1. The taxpayers had had their eye on a particular apartment on the Queensland Sunshine Coast for some time, and in about June 2000 they decided to make an offer to purchase it. Their offer of $1.1 million was accepted by the owner.
2. The purchase was financed in part by a loan of $600,000 from the St George Bank. There is no dispute about that. The dispute centres on the remainder of the purchase money, and specifically, where it came from and under what circumstances.
3. The taxpayers say that a further $600,000 came to them by way of loan from a bank, incorporated in Samoa in 1994 and known as Hua Wang Bank Berhad ("HWBB"). They rely principally on a document styled "Loan Facility Agreement"[1] between them and HWBB, and dated 1 July 2000, but also on:
   • (a) a letter to them of the same date and in which HWBB offered to extend to them a loan facility of $750,000 for a period of five years[2]; and
   • (b) a further letter dated 1 June 2005 in which HWBB indicated its preparedness to "roll-over" the existing loan for a further five years[3].
4. The Commissioner says the arrangement between the taxpayers and HWBB was a sham, that the documents do not represent the true relationship or the true dealings between them. Mr McGovern SC, counsel for the Commissioner, described the purported loan as a "fiction", a "fiasco", and as mere "window dressing", but the taxpayers deny that. They say they truly borrowed the money from HWBB, and to the extent they have not paid it back, plus interest, they remain obliged to do so.

1. The taxpayers were introduced to HWBB by their long-term accountant and financial adviser, Vanda Gould, in 1994. Shortly after that introduction the taxpayers' company entered into a loan with HWBB. The terms of that loan are not before me but it seems the loan was renewed five years later, in 1999, with a loan facility amount at that time of $2 million[4].
2. HWBB itself was, as I have indicated above, incorporated in Samoa in 1994. Throughout the relevant years it held a banking licence, initially described as a "B" Class Off-shore Banking Licence under the Off-Shore Banking Act 1987 (Samoa) and later as a "B2" Class International Banking Licence under the International Banking Act 2005 (Samoa). I was informed by counsel, and I accept, that its licences only authorised it to deal with clients of Mr Gould.

1. The taxpayers knew they did not have the funds available to buy the Sunshine Coast apartment; they would have to borrow. They knew they could get $600,000 from St George but they needed that much again, to cover the purchase price, stamp duty and incidentals. They asked Vanda Gould if he could recommend any further funding sources. He came back with the news that they should be able to borrow the money from HWBB. Mrs Morrison says that Mr Gould explained the position to her in words to the following effect[5]:

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.

1. On 11 October 2000, $600,000 was transferred from the taxpayers' superannuation fund account to HWBB[6]. Three days later, on 14 October 2000, HWBB transferred $600,000 to the trust account of the solicitors who were acting for the taxpayers on the property purchase[7]. The purchase was completed within a few days after that.
2. The taxpayers did not deal directly with anyone at HWBB in relation to these dealings. All their dealings were through Mr Gould[8].

1. Both taxpayers identify the document commencing at T11-232 of Exhibit R1 as an "application for loan from the Hua Wang Bank"[9] but that is not what it is. It is the letter of offer made by the Bank, apparently in response to an application. The application itself is not before me.
2. The letter of offer is dated 1 July 2000 and is signed by "Bede Carran, Director" of HWBB. It indicates that the taxpayers actually applied for $750,000, not $600,000, and that is the amount the Bank offered them. The purpose of the loan is described as "[t]o facilitate property investment", its term is five years and the repayment date is 30 June 2005.
3. The offer explains that the loan is to be "supported by such security that the Hua Wang Bank solicitors and accountants may consider necessary upon further investigation" and that HWBB requires the loan to be guaranteed by the taxpayers (even though they are themselves the borrowers). The offer letter also informs the taxpayers that the accountants for HWBB are "Messrs Gould Ralph & Company".
4. Malcolm Beard, a chartered accountant and a partner since 2001 in the audit firm practising under the name Gould Ralph, explained in his witness statement[10] that Vanda Gould was once, but is no longer, a principal of Gould Ralph. Mr Beard also said that Mr Gould ceased his "professional participation in Gould Ralph" by the end of 1998 - in other words, before the letter of offer to the taxpayers, dated 1 July 2000. Precisely how HWBB's nomination of Gould Ralph as its accountants is to be reconciled with Mr Beard's statement that he was not aware that Gould Ralph had ever done any work for HWBB[11] remains, unfortunately, unclear.
5. Special Conditions set out in the letter of offer include the following:

...

6. Income Tax Returns for the Guarantor are to be supplied to Hua Wang Bank for three years prior to the date of this application.

7. Hua Wang Bank is to be supplied with an asset and liability statement for the Guarantor(s) and the said statement is to be signed and dated.

8. The loan facility is to be reviewed on an annual basis. Financial Statements for the Applicant and Tax Returns of the Guarantor (duly certified) are to be provided for the period ending 30 June each year by no later than 1 October of that year for review by Hua Wang Bank.

...

1. An undated Form of Acceptance[12] indicates that the taxpayers accepted the offer on the terms and conditions stated in the offer letter.

1. The Loan Facility Agreement between HWBB and the taxpayers as Borrower[13] is said to be "made effective 1 July 2000". The Facility Limit is $750,000.
2. Clause 5.1 requires the Borrower to pay interest on each Interest Payment Date - which falls on 30 June after the payment of any advance by HWBB - but clause 5.4 permits HWBB to capitalise any part of the interest that becomes due but is not paid on the due date. The interest has in fact been capitalised every year. As a result the taxpayers have not physically paid any interest to HWBB at all. Mrs Morrison had a vague feeling that interest may have actually been paid in the early stages[14] but I find that is not the case. The outstanding balance at the hearing date was said to be about $1.5 million.
3. Clause 5.1 also provides that interest is generally to be calculated at the Lower Rate but in the event of a specified default it is payable at the Higher Rate, which is "five per centum (5%) per annum above the Lower Rate". The Lower Rate is as set out in the offer letter, namely:

The Lower Rate will be the LIBOR rate prevailing at the date of the advance in the London money market for borrowings by prime banks such as Hongkong & Shanghai Banking Corporation Limited plus a margin of 5%.

1. There is also an Unused Facility Fee payable by the Borrower, calculated at 1.5 per cent of any unused portion of the Facility.
2. "LIBOR", referred to in the definition of the Lower Rate, is not defined in the offer letter or the Loan Facility Agreement. However, no-one is suggesting that it is anything other than the London Inter-Bank Offered Rate - a benchmark rate set daily in London by reference to actual trading activities of major financial institutions in a range of currencies.

1. On 1 June 2005, one month before the "Repayment Date" of the initial advance, a letter on HWBB letterhead was provided to the taxpayers, indicating that HWBB was "prepared to roll-over your existing loan", offering an increased facility amount of $1 million, repayable on 30 June 2010[15]. The structure and contents of the letter are similar to those of the initial letter of offer dated 1 July 2000. However, the 2005 letter is signed on the last page by Mr Morrison, below the words "Yours faithfully" and above the word "Director". The likelihood is, and I find, that the taxpayers were presented with a bundle of documents by Mr Gould, or someone from his office, and were told to sign them where indicated. One of those documents, which should have already been signed by a representative of HWBB, had not been. Mr Morrison paid insufficient attention to the various documents provided to him and signed this particular document by mistake.

