Normandy Finance Pty Ltd v Commissioner of Taxation

The Main Overseas Players 10 Hua Wang Bank Berhard ("HWBB") is incorporated in Samoa and at all relevant times was the holder of a "B" class Offshore Banking Licence under the Off-shore Banking Act 1987 (Samoa) or its successor, the International Banking Act 2005 (Samoa) entitling it to act as a financial intermediary for clients of Gould Ralph and Company, a Sydney-based accounting firm, and the related offshore entities of those clients; in short, to act as a corporate treasury for such international and Australian-based clients. At all relevant times, the ultimate economic ownership and control of HWBB has been held by a person or persons standing behind the cover of JA Investments Limited, a company incorporated in the Cayman Islands, through that company's holding of controlling debentures in Pacific Securities Inc., a Samoan creditor-controlled company which, at all relevant times, owned all the issued shares in HWBB. 11 Hua Wang Finance Limited ("HW Finance") is a Samoan company and a subsidiary of HWBB. It holds a bank account with Westpac Banking Corporation in New Zealand in Australian dollars. 12 JA Investments Limited ("JA Investments") is a company incorporated in the Cayman Islands. It is said to be owned by a Mr Peter Borgas of Neuchatel, Switzerland. Pursuant to the memorandum and articles of association of JA Investments, Mr Vanda Russell Gould ("Mr Gould"), a Sydney-based chartered accountant, is and was at all relevant times the Appointor. 13 Normandy Finance and Investments Asia Ltd ("Normandy Asia") was incorporated in Hong Kong on 9 July 1992. At all relevant times, it has been a wholly owned subsidiary of Normandy Finance and Investments Ltd, a company incorporated in the United Kingdom. At all relevant times, the directors of Normandy Asia have been Mr Townsing and Chapway Ltd, a company incorporated in the British Virgin Islands. Chapway Ltd is the nominee company of a Hong Kong firm of accountants and is the corporate director of many companies formed in Hong Kong for clients of that firm. At all relevant times, Mr Townsing was the directing mind and will of Normandy Asia in the sense referred to in [7] above, albeit that after he left Malaysia to return to Australia in 1999, from time to time Mr Townsing used a Mr Daud bin Yunus, a resident of Malaysia, as his instrumentality. 14 Normandy Finance and Investments Ltd ("Normandy UK") was incorporated in the United Kingdom as a private limited company on 28 April 1983. The directors of Normandy UK are Susan Elizabeth Beech (since 12 July 2007) and Egmont International Associates Inc. of the Republic of Panama (since 14 May 1993). They are both nominee directors in the sense that they take their instructions from Mr Gould. Ms Beach resides in the Principality of Monaco and all meetings of directors of Normandy UK have been held in that Principality. Normandy UK is not resident in the United Kingdom for corporation tax purposes. At all relevant times, all the issued shares of Normandy UK have been beneficially owned by JA Investments. 15 As noted in [14] above, at all relevant times, Normandy UK has been a wholly owned subsidiary of JA Investments and, as noted in [12] above, Mr Gould is the person nominated as the Appointor under JA Investment's memorandum and articles of association. As noted in [10] above, at all relevant times, the ultimate economic ownership and control of HWBB was held by a person or persons standing behind the cover of JA Investments. The significance of Mr Gould's position as Appointor of JA Investments was not explored in the evidence, principally because Mr Gould was not called as a witness. Nevertheless, I am prepared to infer, an inference supported by Mr Townsing's evidence, that Mr Gould was the directing mind and will of both HWBB and Normandy UK at all relevant times. 16 It is clear from the evidence and I find that: (1) Mr Townsing was the directing mind and will, not only of Normandy Australia, Pilmora and Advant, but also of Normandy Asia at all relevant times; and (2) Mr Gould, or the firm through which he provided professional services to clients, Gould Ralph & Company, subsequently Gould Ralph Pty Ltd, provided accounting and taxation services to Mr Townsing and other Australian-based entities economically associated with Mr Townsing and the members of his family over the years with which these proceedings are concerned. Having regard to those matters, I also find that Mr Gould would not have acted contrary to Mr Townsing's instructions or interests in relation to transactions Normandy UK or HWBB had with entities in Australia economically associated with Mr Townsing or members of his family over this period. For that reason, the parties to those transactions could not be regarded as being, or as dealing with each other, at arm's length. So much is manifest in the conduct of the parties, if not in the terms of the instruments said to evidence those transactions. As indicated below, I have found many of these terms to be a disguise or pretence to convey the impression to a third party that the parties to them were, and had dealt with each other, at arm's length and to that extent these terms are shams. In saying this, I do not include dealings between Normandy Asia and Normandy Australia which, by reason of their parent company/wholly owned subsidiary relationship, were, at all times, transparently non-arm's length dealings between related parties which were not sought to be disguised as otherwise. VID 1336 of 2013

