No interest was in fact paid by the Millars to the Samoan entity because it was capitalised pursuant to clause 5.4 of the loan facility agreement but the Commissioner contended that the capitalisation of the interest under clause 5.4 came within the constructive payments contemplated by s 11-5. Clause 5 dealt generally with the payment of interest by the Millars to the Samoan entity. Clause 5.1 provided that they were to pay interest on the outstanding balance, but clause 5.4 gave the Samoan entity a discretion to capitalise the interest. Clause 5.4 provided: Capitalisation [The Samoan entity] may: (a) capitalise, upon an annual or such other periodical basis as Hua Wang Bank may determine, any part of any interest which becomes due and owing and is not paid on its due date, and interest is payable in accordance with this document upon capitalised interest; (b) continue to capitalise interest notwithstanding that as between Hua Wang Bank and the borrower the relationship of financier and customer may have ceased, any composition entered into or agreed to by Hua Wang Bank, any judgment or order against the borrower or any other thing. It was submitted for the Millars that the effect of this provision in the loan facility agreement did not come within the contemplation of constructive payments in s 11-5 of Schedule 1 to the 1953 Act. In that context it was submitted for the Millars that s 221YK(3) of the 1936 Act had previously specifically provided that the capitalisation of interest was deemed to be an amount paid but that the subsequent provision in s 12-245 of Schedule 1 to the 1953 Act did not. 50 Section 11-5 is expressed in broad terms to capture constructive payment. Its breadth is apt to capture the operation of an agreement by which a person obliged to make a payment is contractually bound to terms permitting the lender to capitalise interest payments in its discretion. His Honour said at [181] to [183]: 181 Under the relevant provisions of the ITAA 1936, it was made unambiguously clear that interest was deemed to have been paid (even though no actual payment was made if the interest was capitalized. That is because the capitalization was one of several individual matters which were expressly identified in s 221YK(3)). It is notable, however, that the individual matters so particularised were also accompanied in s 221YK(3) by a catch-all clause which was expressed in terms of "or otherwise dealt with on behalf of the other person or as the other person directs". 182 It is evident that under s 11-5 of the TAA 1953, the particular matters or instances were omitted in the provision relating to whether or not a constructive payment has been made. The legislation simply talks in terms of an amount being taken to have been paid "when the first entity applies or deals with the amount in any way to the other's behalf or as the other directs". That terminology is substantially similar to the catch-all clause in s 221YK(3)(a). The drafting of this aspect of the legislation dealing with withholding tax has been simplified by omitting particular instances or matters and simply relying upon the more high level expression of the concept of an entity applying or dealing with an amount in any way on another entity's behalf or as the other entity directs. That broader concept encompasses the particular instances which were identified in the earlier legislation. 183 There is nothing in the Explanatory Memorandum to suggest an intention to change the substance of s 221YK(3). Despite the change in terminology, I would be satisfied that the legal position has not relevantly altered under the relevant provisions of the TAA 1953. I respectfully agree with his Honour's reasons and conclusion. The contractual ability by the Samoan entity to capitalise interest pursuant to clause 5.4 is an application or dealing with the amount on behalf of the borrowers or as directed by them through the terms of the loan facility agreement, which included clause 5.4. The capitalisation effected pursuant to clause 5.4 is not akin to the debtor merely refraining from payment of a debt at the request of the creditor as was considered in Brent v Commissioner of Taxation (1971) 125 CLR 418 at 430. It may be that, in an economic sense, the Samoan entity capitalising the interest payable by the Millars "got nothing except a new obligation to pay in exchange for an existing obligation [and that it] was no nearer to getting [its] money or of transferring it into anything of any value" (Permanent Trustee Co of New South Wales v Federal Commissioner of Taxation (1940) 2 AITR 109 per Rich J), but the application of s 12-245, by its extension in s 11-5 to constructive payments, does not depend upon such considerations. The section is triggered by a dealing on behalf of another or by a direction by that person rather than, for instance, whether the dealing or direction results in the lender receiving something in exchange for an existing obligation or was nearer to receiving money or of transferring the new obligation into something of value. A dealing may be on behalf of another where, as by application of clause 5.4, the obligation to pay interest is capitalised pursuant to the terms agreed between contracting parties. The capitalisation effected by clause 5.4 may also be seen to be directed by the Millars notwithstanding that the Samoan entity had a discretion under clause 5.4; clause 5.4 included a direction by the Millars that the interest payable by them could be capitalised by the Samoan entity in accordance with its terms. Accordingly, I would, if it were necessary to decide the matter, allow the Commissioner's notice of contention. I certify that the preceding thirteen (13) numbered paragraphs are a true copy of the Reasons for Judgment herein of the Honourable Justice Pagone.