1. The taxpayers see nothing unusual in what they did in 2000. In their view they entered into a simple loan arrangement. If they had not borrowed from HWBB, they both said they would have tried to source the extra funds from one of the other Australian banks[16]. Mr Morrison acknowledged that if they had gone down that path, they may have had to offer the apartment itself, or the family home, as security[17].
2. The transfer of the corresponding amount from the superannuation fund was similarly unremarkable. Mr Morrison described it as a "sweetener"[18]:

As I said before, it was suggested to us that if we - our super fund invested money in HWBB it would act as a sweetener so, therefore, if that was a sweetener that was required so that we got a loan then why wouldn't we transfer it before they gave us the loan?

1. Indeed, it is not unusual for a prospective lender to require a borrower to put money on deposit as a sign of good faith. What is unusual is that the lender would require a deposit of the entire amount that the borrower wished to borrow.
2. The renewal of the loan in 2005 was also not unusual, in the taxpayers' view. They had experienced something similar in 1999 when HWBB renewed the loan to their family company (see [10] of these reasons).

1. The Commissioner's position is set out in paragraph 55 of his written submissions, as follows (references and authorities omitted):

There is no doubt that a payment was made on 14 October 2000 to the Applicants, but the Tribunal will not be satisfied that the Applicants have proved that the sum was paid in accordance with and pursuant to the Loan Documents. In particular, the Applicants have not proved that the terms and conditions of the Loan Documents were intended to be binding on them because notwithstanding those terms and conditions, the payment was made without regard to the operative terms and conditions, or at the very least there is no evidence that the payment was made conformably with the Loan Documents, having regard to the following circumstances:

(i) There is no evidence of the provision of any insurance policy or certificate, and payment occurred without any insurance policy or certificate being provided to HWBB;

(ii) There is no evidence of the performance of any searches, enquiries or requisitions and payment occurred without any searches, enquiries or requisitions hav[ing] been provided;

(iii) There is no evidence that any financial statements were supplied and payment occurred without financial statements being supplied;

(iv) There is no evidence that there were any statement of assets or liabilities provided by the Applicants whether as borrowers or guarantors, and payment occurred without the provision of any such statements;

(v) There is no evidence that income tax returns of the Applicants were provided to HWBB, and payment occurred without income tax returns of the Applicants being provided to HWBB;

(vi) There is no evidence that the Applicants signed and dated asset and liability statements, and payment occurred without HWBB being supplied with asset and liability statements from the Applicants;

(vii) There was never any effective guarantee by the Applicants. The Applicants as borrowers purported to also provide personal guarantees even though a guarantee is a collateral contract to answer for the debt for default of the borrower;

(viii) There is no evidence that the interest rate was calculable having regard to the definition of LIBOR, and payment occurred without any interest rate being defined and without any ability to ascertain the interest rate payable under the facility;

(ix) There is no evidence of the quantum of any establishment fee and payment occurred without the requirement to pay any establishment fee for the loan;

(x) There is no evidence of any drawdown notice and payment occurred without any drawdown notice being given for the alleged advance;

(xi) There is no evidence of HWBB's costs associated with the negotiation, preparation, execution, stamping and registration of the Loan Agreement, the Guarantee Agreement, nor is there any evidence of payment of such costs.

1. These complaints form the basis of the Commissioner's submission that the various loan documents are a sham.
2. The Commissioner says the true arrangement is different from the arrangement as presented by the documents. He says that the documents disguise the truth of the matter, which is that the taxpayers accessed their superannuation funds to purchase the Sunshine Coast apartment.

1. Over the years there have been several formulations of the concept of sham. In Raftland Pty Ltd as trustee of the Raftland Trust v Commissioner of Taxation (2008) 238 CLR 516; [2008] HCA 21, the High Court referred to the following formulations, some of them taken from earlier authorities:
   • That the term "sham", when correctly employed, denotes "an objective of deliberate deception of third parties"[19];
   • The idea that "the parties do not intend to give effect to the legal arrangements set out in their apparent agreement, understood only according to its terms. In Australia, this has become essential to the notion of sham, which contemplates a disparity between the ostensible and the real intentions of the parties"[20];
   • "'Sham' 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"[21].

1. Some of the Commissioner's complaints as listed in [31] of these reasons are justified; some of them are not. Point (i), for example, goes nowhere, since insurance policies and certificates were only required "for each security property" - but no property was being offered as security. Similarly in relation to point (ii) - the only searches, enquiries and requisitions that had to be satisfactory were those that were "required by Hua Wang Bank's solicitors and accountants". They simply did not require any. Point (x) notes that there is no evidence that drawdown notices were ever provided to HWBB; however, the Loan Facility Agreement provides in clause 4.4(b) that HWBB could waive the requirement for a drawdown notice
2. The bigger question is whether there was ever an intention to be bound by the terms of the loan documents. In that enquiry it is relevant to examine subsequent behaviour, to see how it aligns with the terms of the documents.
3. This is where the real disparity is evident. The material available to the Tribunal, viewed in its entirety, is riddled with gaps and inconsistencies. Some of the attempted explanations of the gaps and inconsistencies are implausible. Sometimes the taxpayers are simply incapable of providing an explanation at all. 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. As I have already indicated, he was the only person they dealt with. He told them the arrangement with HWBB was a deposit by the superannuation fund, and a loan to them personally. He told them they should sign the loan acceptance and the Loan Facility Agreement. That is what they did. They did not understand the entirety of the agreement they thought they were making with HWBB. They did not ask him the questions that they themselves have been asked in these proceedings. They do not know the answers. And Mr Gould, the person most likely to be able to answer the questions and fill the gaps, has not given evidence.
4. The taxpayers were able to convince themselves that these arrangements with HWBB were orthodox. No doubt they were encouraged by the fact that, at least as far as the "loan" was concerned, they had done something similar in 1994, when they borrowed from HWBB for their company. They approached the arrangements in 2000 uncritically, not concerning themselves with the detail, only interested in the outcome.
5. The desired outcome was to have enough money to buy the Sunshine Coast apartment. And Mr Gould's solution, which (unlike St George) did not require the taxpayers to provide any security for the $600,000 they would be "borrowing", must have looked very attractive indeed.
6. There is no evidence before me as to whether the 5 per cent per annum simple interest on the "deposit" of the superannuation fund money was a good proposition at the time, but the taxpayers do not appear to have been too anxious about whether it was or not. They did not display any diligence in holding HWBB to its end of the bargain; indeed, at no stage have the taxpayers received a statement from HWBB indicating that the superannuation fund earned interest on that money[22]. Gould Ralph, the auditors of the superannuation fund, received a letter dated 17 February 2006 from HWBB confirming that the balance of the account at 30 June 2005 was $690,000, made up of the principal of $600,000 plus "Interest for the years ended 30 June 2003, 2004, 2005 @ 5%" of $90,000[23]. There is no mention of the interest that should have been payable for 2001 (about $21,000) or 2002 (a further $30,000) and which should have been added to the balance.
7. The taxpayers were able to produce to the Tribunal a document that is described as the "Profit & Loss Statement" for HWBB for the period July 2003 to June 2004[24]. This is where one would expect to see, under the heading "Interest expense", an entry for the taxpayers' superannuation fund in the amount of $30,000. There is no such entry, and no explanation for the omission.
8. Mr Hyde Page, counsel for the taxpayers, suggested from the bar table in his closing submissions that one of the entries in the "Interest expense" list supported the taxpayers' position. He had located in that list, at line 4, an entry in the name of a superannuation fund which Mrs Morrison said she was familiar with[25] and of which, I take it, she and her husband had been directors. To disguise its name, I will refer to it as the "Oceanic Clothing Super Fund". Mr Hyde Page offered me this[26]:

And if you look down to the fourth item, there's [Oceanic Clothing Super Fund], which was the silent super fund that was referred to during the cross-examination of [the taxpayers]. So this purports to show interest accruing in respect of that super fund. One or two points down there's another reference to [Oceanic Clothing], and next to it, [the names of the taxpayers]. And total accrual of interest for the year of $39,249. Now, that of course as an accrual of interest, more than accounts for the 5 per cent simple interest that is said to accrue in respect of the deposit during the years that it was on foot.