Normandy Australia 17 The first applicant in this proceeding is Normandy Australia and the related Tribunal reviews are AAT 2013/6560-6562. 18 As noted in [8] and [13] above, at all relevant times, Normandy Australia has been a wholly owned subsidiary of Normandy Asia that, at all relevant times, has been a wholly owned subsidiary of Normandy UK. 19 During the years ended 31 December 2002 to 2009 inclusive, Normandy Australia was paid amounts totalling $1,709,851 by Normandy Asia and, in addition, during the year ended 31 December 2007, $2,220,000 was said to be provided by Normandy Asia by way of "vendor finance" in respect of the purchase by Normandy Australia from Normandy Asia of shares in Cyclopharm Ltd, an Australian public company. 20 Normandy Australia's case is that, apart from $100,000 received by it in the year ended 31 December 2008 on behalf of and accounted to Lakeside Edgewater Partnership, all other amounts ($1,609,851 plus the vendor finance of $2,220,000, totalling $3,829,851) were provided by way of loans or finance from Normandy Asia. 21 The Commissioner re-calculated Normandy Australia's taxable income over the years ended 31 December 2001 to 2009 inclusive on the basis that all these amounts (including the $100,000 said to be received on behalf of Lakeside Edgewater Partnership and the increase in the loan amount in the financial accounts for the year ended 31 December 2001 in the sum of $233,029) were sham borrowings or transactions, a disguise for the bringing into Australia of funds or assets held for Mr Townsing and/or entities associated with him, with no obligation on Normandy Australia of repayment or payment; and were assessable income of Normandy Australia with the result that Normandy Australia, after the recoupment of losses in earlier years, had a taxable income in each of the years ended 31 December 2007 to 2009 inclusive. 22 The Commissioner gave effect to these re-calculations by issuing to Normandy Australia an amended assessment in respect of the year ended 31 December 2007 (including a shortfall interest charge) and original assessments in respect of the years ended 31 December 2008 and 31 December 2009. In addition, the Commissioner issued assessments of penalty in respect of each of these years. The assessments issued are summarised below. Year ended 31 Dec Taxable income returned by taxpayer Taxable income assessed by Commissioner Tax payable Shortfall interest charge Penalty Rate of penalty 2007 0 2,272,588 681,776.40 211,776.40 511,332.30 75% 2008 -* 337,541 101,262.30 - 75,946.70 75% 2009 -* 196,647 58,994.10 - 53,094.70 90%

• The applicant had not filed income tax returns for the years ended 31 December 2008 and 2009. 23 Prior to making the assessments, the Commissioner decided not to exercise his discretion under s 280-160 or s 298-20 of Sch 1 to the TAA to remit either the shortfall interest charge or the penalties. 24 In respect of Normandy Australia, the reviewable objection decisions before this Court in VID 1336 of 2013 are: (1) The disallowance of Normandy Australia's objection to its amended assessment of income tax for the year ended 31 December 2007. (2) The disallowance of Normandy Australia's objections to its assessments of income tax for the years ended 31 December 2008 and 2009. (3) The disallowance of Normandy Australia's objections to its assessments of penalty tax for the years ended 31 December 2007 to 2009 inclusive, and the reviewable objection decisions before the Tribunal in AAT 2013/6560-6562 are: (4) The refusal to remit penalties for each of the years ended 31 December 2007 to 2009 inclusive. (5) The refusal to remit shortfall interest charge for the year ended 31 December 2007.