DAVIES J: 51 There are two issues in this appeal. The first issue is whether the primary judge was correct to hold that the Administrative Appeals Tribunal ("the Tribunal") did not err in law in reaching its conclusion that the appellants ("the taxpayers") had not discharged their onus of proving that a loan arrangement they had entered into with a Samoan entity, Hua Wang Bank Berhad ("Hua Wang"), was not a sham ("the sham issue"). The second issue is whether the primary judge was correct to hold that the taxpayers were required by s 12-245 of Sch 1 to the Taxation Administration Act 1953 (Cth) ("the TAA") to pay withholding tax on the interest that was capitalised under the terms of that loan arrangement, and the failure to do so meant that the taxpayers were precluded by s 26-25 of the Income Tax Assessment Act 1997 (Cth) ("the 1997 Act") from deducting the interest ("the withholding tax issue"). The withholding tax issue only arises if the conclusions of the Tribunal and the primary judge were in error on the sham issue.

the sham issue 52 The parties were not in dispute about the basic facts. 53 In June 2000, the taxpayers were purchasing an apartment for $1.1 million, which was to be wholly debt funded. They borrowed $600,000 from the St George Bank and a further $600,000 was required. They asked their accountant and financial advisor, Mr Vanda Gould ("Mr Gould") if he could recommend a funding source to provide the additional funds. Mr Gould recommended that they borrow from Hua Wang. Mrs Millar's evidence was that Mr Gould told them that they should be able to borrow the $600,000 at a lower interest rate than was then available from local Australian banks, but a condition of the loan was that they had to place an equivalent amount of $600,000 on deposit with Hua Wang and they would need to give a personal guarantee. He told them that the deposit would earn 5% simple interest per annum. He also told them that they could use money from their Australian superannuation fund to make the deposit. 54 The taxpayers received a letter of offer from Hua Wang dated 1 July 2000 for a loan of $750,000 for a term of five years "supported by such security that the Hua Wang Bank's solicitors and accountants may consider necessary upon further investigation". The accountants were said to be the firm of "Messrs Gould Ralph & Company". There was no express mention in the letter of offer that it was a condition of the loan that the taxpayers place $600,000 on deposit with Hua Wang. 55 The taxpayers accepted the offer and entered into a loan facility agreement with Hua Wang with effect from 1 July 2000. 56 On 11 October 2000, $600,000 was transferred from the taxpayers' Australian superannuation fund to Hua Wang. Three days later, on 14 October 2000, Hua Wang transferred $600,000 to the trust account of the solicitors who were acting for the taxpayers on the property purchase. 57 The loan was purported to be renewed on 1 June 2005, one month before the repayment date of the initial advance. 58 The Tribunal found that the taxpayers did not deal directly with anyone at Hua Wang in relation to these arrangements and that all their dealings had been through Mr Gould. The evidence also disclosed that Mr Gould was previously a principal of Messrs Gould Ralph & Company and that Mr Gould also had a close connection with Hua Wang. Hua Wang was incorporated in Samoa in 1994 and under Hua Wang's banking licences, it was authorised to deal only with clients of Mr Gould. Mr Gould did not give evidence in the Tribunal. 59 The Commissioner included the amount of $600,000 in the taxpayers' assessable income pursuant to s 26AFB(3) of the Income Tax Assessment Act 1936 (Cth) ("the 1936 Act") as a benefit received by them from their superannuation fund. The Commissioner disallowed the taxpayers' objections against the assessments and the taxpayers sought review of the Commissioner's objection decisions in the Tribunal. The taxpayers bore the onus of proof that the assessments were excessive: s 14ZZK of the TAA. 60 In the Tribunal, the Commissioner accepted that Hua Wang had paid $600,000 to the taxpayers but argued that the loan documentation was a sham and disguised the real transaction, namely that the taxpayers had accessed their Australian superannuation fund to purchase the apartment. The taxpayers' case was that they had borrowed the money from Hua Wang and to the extent they had not paid it back, plus interest, they remained obliged to do so.