So, I mean, the inference to draw is just that the bank's internal record-keeping matches what the [taxpayers] have said in respect of their arrangements, the bank regarded there as being interest accruing on its loan to the [taxpayers][27] and the bank regarded there as being interest accruing as a credit into the super fund in respect of the deposit. I can't account for the discrepancy between five per cent, being $30,000 and the figure that appears here which is $39,000. The obvious interpretation I would suggest is just $30,000 was credited to [the taxpayers] and $9,000 was credited to [Oceanic Clothing].

1. It is not clear to me why I would be invited to draw the inference that an entry that identifies not the particular superannuation fund that has been under consideration throughout these proceedings but an entirely different one about which I have been told nothing, represents what Mr Hyde Page suggests. Indeed, his suggestion - not supported by even a shred of evidence to that effect from any representative of HWBB - is so far from the "obvious interpretation" that he urges upon me, that I have had no trouble rejecting it.
2. I also note that, on 18 October 2010, the Commissioner issued to HWBB an "Offshore Information Notice" under s 264A of the Income Tax Assessment Act 1936 (the 1936 Act) requiring, among other things, "[a]ll of HWBB's financial statements, including its balance sheets, profit and loss and cash flow statements for the relevant period" (which was identified as the period 1 July 1999 to 30 June 2007)[28]. The balance sheet as at 30 June 2004[29] provided to the Commissioner in response to the Notice differs markedly from the document now produced by the taxpayers to the Tribunal as Tab 5 of Exhibit A5. "Cash at Bank" in the response to the Notice is shown as $991,302; in Tab 5 it is said to be $4,624,164. The balance sheet provided as part of the response to the Notice has no entry at all for "Customer loans", while Tab 5 shows a whopping $95,966,198. There is no explanation for the discrepancy.
3. These are precisely the types of record-keeping shortcomings and inconsistencies that one is likely to see when people are trying to record transactions and financial outcomes that are not real.
4. Mr Gould may have been able to explain some of these mysteries and inconsistencies, such as why the 5 per cent per annum simple interest on the money deposited with HWBB does not appear to have been credited to the superannuation fund.
5. Mr Gould may also have attempted to support his claim that the interest rate offered by HWBB was lower than that offered by Australian banks at the time. The taxpayers themselves were not equipped to test Mr Gould's claim. They knew nothing about LIBOR. Neither of them appeared to have any real idea how the interest they were being charged compared with rates available from other banks. And when the interest was capitalised from year to year, the likelihood is that the interest rate that applied to the capitalised amount would have been based on LIBOR as at the date of capitalisation. The taxpayers did not claim to know how the interest amount was arrived at; Mrs Morrison made it plain that she and her husband relied entirely on Mr Gould to tell them, from time to time, whether the interest amounts that were being charged by HWBB were correct[30]. There does not appear to be a single occasion on which Mr Gould told them the interest amount was wrong. It is unfortunate that he did not give evidence to explain how he reached his conclusions.
6. Mr Hyde Page explained that there was a "very obvious reason" [31] why Vanda Gould did not give evidence in these proceedings - that he was facing criminal charges of conspiracy to cause a loss, or a risk of loss, to the Commonwealth, and conspiracy to deal with property intended to become an instrument of crime. The alleged offences occurred between August 2006 and June 2012 and have nothing to do with his relationship or dealings with HWBB[32]. I do not understand the connection. In my view that is no explanation at all.
7. Mr Gould may have been able to explain a number of things that the taxpayers could not, including:
   • (a) Why all the taxpayers' dealings with HWBB were through him, rather than direct with HWBB;
   • (b) Why, if HWBB was imposing a "condition" that the taxpayers "place an equivalent amount of $600,000 on deposit with the Hua Wang Bank", that condition was not reflected in the letter of offer;
   • (c) Whether, in light of his claim that the interest rate offered by HWBB was lower than that offered by Australian banks at the time, he advised the taxpayers to draw down the entire facility amount of $750,000 rather than only $600,000, and use the extra $150,000 to reduce their indebtedness to St George, and if he did not, why not. Was it because there was really only $600,000 available all along, rather than $750,000?
   • (d) Whether HWBB had ever called on the taxpayers to pay the Unused Facility Fee of 1.5 per cent per annum of the unused portion of the facility;
   • (e) Whether he or his staff, on the taxpayers' behalf, provided HWBB with the taxpayers' income tax returns for three years prior to the purported loan application in 2000, as required by special condition 6;
   • (f) Whether he or his staff, on the taxpayers' behalf, provided HWBB with a signed and dated asset and liability statement for the taxpayers, as required by special condition 7;
   • (g) Whether the loan facility was reviewed on an annual basis, as required by special condition 8, and if so, what was involved in the review, and what was the outcome;
   • (h) Whether HWBB ever indicated to him that it had decided to waive any of its rights under the offer letter or the Loan Facility Agreement, and if so, what was the extent of any such waiver;
   • (i) Whether HWBB ever indicated to him why it required the taxpayers to guarantee their own borrowing;
   • (j) Whether interest invoices were issued to the taxpayers for each income year from 2001 onwards (the taxpayers produced invoices for only some of the years, not all of them);
   • (k) What negotiations, if any, he or his staff had with HWBB with respect to a revised interest rate, expressed in invoices issued for the years ended 30 June 2007[33], 30 June 2008[34] and 30 June 2010[35] as "a concessional rate of 1% over Prime, as negotiated", including why a "concessional" rate had been agreed to by HWBB in circumstances where no interest at all had yet been paid;
   • (l) What discussions, if any, he had with the taxpayers about the impact of that revised interest rate on their borrowings and interest liability;
   • (m) How Mr Morrison was presented with a bundle of documents in 2005, including an unsigned letter from HWBB offering a roll-over of the existing loan, and how Mr Morrison came to sign that letter;
   • (n) The circumstances surrounding the purported assignment, in about 2011, of the taxpayers' debt to a UK company named Vycrown Investments.
8. Mr Gould is uniquely placed to throw light on these issues. Not only has he been intimately familiar with the taxpayers' affairs for several decades, he is intimately familiar with HWBB's affairs as well. There are two reasons why I reach that conclusion.
9. The first is that, as I have already indicated, HWBB's licences only authorised it to deal with clients of Mr Gould. I have not been told whether licences with restrictions of that kind are unusual in Samoa or whether they are entirely commonplace. But it must follow that every single transaction undertaken by HWBB was with one of Mr Gould's clients, otherwise the bank was at risk of losing its licence. For that reason I am not prepared to accept that Mr Gould is in a position of total ignorance in relation to the operations of the bank, the basis on which it accepts deposits, the diligence it applies to the assessment of risk in relation to potential borrowers, how (or even whether) it keeps its books and records, or whether the loan documents entered into with the taxpayers are "boilerplate", as submitted by Mr Hyde Page on behalf of the taxpayers, or customised to their particular circumstances.
10. The second reason stems from a telling document that is included in the Applicants' Supplementary Exhibits[37]. This is an email sent on 15 March 2004 by Irina Skvortsova - who, Mr Beard tells me, was an employed accountant at Mr Beard's firm, Gould Ralph. The purpose of the email from Ms Skvortsova was evidently to discover, for audit confirmation purposes, certain financial information relating to two of the taxpayers' related entities. The specific question she asked was:

Would you please advise what were the HWB loan balance as at 30/06/2003, interest and facility fee charged for 2003FY for each of the following [named entities].