Advant 25 The second applicant in this proceeding is Advant Pty Ltd ("Advant"), a company incorporated in Australia, and the related Tribunal reviews are AAT 2014/3353 and 3354. 26 It is an agreed fact that, at all relevant times, Advant was owned by Mr Townsing, and his wife, Mrs Gaynor Patricia Townsing ("Mrs Townsing"). 27 During the year ended 30 June 2002 Normandy Asia paid $650,000 to Advant and Normandy UK paid $500,000 to Advant. Advant's case is that both these amounts were received by way of loan from Normandy Asia and Normandy UK respectively. 28 The Commissioner re-calculated Advant's taxable income for the years ended 30 June 2002 and 2003 on the basis that both these amounts were sham borrowings, a disguise for the bringing into Australia of funds held for Mr Townsing and/or entities associated with him, with no obligation on Advant of repayment; and were assessable income of Advant in the 2002 year and claims for deductions for interest and borrowing expenses in both years were not allowable. The Commissioner issued amended assessments to give effect to these re-calculations after allowing for losses carried forward from earlier years and losses previously returned in the years ended 30 June 2002 and 2003. In addition, the Commissioner issued assessments of shortfall penalty in respect of each of these years. The assessments issued are summarised below: Year ended 30 Jun Taxable income returned by taxpayer Taxable income assessed by Commissioner Tax payable Penalty Rate of penalty 2002 0 886,679 266,003.70 199,502.70 75% 2003 0 1,855 556.50 500.85 90%

29 Prior to making the assessments, the Commissioner decided not to exercise his discretion under s 298-20 of Sch 1 to the TAA to remit the penalties. 30 In respect of Advant, the reviewable objection decisions before this Court in VID 1336 of 2013 are: (1) The disallowance of Advant's objections to its amended assessments of income tax for the years ended 30 June 2002 and 2003. (2) The disallowance of Advant's objections to its assessments of penalty tax for the years ended 30 June 2002 and 2003, and the reviewable objection decisions before the Tribunal in AAT 2014/3353 and 3354 are the refusal to remit penalties for each of the years ended 30 June 2002 and 2003. VID 1337 of 2013