The Tribunal decision 61 The Tribunal held that the taxpayers had not discharged their onus. The Tribunal found a "real disparity" between the transaction documents and what in fact transpired, which the taxpayers had either been unable to explain or had given explanations that were not plausible. The Tribunal found that the "main reason for this is that the taxpayers were more or less passive, compliant participants in an arrangement presented to them by their trusted adviser, Vanda Gould", who was "intimately familiar with [Hua Wang's] affairs". The Tribunal accepted that Mr Gould told the taxpayers that they were putting moneys from their superannuation fund on deposit with Hua Wang and borrowing funds from Hua Wang personally but found "they did not understand the entirety of the agreement they thought they were making with [Hua Wang]" and whilst "the taxpayers were able to convince themselves that these arrangements with [Hua Wang] were orthodox", the taxpayers had approached the arrangement uncritically, not concerning themselves with the detail, only interested in the outcome. The Tribunal stated at [50] that Mr Gould was uniquely placed to throw light on the disparities, reasoning that: Not only has he been intimately familiar with the taxpayers' affairs for several decades, he is intimately familiar with [Hua Wang's] affairs as well. 62 Mr Gould was not called as a witness and the Tribunal did not accept that a valid reason had been given for his failure to give evidence. 63 At [56] the Tribunal set out the taxpayers' submission that they discharged their onus of proof if the Tribunal accepted that they signed the loan agreements in the belief they were binding legal documents that could be enforced against them. At [57], the Tribunal summarised the submission in these terms: In other words, all the taxpayers need to do is present evidence of their subjective intention - even though they really know nothing about the detail of the documents - and if I accept it they have disproved sham. 64 The Tribunal did not accept that submission. At [58] the Tribunal stated: Never mind that the transaction, objectively viewed, looks too good to be true. Never mind that the person who does know something about the transaction, and who introduced the taxpayers to it, gives no evidence about his intention. Never mind that that same person is so close to the other contracting party, [Hua Wang], that his clients are the only people who can deal with it. Never mind that he may well be the person who, on [Hua Wang's] side, structured the arrangement. His intention, which may very well be brought home not only to the taxpayers but to [Hua Wang] as well, is irrelevant. 65 The Tribunal stated at [59]: In the circumstances, not only is the intention of the taxpayers not determinative, it is probably not even relevant. The relevant intention is that of the puppet master, not the puppets. And I have no idea what that intention was. 66 In this appeal, it was submitted for the taxpayers that the law at [57] was correctly stated but the law at [59] was incorrectly stated. 67 The Tribunal concluded at [67]-[69] : 67. The taxpayers have not satisfied me that the documents taken at face value represent the real agreement between the parties. In particular, they have not satisfied me that the loan documents are anything other than a façade to disguise the reality of the arrangements, which is that the $600,000 is a distribution to them of money from their superannuation fund, with [Hua Wang] an intermediary. In summary, the taxpayers have not disproved sham. 68. I conclude, therefore, that in 2000 the taxpayers improperly accessed their superannuation funds to purchase the Sunshine Coast apartment. The documents that were created at the time were created for the purpose of providing a smokescreen to disguise the true position. The taxpayers did not truly place the $600,000 on deposit with [Hua Wang] and [Hua Wang] did not truly lend the $600,000 to the taxpayers. The money was transferred to Samoa to make it look as though it was being put on deposit, in the name of the superannuation fund, for the purpose of earning interest. The subsequent transfer of the identical amount to Australia was not an advance of loan funds but a return of the money sent over only three days before. The purported placing of funds on deposit with [Hua Wang] and the loan documentation are mere window dressing. 69. Having said that, I accept that the taxpayers themselves were unaware, at the time, that what was being created around them was a fiction. They believed what Mr Gould told them: that they were putting funds on deposit with [Hua Wang], and that they were borrowing money from [Hua Wang]. That is despite the fact that, if they had taken a step back from what was taking place, they may well have realised that what Mr Gould was offering them was too good to be true. And as time passed, with no receipt of interest on the alleged deposited funds, and with [Hua Wang] not calling on them to make actual interest payments on their "borrowings", surely there must have come a time when the reality started to dawn on them. If it did, they did nothing about it. And if it did not, then it must be because of their unwavering faith in Vanda Gould, their trusted adviser for over 40 years.