The question was not directed to HWBB, as one might have expected (on the simple assumption that the bank itself would be best placed to provide information on the loan balances of its own borrowers and would therefore be the best target at which the auditor of those entities might aim its query), but instead to Christine Shean, who, I was told, was Vanda Gould's personal assistant[38], and who, judging by her email address, was based in Australia. On the email printout is a handwritten note (probably written by Ms Skvortsova) stating what the balances are. There is no indication that those balances were provided to the writer by anyone other than Ms Shean.

1. But why did Ms Skvortsova direct this question to Mr Gould's personal assistant in the first place, rather than to HWBB? Surely Ms Skvortsova knew that Ms Shean's boss, Mr Gould, was no longer part of the Gould Ralph firm - Mr Beard was quite clear about that, despite the fact that (a) Mr Gould continued to operate out of the same business address as Gould Ralph, and (b) Mr Gould sometimes sent correspondence (as Mr Beard had to concede) on Gould Ralph letterhead with the endorsement "From the office of Vanda Gould"[39]. Mr Beard insisted that Mr Gould had ceased his "professional participation in Gould Ralph" by the end of 1998, and since then he had "practised as a tax agent accountant independently of Gould Ralph"[40] and "was always a completely separate individual"[41]. So the email to Ms Shean cannot be viewed as an internal communication, from one Gould Ralph colleague to another. Mr Beard's evidence would make this a communication from an auditor, A, to a third party, B, to confirm the loan balance of a borrower from lender C. But Mr Beard's evidence was to the effect that an auditor would seek financial confirmation from the entity concerned[42] - here, the lender. At no stage did he suggest that it would be proper for an auditor to seek that information from a third party - indeed, reputable auditors would surely not be content to rely on hearsay information in that way. It must follow, and I find, that the people at Gould Ralph knew full well that the way to get information about HWBB was to ask Mr Gould. And whenever they did that, the strong likelihood is that they were asking HWBB, not an intermediary.

1. Now, against that background, incomplete as it is, I need to consider whether the taxpayers have satisfied me that the arrangement is not a sham.
2. My consideration starts with the proposition, taken directly from the authorities cited above[43], that sham involves an intention to deceive third parties by creating a disparity between the apparent and the real. The Commissioner submitted that the threshold may be lower than that; that it may be sufficient that "the parties intended that the documents or arrangements were to be 'a mere piece of machinery ... serving some purpose other than that of constituting the whole of the arrangement', in which event it is not necessary that the documents or arrangements be intended to deceive third parties"[44], but I am content to approach the question by reference to the higher threshold.
3. 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.

1. 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.
2. 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, HWBB, that his clients are the only people who can deal with it. Never mind that he may well be the person who, on HWBB's side, structured the arrangement. His intention, which may very well be brought home not only to the taxpayers but to HWBB as well, is irrelevant.
3. 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.
4. There are serious discrepancies between what is said in the loan documents and what actually happened. It does not look as though the terms of the loan documents have been substantially complied with. Information around the interest rate is obscure, the records of the bank - such as they are - are not consistent with the apparent agreement.
5. The taxpayers make much of the fact that $720,000 was transferred to the superannuation fund in January 2011; this is said to support the proposition that the original $600,000 really was put on deposit with HWBB in October 2000 and was not immediately transferred out three days later. The submission on behalf of the taxpayers is this[45]:

A further reason the AAT should find the Hua Wang Bank intended to give effect to these transactions in accordance with their terms is that in January 2011, when the Australian superannuation fund sought to terminate its deposit with Hua Wang Bank, the Bank promptly remitted the entire $600,000 principal along with $120,000 in accrued interest. This occurred at a time when [the taxpayers] had not repaid their loan to the Bank. This is clear evidence that the Bank regarded the Australian superannuation fund's deposit, and the fund's entitlement to return of that deposit with interest, as an enforceable legal obligation. This contradicts any suggestion that the deposit with the Hua Wang Bank was a fiction, intended to disguise something sinister.

1. It is not quite so straightforward.
2. It is true that $720,000 was transferred to the taxpayers' superannuation fund on 28 January 2011[46]. However, by January 2011, the balance of the superannuation fund's account ($600,000 at 5 per cent per annum simple interest for 10 years and 3 months) would have been over $900,000. It is not clear to me why I should accept that the $720,000 amounted, as submitted, to the return of "the entire $600,000 principal along with $120,000 in accrued interest". It might be part of the principal plus part or all of the interest on the principal. It might be all of the principal plus part of the interest. Or it might have nothing at all to do with the original $600,000. There is no HWBB document to tell me what the money is.
3. Mrs Morrison said in her second witness statement, Tab 2 of Exhibit A1, that after the deposit of the $720,000 into the superannuation fund's bank account[47]:

... I considered that our super fund had received back its principal of $600,000 which had been placed on deposit, and had received $120,000 in February 2007, and $120,000 in 2011. By my calculation this was 5% simple interest on $600,000 for the eight years: 2003-2010.

1. There is no mention of the interest payable for the years 2001 and 2002 (around $51,000) or the interest payable from the end of June 2010 to the date of payment (a further $17,000 approximately). Even assuming there was a payment of $120,000 in February 2007 (which is not free from doubt), the taxpayers are either willingly or through negligence forgoing $68,000 to which they say their superannuation fund is entitled. That is an affront to common sense. It displays a level of indifference that is consistent with the Commissioner's case that what is said to be the arrangement is not the true arrangement.
2. The payment of $720,000 to the superannuation fund does not assist the taxpayers' claim that the arrangements are as they appear to be.
3. 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.
4. 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.
5. 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 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. And as time passed, with no receipt of interest on the alleged deposited funds, and with HWBB 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.

Interest deductions, withholding tax and Part IVA

1. It follows from those findings that the taxpayers' claims for interest deductions on the "loan" from HWBB cannot be sustained. The disputes about the taxpayers' failure to pay interest withholding tax and about Part IVA also fall away.

1. However, there remains the question whether the Commissioner was empowered to amend the taxpayers' assessments, or whether the amended assessments were out of time.
2. As the law applied in relation to the amendment of assessments for income years prior to 2005, the Commissioner was empowered to amend assessments "at any time" under the then s 170(2) of the 1936 Act if "there has been an avoidance of tax" and "the Commissioner is of the opinion that the avoidance of tax is due to fraud or evasion".
3. For income years from 2005 onwards, item 5 in the table in the current s 170(1) of the 1936 Act provides:

The Commissioner may amend an assessment at any time if he or she is of the opinion there has been fraud or evasion.