Pilmora 31 The first applicant in this proceeding is Pilmora as trustee of the Trust, and the related Tribunal reviews are AAT 2013/6548-6552. 32 It is an agreed fact that, at all relevant times, Pilmora was the trustee of the Trust constituted by deed made the 13th day of May 1982. 33 During the year ended 30 June 1994 Pilmora as trustee of the Trust claims that it disposed of a receivable in the sum of $4,999,998.50 owing by Jarrell Pty Ltd ("Jarrell"), an Australian incorporated company in which it held a 50% interest, and incurred a capital loss of that amount. This is disputed by the Commissioner on a number of bases, including that: (1) There is no contemporaneous written evidence to support the acquisition of the receivable; and the oral evidence adduced on the subject did not discharge the onus Pilmora carried; (2) There is no contemporaneous written evidence to support the acquisition of the receivable after 19 September 1985; and the oral evidence adduced on the subject did not discharge the onus Pilmora carried; (3) Pilmora had not discharged the onus it carried to prove the cost base of the receivable was $4,999,998.50; (4) There is no contemporaneous written evidence to support the disposal of the receivable during the year ended 30 June 1994; and the oral evidence adduced on the subject did not discharge the onus Pilmora carried; (5) The receivable was not Pilmora's to dispose of; it was owned by Mr Townsing and Mrs Townsing. Pilmora claims that the transaction which gave rise to its acquisition of the receivable and of which there is no contemporaneous written evidence, also gave rise to a pre-20 September 1985 capital gain which, during the year ended 30 June 1986, Pilmora resolved to distribute to Mr and Mrs Townsing for their own use and benefit absolutely. There is a real issue here as to the identity or subject of Pilmora's resolution: the pre-20 September 1985 capital gain which, even on Pilmora's case, could not be more than $4,914,998.50, or the receivable in the amount of $4,999,998.50. Whatever it was, this unpaid entitlement of Mr and Mrs Townsing was relied on for a large number of subsequent distributions of money by Pilmora to Mr and Mrs Townsing out of money said to be borrowed by Pilmora from entities overseas. These borrowed moneys are alleged by the Commissioner to be sham borrowings, a disguise for the bringing into Australia of funds held for Mr Townsing and/or entities associated with him, with no obligation on Pilmora of repayment; and were assessable income of the Trust in computing its s 95 net income for the purposes of the Income Tax Assessment Act 1936 (Cth) ("1936 Act"), to be assessed to Pilmora as trustee of the Trust, or Mr Townsing, Mrs Townsing and/or their sons, Henry Townsing Jnr and Edward Townsing, as beneficiaries. 34 The Commissioner has included the sum of $1,784,450 in the s 95 net income of the Trust for the year ended 30 June 1994. The basis upon which the Commissioner has done this is far from clear and is disputed by Pilmora: first, that it involves a misconception of the underlying circumstances as to how Pilmora came under an obligation in respect of this amount; and second, that, in any event, the amount was not paid, by way of loan or otherwise, to Pilmora in the year ended 30 June 1994, so as to be capable of being included in the s 95 net income of the Trust for that year. Pilmora claims that the amount of $1,784,450 represents the balance of its obligation to Glossolalia Pty Ltd ("Glossolalia"), a company owned by Townsing family interests, as a beneficiary of the Trust, in respect of its unpaid present entitlements to the income of the Trust for the years ended 30 June 1990 (grossed up franked dividend $1,821,105 less franking credit $710,231 = $1,110,874) and 30 June 1991 (grossed up franked dividend $1,134,517 less franking credit $442,461 = $692,056) making a total unpaid present entitlement for both years of $1,802,930. According to Pilmora, the unpaid present entitlements were further reduced to $1,784,450 by payments made by Pilmora to Glossolalia after the 1991 income year. Pilmora claims that apart from its unpaid present entitlements from those years, Glossolalia had no assets in the 1990-1994 period; the Trust had a negative net income in the 1993 and 1994 income years and Glossolalia was not capable of advancing $1.7 million to Pilmora as trustee of the Trust in that period. Due to the effluxion of some 25 years since the 1990 and 1991 years of income, the evidentiary material in support of Pilmora's claims is not optimal. 35 By reason of the matters referred to in [33] and [34] above, and because Mr and Mrs Townsing were non-residents of Australia during the years ended 30 June 1994 to 1997 inclusive, the Commissioner has issued assessments of income tax against Pilmora as trustee of the Trust on account of Mr Townsing and Mrs Townsing, in reliance on former s 98(4) of the 1936 Act, to give effect to his re-calculation of the s 95 net income of the Trust for those years. The assessments of income tax are summarised below. Year ended 30 June Total share of net income assessed to Trustee pursuant to s 98(4) Account of Mr Townsing Account of Mrs Townsing* ($) Share of net income assessed to Trustee pursuant to s 98(4) Tax Payable by the Trustee at non-resident rates Share of net income assessed to Trustee pursuant to s 98(4) Tax Payable by the Trustee at non-resident rates ($) ($) ($) ($) 1994 1,718,057 859,028 397,742.66 859,029 397,743.13 1995 540,235 270,118 120,500.46 270,117 120,499.99 1996 13,753 6,876 1,994.04 6,877 1,994.33 1997 1,133 567 164.43 566 164.14

• The Commissioner acknowledges that these should have been assessed to the account of Mr Townsing and does not seek to defend the assessments to Pilmora on account of Mrs Townsing. 36 In addition, he has issued assessments of shortfall penalty in respect of each of those years, as follows: Year ended 30 June Trustee Tax Shortfall Penalty * Penalty Rate 1994 $795,486.26 $596,614.30 75% 1995 $241,000.00 $216,900.35 90% 1996 $3,988.66 $3,589.50 90% 1997 $328.28 $295.70 90%