the decision BELOW 68 On appeal, the primary judge found no error of law in the decision of the Tribunal on the sham issue. A critical part of the primary judge's reasons appears at [133] where his Honour stated: It seems to me that the core of this appeal essentially relates to the [taxpayers'] burden under s 14ZZK of the TAA 1953. To discharge this burden the [taxpayers] had to defeat the Commissioner's claim that the loan was a sham. In the particular circumstances of this case it was insufficient for them simply to persuade the AAT (as they did) that they genuinely believed and intended that the transaction was a loan. The difficulty the [taxpayers] faced was that, as the AAT found, they placed their total trust and faith in Mr Gould ([83] of the AAT's reasons for decision), such that Mr Gould's actions were "properly imputed to the taxpayers" (at [84]). Once that point was reached, and given all the unanswered questions regarding the transaction which the AAT found Mr Gould could probably answer because of his prominent role in implementing and administering the arrangements (see [46]-[50]), it was a short and legitimate further step for the AAT to find that, because the evidence left unclear what Mr Gould's intention was, the [taxpayers] failed to discharge their burden of demonstrating that the assessments were excessive. It may well be that, in a different set of circumstances, the taxpayers' subjective intentions would carry more if not decisive weight. In my view, however, the [taxpayers] have failed to establish any legal error in the AAT's approach in the particular circumstances here. 69 At [137] his Honour rejected the argument that the Tribunal erred in law by not taking the taxpayers' subjective intentions into account, stating: In the particular circumstances of this case and having regard to the AAT's findings concerning the [taxpayers'] lack of knowledge of many aspects of the transaction and that they were passive and compliant participants in an arrangement presented to them by Mr Gould, it was open to the AAT to find at [59] that the [taxpayers'] intention was not determinative and was "probably not even relevant". It is significant to note the express reference by the AAT in [59] of its reasons for decision that these findings were made in the circumstances of the particular case.

the appeal 70 The grounds of appeal on the sham issue were that: 1. The primary judge erred by concluding (at [133]) that the existence of sham does not necessarily depend on the subjective intentions of the parties to the impugned transaction. Consistent with Coshott v Prentice [2014] FCAFC 88 at [64], the primary judge should have concluded the Tribunal made an error of law at [59] of the Tribunal reasons where the Tribunal identified the relevant intention as that of a non-party to the transaction. 2. The primary judge erred by concluding (at [137]) that the Tribunal was permitted to treat the subjective intentions of the parties to the transaction as irrelevant to the existence of sham. The primary judge should have concluded the Tribunal made an error of law at [59] of the Tribunal's reasons where the Tribunal said the intentions of the parties to the transaction were 'probably not even relevant'. 3. The primary judge erred (at [136]) by failing to conclude that the facts found by the Tribunal were necessarily outside s.26AFB of the Income Tax Assessment Act 1936. The primary judge should have found that, because the parties to the transactions did not intend the transactions to be a façade, the transactions were not a sham and s.26AFB did not apply.