1. The Commissioner formed an opinion, in respect of each taxpayer, and for each of the income years 2001 to 2008 inclusive[48], that there had been an avoidance of tax and that the avoidance of tax was due to fraud or evasion. That formulation is not precisely in accordance with the "old" s 170(2) and it includes concepts that are not referred to in the "new" s 170(1). Nevertheless, it is clear that the Commissioner considered that the circumstances took the taxpayers outside the normal time-limit protections of s 170. It is now for the taxpayers to satisfy the Tribunal that:
   • any avoidance of tax in the 2001 to 2004 income years was not "due to fraud or evasion"; and
   • it is not the case that there "has been fraud or evasion" in the 2005 to 2008 income years.
2. I do not need to concern myself with fraud; it is sufficient to deal with evasion. In Denver Chemical Manufacturing Co v Commissioner of Taxation [1949] HCA 25; (1949) 79 CLR 296 Dixon J said at 313 that "evasion":

... means more than avoid and also more than a mere withholding of information or the mere furnishing of misleading information. It is probably safe to say that some blameworthy act or omission on the part of the taxpayer or those for whom he is responsible is contemplated. An intention to withhold information lest the commissioner should consider the taxpayer liable to a greater extent than the taxpayer is prepared to concede, is conduct which if the result is to avoid tax would justify finding evasion.

1. In R v Meares (1997) 37 ATR 321, Gleeson CJ said at 323:

Although on occasion, it suits people for argumentative purposes, to blur the difference, or pretend that there is no difference, between tax avoidance and tax evasion, the difference between the two is simple and clear. Tax avoidance involves using, or attempting to use, lawful means to reduce tax obligations. Tax evasion involves using unlawful means to escape payment of tax. Tax avoidance is lawful and tax evasion is unlawful. Although some people may feel entitled to disregard that difference, no lawyer can treat it as unimportant or irrelevant. It is sometimes said that the difference may be difficult to recognise in practice. I would suggest that in most cases there is a simple practical test that can be applied. If the parties to a scheme believe that its possibility of success is entirely dependent upon the revenue authorities never finding out the true facts, it is likely to be a scheme of tax evasion, not tax avoidance

1. The taxpayers submit as follows[49]:

[5] ... The Applicants discharge their burden in respect of fraud or evasion because the arrangements with the Hua Wang Bank were not, in themselves, fraudulent and also because the arrangements were put in place by an independent third party, being Vanda Gould, and there is limited potential for a third party's actions to be imputed to the [taxpayers] if that third party was not the agent.

[6] A major obstacle to the Respondent's contention that the arrangements with Hua Wang Bank constituted fraud or evasion is that the Federal Court considered an almost identical set of transactions involving the Hua Wang Bank in Fitzroy Services v Commissioner of Taxation[50], and determined that the transactions were not evasion. Moreover, as these submissions outline, Fitzroy Services was a case in which the facts were significantly less favourable to the taxpayer than in the current proceeding.

[7] If the obstacle presented by Fitzroy Services is overcome, this still does not mean the Respondent was authorized to amend the 2001-2008 assessments. The allegation of fraud or evasion should be rejected, but it is well to consider the position if there was fraud or evasion. If the AAT concludes that the deposit with the Hua Wang Bank and subsequent loan to the [taxpayers] was in some respects fraudulent (which it should not) it was Vanda Gould who designed and implemented these transactions. All [the taxpayers] ever knew is that Hua Wang Bank was a Samoan banking institution offering a loan on attractive terms, and Vanda Gould had some connection or relationship to the Bank.

[8] The Applicants submit that for s 170 purposes the relevant 'fraud or evasion' must be that of the taxpayers or, at most, the taxpayers' agents (who in this case were the directors and staff of Gould Ralph). This is a question of the proper construction of s 170. Section 170 does not specify whose 'fraud or evasion' can potentially trigger an unlimited amendment period, and there do not appear to be any decided cases on the point, but application of the normal principles of statutory construction suggests a clear answer. The loss of the statutory limitation period for amending assessments has significant penal effects for a taxpayer. Loss of the limitation period should not be triggered by conduct of a third party for which a taxpayer is not personally culpable and where the taxpayer had no knowing involvement.

[9] At the very most the conduct of a person who is not the taxpayer's agent should only be imputed to a taxpayer for s 170 purposes if the taxpayer maintains a willful (sic) blindness to fraud or evasion that is being performed for the taxpayer's benefit. That does not arise on the facts of this case. The [taxpayers] were not asked to believe anything inherently improbable in connection with their borrowing from the Hua Wang Bank, and they were not put on inquiry by anything said to them by Vanda Gould. ... (Emphasis in the original)

1. There was no elaboration of the assertion that to require a taxpayer to pay the amount of tax properly payable by him or her has "significant penal effects" for that taxpayer. It is an assertion that is so extraordinary and so devoid of substance that I put it to one side.
2. I also put aside the reference to Fitzroy Services, which is a distraction. Fitzroy Services was a different case. Apart from what is revealed in Edmonds J's judgment, I know nothing about the arrangements there.
3. It is more productive to focus on the arrangements here. The starting point, in the context of the "old" s 170(2), is that there has been an avoidance of tax in each of the years 2001 to 2004. That follows from my finding that the taxpayers have not established to my satisfaction that the "loan" really is a loan. The deduction claims for interest expenses have not been made out, and as a result there has been an underpayment of tax. That is an "avoidance of tax".
4. The next question, for the 2001 to 2004 years, is whether the taxpayers have satisfied me that the avoidance of tax was not due to fraud or evasion.
5. The taxpayers say that for the relevant provision to apply, any fraud or evasion must be theirs, or at least capable of being imputed to them if they did not commit it personally. They then emphasise that Mr Gould was an "independent third party", that he was not their "agent", that it was he, and not they, who "designed and implemented these arrangements". That seems to me to be nothing but empty rhetoric.
6. I could not possibly find, on the evidence before me, that Mr Gould was truly independent of the taxpayers. He was their trusted adviser over several decades. They did not question him to any extent about the arrangements that he was recommending to them. Mrs Morrison agreed that she "accepted and took on board and agreed to whatever Mr Gould told [her]"[51]; she said she and her husband "trusted" Mr Gould[52]. She described him as their "financial adviser"[53]. In relation to the "loan", she said he was "the authorised representative for us"[54]. She said "he was the one that handled all of this. He was the one that set everything up for us, and we trust him"[55]. He is clearly not an "independent third party" but a person who has been in the taxpayers' camp for years.
7. I therefore do not have to decide whether the taxpayers' submissions are correct because, contrary to the proposition they are putting, Mr Gould's actions are properly imputed to the taxpayers. All I have to decide, in relation to the 2001 to 2004 years, is whether the taxpayers have established that the avoidance of tax was not "due to ... evasion".
8. Going back to the comments of Dixon J in Denver Chemical, the use of the word evasion contemplates that there is a "blameworthy act" of some sort. Here the blameworthy act is the claiming of interest deductions on a "loan" which is not what it purports to be. Information most likely held by Mr Gould was withheld from the Commissioner "lest the Commissioner should consider the taxpayer[s] liable to a greater extent than the taxpayer[s are] prepared to concede". Similarly, by reference to the "simple practical test" suggested by Gleeson CJ in Meares, this scheme depends for its success on the "true facts" not being discovered. There can be no clearer indication of that than the failure to have Mr Gould offer one word of explanation about the arrangements.
9. The taxpayers have failed to prove that the avoidance of tax was not due to evasion.
10. The position in 2005 to 2008 is more straightforward because the language of the statute is more neutral. The Commissioner formed the opinion that "there has been ... evasion". The taxpayers have failed to prove otherwise.
11. The amended assessments are not out of time.