The parties' submissions 71 The taxpayers submitted that the Tribunal's approach to the sham issue reflected three interrelated errors of law: (a) As to ground 1: the Tribunal erred by refusing to treat the taxpayers' subjective intention as determinative of whether the loan was a sham. This was an error because sham is determined by ascertaining the intentions of the parties and the test of the parties' intentions is subjective in nature. (b) As to ground 3: the Tribunal's factual finding that the taxpayers did not intend the loan to be a sham meant the only possible conclusion was that a loan existed on the terms set out in the loan agreement. There was an error of law when the Tribunal did not draw the only conclusion that was open to it on the facts. (c) As to ground 2: if, contrary to the foregoing, it was permissible for the Tribunal to determine whether the loan was a sham by reference to the intention of Mr Gould, it was an error of law for the Tribunal not to ascribe weight to the subjective intentions of the taxpayers. The subjective intention of the parties to a transaction is a mandatory consideration when the transaction is alleged to be a sham. 72 It was submitted that the reasons of the primary judge at [133] contained the same error of principle in concluding that there was no legal error in the Tribunal's approach in not attributing decisive weight to the subjective intentions of the taxpayers, as found by the Tribunal, and finding that the relevant intention was that of Mr Gould. 73 The Commissioner argued that the taxpayers' contention that both the primary judge and the Tribunal fell into error by refusing to accept the taxpayers' evidence of their actual intentions regarding the loan arrangement with Hua Wang as determinative on the issue of sham was wrong and should be rejected for the following three reasons. 74 First, that the taxpayers' submissions paid no regard to the significance of the Tribunal's unchallenged findings at [37] that the taxpayers were "passive, compliant participants" in a set of loan arrangements that were effectively orchestrated on both sides of the transaction by Mr Gould. It was submitted that the evidence before the Tribunal established that Mr Gould was the taxpayers' agent for all purposes of the loan agreement other than the execution of the written documents and, in the particular factual circumstances of this case, it was open to the Tribunal to conclude (and for the primary judge to accept) that Mr Gould's knowledge and intention could properly be imputed to the taxpayers. 75 Secondly, the taxpayers had the onus of proving that the loan agreement was not a sham in order to establish that the assessments were excessive. It was submitted that "they made a forensic decision not to call the orchestrator of the loan arrangements and their agent for the purposes of the agreement, whose intention was thereby determinative on the issue of sham". It was submitted that, in the circumstances, the taxpayers' burden properly extended to demonstrating that Mr Gould did not have a shamming intent, which they failed to do. 76 Thirdly, it was submitted that it was not correct for the taxpayers to assert that, as a matter of law, their evidence of their subjective beliefs was sufficient to discharge their burden of proof. It was submitted that the subjective intention of the taxpayers had to be determined in light of all the evidence concerning the transaction as a whole, consistent with the approach of the majority of the High Court in Raftland Pty Ltd v Commissioner of Taxation (2008) 238 CLR 516; [2008] HCA 21.

Raftland Pty Ltd v Commissioner of Taxation 77 Sham was most recently considered by the High Court in Raftland Pty Ltd v Commissioner of Taxation (2008) 238 CLR 516; [2008] HCA 21. In that case, a finding of sham made at first instance was upheld by the High Court. 78 The facts in broad compass were that the Herans had accumulated substantial profits in their corporate group and sought to reduce their tax liability by having the profits distributed to an unrelated unit trust controlled by the Thomasz which had substantial losses ("the Unit Trust"). To achieve this, the Herans had the Unit Trust appointed as a beneficiary of the Raftland Trust (which the Herans controlled) and Raftland then passed two resolutions for distribution of the trust income to the Unit Trust. One resolution was for the distribution of $250,000 and the other resolution was for the distribution of the balance of the trust income for the relevant income year. In fact only $250,000 was actually distributed. The Commissioner assessed Raftland on the whole of the trust income, initially relying on Pt IVA of the 1936 Act, but at trial supported the assessment on the basis that the resolutions were a sham. 79 It was not in dispute before Kiefel J at first instance that the fiscal objective of the arrangement between the Herans and the Thomasz was to enable the Herans to obtain the benefit of the tax losses in the Unit Trust and the attainment of that fiscal objective depended on the legal rights created. Kiefel J also found at [83] that the only reason why the Raftland Trust was created with the Unit Trust as a beneficiary was to enable income to be channelled to a trust which had accumulated losses. However, as her Honour noted, a "sham" refers to steps which take the form of a legally effective transaction, but which the parties do not intend should have the apparent, or any, legal consequences. Kiefel J had regard to the subsequent conduct of the parties and found a disparity between the legal rights created and the actual application of the funds. The evidence showed that the Unit Trust only ever received $250,000, and that the parties did not intend that any further payment would be made by Raftland or received by the Thomasz. Kiefel J held that Raftland had the burden of proving that there were distributions of trust income, which it had not discharged. Her Honour stated at [89]: The true nature of the distributions is to be determined by reference to all of the evidence. Raftland is required to prove that there were distributions of trust income and there is evidence which strongly suggests that this was not the parties' common intention. Rather Raftland was to pay and the E&M Unit Trust was to receive a sum for control of the Trust and access to its losses. No further dealings were intended to take place. The onus then shifts to Raftland to show that these inferences, concerning the parties' intentions, are not correct. It might have done so by direct evidence from the parties or to what had taken place between them, if that had been helpful. Having not done so it has not established that there were distributions of income. Her Honour accordingly concluded that the resolutions and appointment of the Unit Trust as a beneficiary were a sham: Raftland Pty Ltd v Commissioner of Taxation (2006) 62 ATR 49; [2006] FCA 109, [90]. 80 The Full Federal Court disagreed with Kiefel J's conclusion: Raftland Pty Ltd v Commissioner of Taxation (2007) 65 ATR 336; [2007] FCAFC 4. Edmonds J (who gave the principal judgment) reasoned that the creation of a present entitlement in the Unit Trust to the Raftland Trust income was "at the forefront of the intentions of those charged with responsibility for establishing the Raftland Trust" and "the attainment of that fiscal objective drove the transaction from the point of view of its participants": at [81] and [83]. 81 The High Court held that notwithstanding the fiscal objective, the legal rights created did not reflect the intentions of the parties. In a joint judgment, Gleeson CJ, Gummow and Crennan JJ agreed with the approach taken by Kiefel J. The majority noted that it was central to Raftland's argument that the amounts that Raftland had resolved to distribute to the Unit Trust were amounts to which the Unit Trust was entitled but stated that "the apparent discrepancy between the entitlements appearing on the face of the documents and the way in which the funds were applied gave rise to a question of whether the documents were to be taken at face value" and, in such a case, the parol evidence rule (which prevents a party from presenting evidence to contradict the terms of a written agreement) did not apply in determining the parties' intention. The majority stated at [49] that the parties' subsequent conduct was evidence of their intention and, at [58], that Kiefel J was fully justified on the evidence as a whole in finding that the parties did not intend the Unit Trust to receive the whole of the trust distributions, and all the Unit Trust was to receive or seek was $250,000 despite the Unit Trust's apparent legal entitlement and the fiscal objective of the transaction. The majority observed that the fact that the transaction was driven by a fiscal objective did not deny the possibility that the documents might not be intended by the parties to have legal effect according to their tenor: at [56]. Kirby and Heydon JJ gave separate concurring judgments. 82 Raftland is clear authority that where sham is in issue, the Court is not confined to examining the documentation alone in determining the parties' intentions. The Court may examine and draw inferences from other evidence, including the parties' explanations as to their dealings and their subsequent conduct. Their subsequent conduct is relevant as evidence of their intentions, either because such conduct is consistent with the transactional documents or because such conduct is not consistent. In a proceeding under Pt IVC of the TAA in which the taxpayer has the onus of proving that the assessment is excessive, this means that where the transactional documents cannot be taken at face value because of apparent discrepancies between the legal rights created and the actual dealings, or where there is other evidence that indicates, or from which the inference may be drawn, that the parties' intention is or may be different from the apparent arrangement, the taxpayer does not discharge the onus of proof without establishing that the parties did intend the documents to have legal effect according to their tenor.