1. This provision is now repealed but it was still in place for the 2001 year.
2. The Commissioner submits that the taxpayers are assessable under s 26AFB(3) (as to $300,000 each) on the $600,000 that came to them through HWBB in October 2000 because it amounted to a receipt by them of a "benefit of any kind out of, or attributable to assets of, an exempt fund" as a result of a breach of the payment standards contained in Part 6 of the Superannuation Industry (Supervision) Regulations 1994.
3. There is no dispute that the superannuation fund was both an "exempt fund" and a "regulated fund" for the purposes of s 26AFB[56]. There is no evidence that the taxpayers met any of the conditions for lawful release of amounts from the superannuation fund. The taxpayers, however, attack the proposition that they received a benefit "out of or attributable to" assets of the fund. That submission is founded on the premise that a true loan existed between them and HWBB. I have found otherwise. The taxpayers' submissions cannot succeed in the light of my finding. Moreover, to the extent that the taxpayers submit that there is some uncertainty about the meaning of the word "value" in s 26AFB(3), I note that the provision speaks of including the "amount or value of the benefit" in the taxpayer's assessable income. There can be no doubt that the "amount" of the benefit is $600,000, or $300,000 each.
4. Finally, I have had regard to the matters specified in s 26AFB(4) but I am not satisfied that it would be unreasonable for s 26AFB(3) to apply. The amounts are properly included in the taxpayers' assessable income for the 2001 year.

Dividend - s 44 and Division 7A of the 1936 Act

1. On 18 June 2008 an amount of $122,000 was transferred to the taxpayers' superannuation fund by one of the taxpayers' companies.
2. The Commissioner submits that the amount was paid to the taxpayers as a dividend, assessable under s 44 of the 1936 Act, the amount having been paid at the direction of and for the benefit of the taxpayers when each of them held a 50 per cent share in the company, which at 30 June 2008 had retained profits of over $5 million.
3. In the alternative the Commissioner submits the amount is assessable to the taxpayers under Division 7A of the 1936 Act.
4. The taxpayers have had a number of explanations for the payment. The one they appear to have finally settled upon is the one outlined in Mrs Morrison's first witness statement, which is dated 1 September 2013[57]:

[34] In or about January 2007 I wanted to pay $122,000 to the Hua Wang Bank in order to reduce our indebtedness under the loan facility. It was my intention to transfer an amount of $122,000 out of the bank account of [our company] to the Bank's nominated bank account.

[35] At the time the funds were transferred, which was 18 January 2007, my practice was to operate the bank accounts of [the company] as well as [our] Superannuation Fund [of which the company is the trustee] through an internet banking facility that I accessed from my computer at my house. I do not specifically recall logging in and the steps I took to effect a transfer of $122,000 on 18 January 2007. However, it was my belief throughout the rest of 2007 that I had transferred funds from the [company] bank account in accordance with my intention to do this.

[36] I advised our accountants, when they were preparing the financial statements for [the company] and other entities, that this is what I had done.

[37] More than a year later, in or about June 2008, I received a phone call from Sytara Anekamai, who is an accountant with the firm of Gould Ralph chartered accountants. She said words to the following effect:

'[Gloria], I think you are mistaken about that transfer of funds to the Hua Wang Bank. Your bank statements show the transfer was made from [your] Superannuation Fund. This could be a real problem for the fund's status as a complying fund.'

[38] I then said: 'That's extraordinary. I had no idea' because up until that point my belief had been that the funds had been paid from by (sic) [the company].

[39] I then took some advice from our accountants about how to rectify this error.

[40] On or about 18 June 2008 I caused the sum of $122,000 to be transferred from the bank account of [the company] to the bank account of the trustee for [our] Super Fund. I did this because my accountants had advised me, and I believed, that this would reverse the error created the previous year by the transfer of funds from the incorrect bank account.

1. On that version, it was a simple inadvertent error. The intention was to use the funds of the company in January 2007 to make a payment to HWBB on behalf of the taxpayers personally, but the money came out of the wrong account. It came out of the account of the company as trustee of the superannuation fund rather than the company's normal account. The June 2008 payment was to correct the error.
2. There is an immediate problem with that explanation. If the intention, all along, was to transfer the money from the company's account to HWBB, it is hard to understand why there were two deliberate transactions to move the money, instead, from the superannuation fund account to HWBB. The first transaction was a transfer, on 16 January 2007, from the superannuation fund's account with ING Bank to the fund's St George Bank account[58]. The second was the transfer two days later, presumably once the funds were "cleared", from St George to HWBB. It cannot be explained as a slip, or just an inadvertent selection of the wrong account in internet banking.
3. In any event, what is included in Mrs Morrison's witness statement differs from what she said in her oral evidence. Shortly after a brief adjournment on the second day of the hearing, Mrs Morrison was attempting to explain things when Mr McGovern tried to cut her off. I intervened[59]:

DEPUTY PRESIDENT: Well, I would like to hear?

MRS MORRISON: Thank you. When I originally paid that money I was of the opinion that it was to go - come out of the super fund and then it was later on that I discovered that, no, it wasn't supposed to come out of the super fund and that's why I've probably transferred that money from ING but I just had to get my head around it when I went outside. I was of the opinion - - -

MR McGOVERN: Did you talk to anyone when you went outside?

MRS MORRISON: No. No, no, no. I just sat and thought about it and I just - I - from memory I believe what happened was I got a letter from Goulds to say to remit $122,000 in interest. Now, I thought it was to come out, and I thought it said to come out of [our] Superannuation Fund and that's what I did and that's why I transferred that ING money and then when I did it I forgot all about it until the next 12 months when we did our financials and they come (sic) back to me and they said, "That shouldn't have come out of that account" and I said, "But I believe that's - I got confirmation from you people." And they said, "No, it shouldn't have come out of that account, it should have come out of [the company]."

1. On this version, the suggestion to make the payment, and the identification of the amount, came from Gould Ralph. Mrs Morrison's understanding of the proposal was that the money was to come from the superannuation fund account. That does not sit comfortably with Mrs Morrison's written statement that she "wanted to pay $122,000" to HWBB, or that she intended to take the money from the company account.
2. When the Commissioner first raised the matter with the taxpayers in 2009, the response from Gould Ralph, as "instructed by [their] clients"[60], was this[61]:

The payment of A$122,000 on 18/01/2007 represented a payment of interest made by [the taxpayers] in relation to a personal loan that they have with Hua Wang Finance. The payment of this interest was inadvertently made from the Fund's bank account and included in the 2007 accounts as an additional deposit of funds with Hua Wang Finance. Upon the realisation of the error the funds were reimbursed by [the taxpayers] and the correction was reflected in the Fund's financial accounts.

[The taxpayers] have not claimed any tax deduction in relation to this interest payment as the loan funds were acquired for personal purposes and therefore the interest was not deductible.