Decision 83 In the present case, the taxpayers' case was that the amount of $600,000 should not have been included in their assessable income under s 26AFB of the 1936 Act because the $600,000 came to them by way of a loan from Hua Wang, not from accessing money in their superannuation fund. The taxpayers accordingly had the onus of proving that the loan documents were intended by them to have the legal effect which they purported to create: that is, they had a genuine loan from Hua Wang. 84 The Tribunal's starting point at [36] was to examine the subsequent behaviour of the parties to see how it aligned with the terms of the documents and the Tribunal identified several apparent discrepancies, including that the evidence did not show that the superannuation fund had ever earned any interest on the deposit with Hua Wang. The approach of the Tribunal in looking at the subsequent conduct of the parties as evidence of their intention was entirely orthodox. As the Tribunal found, the taxpayers could not themselves explain the disparities because they were "passive, compliant participants in an arrangement presented to them by their trusted advisor, Vanda Gould" who did what Mr Gould told them to do, and "did not understand the entirety of the agreement they thought they were making with [Hua Wang]". The Tribunal was not bound to find that the taxpayers did not have a shamming intention because they believed what they had been told by Mr Gould about the loan transaction. The onus upon them was to prove that they intended the legal relations created by the loan arrangement with Hua Wang to take effect on their terms. In light of the evidence that showed "serious discrepancies between what [was] said in the loan documents and what actually happened", the taxpayers could not rely on the transaction documents alone to prove that they did not have a shamming intention. As in Raftland, the fact that the loan arrangement with Hua Wang was driven by the taxpayers' need to obtain funds did not deny the possibility that the loan arrangement was not intended by the parties to have legal effect on its terms. The apparent discrepancies between the transaction documents and what the parties actually did invited inquiry into whether the transaction documents were a pretence. The Tribunal did not wrongly substitute Mr Gould's intention for that of the taxpayers in determining that the taxpayers had not discharged their burden of proof. 85 The Commissioner's submission sought to defend the approach of the Tribunal on the basis that the evidence before the Tribunal established that Mr Gould was the taxpayers' agent for all purposes of the loan agreement, other than the execution of the written documents. That was not the approach of the Tribunal though, and agency need not be shown to support the correctness of the Tribunal's decision. The Tribunal accepted that the taxpayers believed what Mr Gould told them, that they were putting funds on deposit with Hua Wang and they were borrowing money from Hua Wang, but the taxpayers could not discharge the onus on them without establishing that they intended the transaction documents to have legal effect on their terms. However, the taxpayers knew nothing about the details of the documents and were unable to explain why the parties had not acted upon their legal rights consistently with those transaction documents. Mr Gould's intention became relevant because, on the evidence, he was the person who did know something about the transaction. In the absence of evidence from Mr Gould who may have been able to explain those discrepancies, the Tribunal was not satisfied that the transaction documents taken at face value did represent the real agreement between the parties. There was no wrong application of principle by the Tribunal in regarding Mr Gould's intention as relevant to the determination as to whether the taxpayers had discharged their onus and the primary judge was correct to conclude that no legal error was shown in the Tribunal's approach.

The withholding tax issue 86 The issue raised by the Commissioner's notice of contention was whether the taxpayers were required by s 12-245 of Sch 1 to the TAA to pay withholding tax on the interest that was capitalised under the terms of cl 5.4 of the loan facility agreement between the taxpayers and Hua Wang. 87 Clause 5.4 of the loan facility agreement provided that Hua Wang may: (a) capitalise, upon an annual or other such periodical basis as Hua Wang Bank may determine, any part of any interest which becomes due and owing and is not paid on its due date, and interest is payable in accordance with this document upon capitalised interest; and (b) continue to capitalise interest notwithstanding that as between Hua Wang Bank and the Borrower the relationship of financier and customer may have ceased, any composition entered into or agreed by Hua Wang Bank, any judgment or order against the Borrower or any other thing. 88 The obligation to withhold an amount from an interest payment to an overseas person is imposed by s 12-245 of Sch 1 to the TAA which provides: 12-245 Interest payment to overseas person An entity must withhold an amount from interest (within the meaning of Division 11A of Part III of the Income Tax Assessment Act 1936) it pays to an entity, or to entities jointly, if: (a) the recipient or any of the recipients has an address outside Australia according to any record that is in the payer's possession, or is kept or maintained on the payer's behalf, about the transaction to which the interest relates; or … 89 Section 12-245 must be read in conjunction with s 11-5 of Sch 1 to the TAA which provides: 11-5 Constructive payment (1) In working out whether an entity has paid an amount to another entity, and when the payment is made, the amount is taken to have been paid to the other entity when the first entity applies or deals with the amount in any way on the other's behalf or as the other directs. (2) An amount is taken to be payable by an entity to another entity if the first entity is required to apply or deal with it in any way on the other's behalf or as the other directs. 90 The taxpayers argued that unlike the predecessor provision to s 12-245, which was s 221YK(3)(a) of the 1936 Act, s 12-245 does not apply to the capitalisation of interest as a matter of construction. It was submitted that it was a matter of considerable importance that s 221YK(3)(a) expressly deemed an amount of interest to be paid at the time it was capitalised, whereas s 12-145 contains no similar deeming provision. It was submitted further that the authorities indicate that an amount is not "applied or dealt with" when an amount of interest is converted into a different form of debt obligation to the same lender. 91 The primary judge considered that the change of wording in s 11-5 preserved the substance of s 221YK(3)(a), despite the change in terminology, and formed the view that he would have upheld the Commissioner's notice of contention, if it was necessary to determine. 92 Section 221YK(3)(a) provided that: (3) For the purposes of this Division: (a) interest or a royalty shall be deemed to have been paid by a person to another person although it is not actually paid over to the other person but is reinvested, accumulated, capitalized, carried to any reserve, sinking fund or insurance fund however designated, or otherwise dealt with on behalf of the other person or as the other person directs; and … 93 His Honour reasoned as follows at [181]-[183]: 181. Under the relevant provisions of the ITAA 1936, it was made unambiguously clear that interest was deemed to have been paid (even though no actual payment was made if the interest was capitalized. That is because the capitalization was one of several individual matters which were expressly identified in s 221YK(3)). It is notable, however, that the individual matters so particularised were also accompanied in s 221YK(3) by a catch-all clause which was expressed in terms of "or otherwise dealt with on behalf of the other person or as the other person directs". 182. It is evident that under s 11-5 of the TAA 1953, the particular matters or instances were omitted in the provision relating to whether or not a constructive payment has been made. The legislation simply talks in terms of an amount being taken to have been paid "when the first entity applies or deals with the amount in any way [on] the other's behalf or as the other directs". That terminology is substantially similar to the catch-all clause in s 221YK(3)(a). The drafting of this aspect of the legislation dealing with withholding tax has been simplified by omitting particular instances or matters and simply relying upon the more high level expression of the concept of an entity applying or dealing with an amount in any way on another entity's behalf or as the other entity directs. That broader concept encompasses the particular instances which were identified in the earlier legislation. 183. There is nothing in the Explanatory Memorandum to suggest an intention to change the substance of s 221YK(3). Despite the change in terminology, I would be satisfied that the legal position has not relevantly altered under the relevant provisions of the TAA 1953. 94 As the primary judge stated, the terminology of the phrase in s 11-5 "applies or deals with the amount in any way on the other's behalf or as the other directs" is substantially similar to the catch-all clause in s 221YK(3)(a). It follows that the application of s 11-5 in the present case does not depend on whether the provision makes express reference to the capitalisation of interest. As a matter of construction of s 11-5, the absence of an express deeming that interest is paid if it is capitalised does not mean that the section was not intended by Parliament to apply to capitalised interest at all. In each case, it must depend on whether the interest was applied or dealt with "in any way" by the first entity on the other entity's behalf or as the other entity directed. Thus the taxpayers' submission that there was a clear policy rationale for removing the act of capitalising interest from the withholding tax regime does not answer the question as to whether, in a particular case, the interest is taken to have been paid within the terms of s 11-5. Furthermore, and contrary to the taxpayers' submissions, nor do authorities on the phrase "applied or dealt with" as used in different statutory contexts provide the answer to whether an amount is taken to have been paid within the meaning of s 11-5. 95 In the present case, the parties had a contractual arrangement pursuant to which the taxpayers had agreed that Hua Wang may capitalise interest which was due and unpaid on the loan and it was not in dispute that Hua Wang exercised that contractual right. The taxpayers' agreement that Hua Wang may capitalise interest as provided for in cl 5.4 of the loan agreement is apt to fall within the ordinary language of the provision of s 11-5 as an amount applied or dealt with by the taxpayers on behalf of Hua Wang or as Hua Wang directed.

conclusion 96 Accordingly I would dismiss the appeal. I certify that the preceding forty-six (46) numbered paragraphs are a true copy of the Reasons for Judgment herein of the Honourable Justice Davies.