1. Where did Hua Wang Finance come from? The original "loan" to the taxpayers and the interest-bearing "deposit" by the superannuation fund are supposed to have been with HWBB - Hua Wang Bank Berhad - not Hua Wang Finance. Now the taxpayers are said to have a loan with Hua Wang Finance, and that entity is also said to be holding the funds on deposit from the superannuation fund.
2. Furthermore, why would Gould Ralph be saying that "the loan funds were acquired for personal purposes and therefore the interest was not deductible"? This same firm had been lodging the taxpayers' returns, year after year, with interest deduction claims. Or is this a separate loan?
3. Mr McGovern asked Mrs Morrison[62]:

So what was the liability for interest that you had in relation to any relationship you had with Hua Wang Finance as opposed to Hua Wang Bank Berhad?

I would - I just assumed they were one and the same.

1. Mrs Morrison, then, is not aware of any additional or separate liability to Hua Wang Finance, which makes the statement by Gould Ralph about non-deductibility all the more mysterious.
2. None of this is clarified by the later explanation, provided by Gould Ralph to the Commissioner on 13 July 2011. In Schedule A to that letter appears the following statement[64]:

The payment of $122,000 by [the] Superannuation Fund did not relate to the personal loan to [the taxpayers]. It related to a loan from the Hua Wang Bank Berhad to [the company] itself. As a result, there was no reimbursement by [the taxpayers] to [the] Superannuation Fund. As detailed in the letter dated 10 December 2009 this was reimbursed by [the company].

1. The author of the two Gould Ralph letters has not been called to explain the different versions provided to the Commissioner. Mrs Morrison was unable to explain them. Mrs Morrison's oral evidence differed from her written statement. There are in fact four different versions of what happened.
2. One thing ignored in all of those versions is the further transfer, on 30 January 2007, of $120,000 from Hua Wang Finance to the superannuation fund, and described in the AUSTRAC report as "interest payment"[65]. Of course, and putting aside the possible HWBB/Hua Wang Finance dichotomy, the arithmetic makes no sense, because by now the interest on the "deposit" made over six years earlier would be close to $200,000. By the same token, nor does there appear to be any science in the calculation of the $122,000 moving in the opposite direction. This transfer on 30 January 2007 just throws a little more uncertainty into the mix.
3. Furthermore, this whole episode (and particularly the divergent responses given to the Commissioner in the letters dated 21 August 2009 and 13 July 2011) fortifies my view that Gould Ralph did not really understand what was going on any better than the taxpayers did.
4. I am left unconvinced by the "inadvertent error" explanation.
5. What I see is a payment from the taxpayers' company to the superannuation fund in June 2008. What I do not see, however, is the characterisation of the payment that the Commissioner urges upon me.
6. It seems to me that the proper characterisation is that of a contribution by an employing company to the superannuation fund that it operates for its employees. That is what the taxpayers identified as the proper characterisation of the payment in the event that I did not accept the recoupment characterisation. I agree with the taxpayers' submission in that regard.
7. The contribution is, on the face of it, assessable income of the superannuation fund. The amount is not assessable to the taxpayers under either s 44 or Division 7A.

1. Administrative penalty was assessed by the Commissioner at the rate of 75 per cent of the shortfall amount for the 2001 year and 90 per cent of the shortfall amount for each of the 2002 to 2008 years.
2. The administrative penalty rate of 75 per cent applies where a shortfall results from intentional disregard of the law by the taxpayer or the taxpayer's agent: table item 1 in s 284-90(1) in Schedule 1 to the TAA. That rate will be uplifted to 90 per cent if an aggravating factor in s 284-220(1) is present. Here the Commissioner relied on paragraph (c): there had been a previous imposition of penalty under table item 1, 2 or 3 in s 284-90(1).
3. Before s 284-220(1) was amended in 2010 by the Tax Laws Amendment (2010 Measures No. 1) Act 2010 (the 2010 amending Act), paragraph (c) provided for the uplift if a relevant penalty had been imposed "for a previous accounting period". It now requires the relevant penalty to have been imposed "previously". In Gashi v Commissioner of Taxation [2012] FCA 638, Jessup J, dealing with the law as it stood prior to the 2010 amendment, held at [57] that the uplift could be applied even where the Commissioner served multiple notices of assessment on the taxpayer, for multiple years, at the same time.
4. The 2010 amendment applies "in relation to things done on or after the commencement of" the relevant provisions (4 June 2010) - clause 101 in Schedule 6 to the amending Act - and, as a result, it does not apply to the taxpayers' circumstances. It follows that the law that applies here is the same as the law that applied in Gashi. The Commissioner was accordingly entitled to uplift the penalty in reliance on s 284-220(1)(c) even though many of the notices of amended assessment for Mr Morrison, and all of the notices for Mrs Morrison, were issued at the same time.
5. The question that needs to be addressed is whether the shortfall amounts that resulted from the false statements in the taxpayers' returns resulted from intentional disregard of a taxation law by them or their "agent".
6. In this regard the taxpayers mount a spirited argument against the proposition that either they or their "tax agent", Gould Ralph, intentionally disregarded the law. The argument does not address the expression used in the statute, which is "agent", not "tax agent".
7. A convenient starting point for the analysis of the taxpayers' argument is the evidence of Mr Beard. As I have already noted, he said in his witness statement that by the end of 1998, Vanda Gould had "ceased professional participation in Gould Ralph", and that since then Mr Gould had "practised as a tax agent accountant independently of Gould Ralph". In fact, on close analysis, there appear to be two main points that Mr Beard was trying to make in his witness statement. The first was that Mr Gould was now, and had been for many years, independent of Gould Ralph. The second was that Gould Ralph, and not Vanda Gould, was now, and had been for many years, the tax agent for the taxpayers.
8. That second point is evident from paragraph 8 of his witness statement[66]:

[The taxpayers] are long-term clients of Gould Ralph Pty Ltd. Since Mr Gould discontinued his formal participation in Gould Ralph [the taxpayers] have continued to use Gould Ralph, rather than Vanda Gould, as their tax agent.

1. Beyond that, Mr Beard was able to provide very little worthwhile information about the taxpayers' affairs. That is because, as he explained in paragraph 9 of his statement:

For a number of years now the accountant at Gould Ralph with particular responsibility for [the taxpayers] has been Mr Steven Barr.

1. Mr Beard went on to explain (not in his witness statement, but in cross-examination) that, although Gould Ralph is the tax agent for some of the taxpayers' companies and for the taxpayers personally[67], and although Mr Beard had been signing the tax returns for the taxpayers individually and for at least some of their companies for more than ten years[68], his own involvement in the preparation of the tax returns, as well as his knowledge of the taxpayers' affairs, was slim. Here is how he dealt with some of the questions[69]:

MR McGOVERN: Right. And you can assume that [the loan taken out with HWBB by the taxpayers' company in 1999] was rolled over or renewed on five-yearly rests, such that it was renewed in 2004, 2009 and 2013. Just pausing there with those assumptions, you would have been involved in the income tax return preparation for [the company] in a period that's covered by the existence of this loan, correct, on the assumptions that I've put?

MR BEARD: It's likely that I would have signed the tax return, to lodge the tax return.

MR McGOVERN: Well, are you in the habit of simply signing a tax return without attending to any of the detail to verify its accuracy?

MR BEARD: I pretty much sign all the tax returns in the whole practice. All the tax returns are prepared by managers who would do the detailed checking of the tax returns and supporting working papers.

MR McGOVERN: So when you sign off on the tax returns as the tax agent, you don't bring any independent mind to bear, you just append your signature; is that what you're saying?

MR BEARD: It would depend on the circumstances but there would be plenty where the work has been done by a different partner or a manager.

MR McGOVERN: Right. Well, I'm just trying to understand your general methodology. You say it depends on the circumstances, there would be some circumstances where you would simply sign a return as the tax agent without further ado; is that right?

MR BEARD: That's correct.

MR McGOVERN: And in what circumstances would that occur?

MR BEARD: When I could see that the tax return had been through the process of Gould Ralph, and in particular when it has been signed by the client.

MR McGOVERN: And then in what circumstances would you undertake an independent check yourself?

MR BEARD: If it was my client or if I was doing the work on it, if I was reviewing it.

MR McGOVERN: Well, [the taxpayers] are you client, is that right?

MR BEARD: Not specifically, no.

MR McGOVERN: Well, not specifically sounds a little vague but no sounds a little bit more emphatic. Have you had them as your clients at some point?

MR BEARD: Not me, personally. They are clients of Gould Ralph but they historically were clients of Vanda Gould.

MR McGOVERN: Well, it seems that I may be talking to the wrong person ...

1. Indeed. Mr Beard was called not to throw light on the taxpayers' affairs but to establish that Gould Ralph was the "tax agent" of the taxpayers, and that Vanda Gould had nothing to do with Gould Ralph.
2. The taxpayers' work at Gould Ralph was mainly done by Steven Barr. I infer that another person who had some involvement was Gaibrielle Cleary, the author of the Gould Ralph letters dated 21 August 2009[70] and 13 July 2011[71]. I have not heard from either of them.
3. Therefore, even if I approached the penalty question from the narrow perspective, as proposed by the taxpayers, that the "agent" referred to in the penalty provisions is the "tax agent", I do not see on what basis I could find that the tax agents, Gould Ralph, did not intentionally disregard the law when they lodged the taxpayers' returns. I can discern nothing in Mr Beard's evidence dealing with the question whether the firm had an intention one way or the other - either to regard, or to disregard, the law. On the material that has been presented, it is not possible to infer that the taxpayers are not liable to the administrative penalty on the basis of the tax agents' behaviour.
4. In any event, I do not accept that the narrow perspective is the correct one.
5. The question in table item 1 in s 284-90(1) in Schedule 1 to the TAA is whether the shortfall amount "resulted from intentional disregard of a taxation law (other than the Excise Acts) by you or your agent"[72]. It does not ask about the behaviour of "you or your tax agent", but the behaviour of "you or your agent". There is no reason why the word "agent" in that context would take the narrow, and specialised, meaning of "tax agent" rather than its normal meaning of "representative", or "person who acts on behalf of another". Otherwise a taxpayer would be immune from penalty if a person who is not a tax agent communicated wrong information to the Commissioner on the taxpayer's behalf.
6. The taxpayers submit Mr Gould was an "independent third party", but I have rejected that submission. I have also found that the taxpayers did not truly understand the arrangements they entered into. Obviously Mr Gould did. The taxpayers were not the ones who suggested this arrangement; Mr Gould was. The taxpayers did not deal with HWBB; Mr Gould did. The taxpayers did what Mr Gould told them to do. If he told them to sign documents, they signed them. Whatever they understood about the documents is what he told them. The arrangement they entered into was one that he introduced them to, and one that he recommended. They took his advice. When the Gould Ralph accountants were compiling the tax returns for the taxpayers and their related entities, and needed information that the taxpayers could not provide, who did the accountants turn to? Of all the people in the world, they turned to Vanda Gould for that information. Of course he was the taxpayers' agent, even if not their tax agent.
7. Clearly, the question that remains unanswered is whether the taxpayers' shortfall amounts resulted from intentional disregard of the law by Mr Gould through his provision to Gould Ralph of information relating to the taxpayers and which was then included in their tax returns. The question remains unanswered because Mr Gould has not given evidence in these proceedings. And if there is no answer to the question, there is no room for an inference favourable to the taxpayers.
8. The taxpayers have not discharged their burden of proving the penalty assessments excessive (except to the extent that penalty was imposed in respect of the claimed shortfall amount for 2008 on the $122,000 payment to the superannuation fund). Subject to that exception, the penalty will be upheld.
9. I have considered the question of remission of penalty under s 298-20 in Schedule 1 to the TAA. This is a different question from the one dealing with imposition, where excessiveness of the penalty assessment is the test: s 14ZZK(b)(i) of the TAA. With regard to remission, and by reference to the Commissioner's original decision not to remit the penalty to any extent, the test is whether the decision not to remit "should not have been made or should have been made differently": s 14ZZK(b)(iii).
10. The taxpayers submit that at least there should be remission of the s 284-220 uplift since, even though it is authorised by Gashi, there is no "recidivism" in the taxpayers' behaviour and they had no prior notice of the Commissioner's concerns about the HWBB deduction claims. Even though I accept those two propositions, I do not consider that the circumstances of this case warrant the remission of the s 284-220 uplift element.

1. For each taxpayer the objection decision relating to the 2008 income year is set aside. Instead I decide in each case to allow the objection in part, so as to exclude the $122,000 payment ($61,000 each). As a consequence, the quantum of the administrative penalty, but not the rate, will be reduced for that year.
2. In all other respects the objection decisions are affirmed.

I certify that the preceding 136 (one hundred and thirty -six) paragraphs are a true copy of the reasons for the decision herein of Deputy President S E Frost

.............................[sgd]...........................................

Mr D Morris, of Australian Government Solicitor

[1] T11-237; all references to T-documents are to those in Exhibit R1 (relating to the male taxpayer) unless otherwise indicated

[5] Second witness statement of Mrs Morrison, Tab 2 of Exhibit A1, at [10]

[9] Exhibit A1 - Tabs 1 and 3, both at [18]

[16] Exhibit A1, Tab 2 [9], Tab 4 [8]

[19] At [35], citing Hadjiloucas v Crean [1988] 1 WLR 1006 at 1019; [1987] 3 All ER 1008 at 1019

[20] At [11], citing Scott v Commissioner of Taxation (Cth) (No 2) (1966) 40 ALJR 265 at 279; cf Re State Public Services Federation; Ex parte Attorney-General (WA) [1993] HCA 30; (1993) 178 CLR 249 at 290 per Toohey J

[21] At [131], citing Equuscorp Pty Ltd v Glengallan Investments (2004) 218 CLR 471; [2004] HCA 55 and Sharrment Pty Ltd v Official Trustee in Bankruptcy (1988) 18 FCR 449; [1988] FCA 179

[27] There is, indeed, an entry next to the taxpayers' name, in the category "Interest income", showing the amount of $43,611.00, which agrees with the figure invoiced to the taxpayers at T19-616

[36] As outlined in Mrs Morrison's second witness statement, Exhibit A1, Tab 2 [30]ff

[44] Respondent's Written Outline of Submissions, at [80](b)(iii), relying on Raftland, per Gleeson CJ, Gummow and Crennan JJ at [34] and [36], and Hadjiloucas v Crean (see footnote 18)

[45] Applicant Submissions at [37]

[48] T26-760 of Exhibit R1 for Mr Morrison; T26-777 of Exhibit R2 for Mrs Morrison

[50] [2013] FCA 471

[52] Transcript 64.26, 64.28, 65.10, 65.34, 66.2, 71.18

[56] Applicant Submissions at [95]

[60] Letter dated 21 August 2009, T9-130

[72] Asterisks in the legislation have been omitted