• It follows from * in [35] above, that the Commissioner only seeks to defend 50% of the penalties assessed in each year. 37 Prior to making these penalty assessments, the Commissioner decided not to exercise his discretion under s 227(3) of the 1936 Act to remit these penalties. Such decisions are not objectionable taxation decisions separate from the penalty assessments themselves. 38 The Commissioner also assessed Pilmora as trustee of the Trust in respect of the year ended 30 June 2001 on the sum of $41,579 on the basis that having been distributed to Advant, which was not a specified beneficiary of the Trust, that sum represented a share of the net income of the Trust for the year ended 30 June 2001 to which no beneficiary was presently entitled, assessable to Pilmora in reliance on s 99A(4A) of the 1936 Act. The Commissioner no longer seeks to defend this assessment. 39 In respect of Pilmora as trustee of the Trust, the reviewable objection decisions before this Court in VID 1337 of 2013 are: (1) The disallowance of Pilmora's objections to the s 98(4) assessments of income tax on account of Mr Townsing and Mrs Townsing (the latter now conceded by the Commissioner) for the years ended 30 June 1994 to 1997 inclusive. (2) The disallowance of Pilmora's objection to the s 99A(4A) assessment of income tax for the year ended 30 June 2001 (now conceded by the Commissioner), and the reviewable objection decisions before the Tribunal in AAT 2013/6548-6552 are: (3) The disallowance of Pilmora's objections to its assessments of penalty tax for the years ended 30 June 1994 to 1997 inclusive.

Henry George Townsing 40 The second applicant in this proceeding is Mr Townsing and the related Tribunal reviews are AAT 2013/6563-6571. 41 The Commissioner re-calculated the s 95 net income of the Trust for the years of income ended 30 June 2000 to 2009 inclusive: (1) By including as assessable income of the Trust amounts which Pilmora claims it borrowed from Normandy Asia. The Commissioner contends that these are sham borrowings, a disguise for the bringing into Australia of funds held for Mr Townsing and/or entities associated with him, with no obligation on Pilmora of repayment. Year Amount ($) 30 June 1999 124,335 30 June 2001 674,951 30 June 2006 60,000 30 June 2008 160,000

and by disallowing the following amounts claimed as allowable deductions by Pilmora for interest under the borrowings: Year Interest ($) 2001 25,375 2002 73,333 2003 73,737 2004 69,811 2005 76,922 2006 68,950

(2) By including as assessable income of the Trust amounts which Pilmora claims it borrowed from Normandy UK (less amounts paid by Pilmora to Normandy UK for which deductions have not been allowed). The Commissioner contends that these are sham borrowings, a disguise for the bringing into Australia of funds held for Mr Townsing and/or entities association with him, with no obligation on Pilmora of repayment: Year Amount ($) 2002 500,000 2004 350,000 2005 200,000 2008 750,000

and by disallowing the following amounts claimed as allowable deductions by Pilmora for interest under the borrowings: Year Interest ($) 2002 16,333 2003 49,600 2004 55,000 2005 112,350 2006 128,635

(3) By including as assessable income of the Trust amounts which Pilmora claims it borrowed from HWBB (less amounts paid by Pilmora to Normandy Asia for which deductions have not been allowed). The Commissioner contends that these are sham borrowings, a disguise for the bringing into Australia of funds held for Mr Townsing and/or entities associated with him, with no obligation on Pilmora of repayment: Year Amount ($) 2003 140,000 2004 30,000

and by disallowing the following amounts claimed as allowable deductions by Pilmora for interest under the borrowings: Year Interest ($) 2003 7,456 2004 16,100 2005 20,437 2006 23,228

(4) By disallowing the following amounts claimed as allowable deductions by Pilmora for borrowing costs pursuant to s 25-25 of the Income Tax Assessment Act 1997 (Cth) ("1997 Act") in respect of the borrowings referred to in (1), (2) and (3) above: Year Deduction claimed for borrowing costs ($) 2002 3,333 2003 5,002 2004 6,182 2005 5,240 2006 17,701 2007 26,189 2008 22,204 2009 5,302 2010 5,000

42 The Commissioner gave effect to these re-calculations by, inter alia, issuing to Mr Townsing notices of amended assessment and penalty assessments as follows: Year ended 30 June Previous taxable income Adjustment for share of net income of Trust Amended taxable income Tax shortfall Penalty Penalty Rate Shortfall interest charge ($) ($) ($) ($) ($) ($) ($) 2000 20,259 89,507 109,766 41,016.71 30,762.50 75% 2001 161,596 170,186 331,782 82,540.21 74,286.15 90% 2002 133,339 337,389 470,728 163,633.67 147,270.30 90% 2003 110,578 595,753 703,331 287,485.20 258,736.65 90% 2004 62,547 1,055,798 1,118,345 512,061.54 460,855.35 90% 2005 99,606 49,268 148,874 23,894.98 21,505.45 90% 16,254.68 2006 101,539 89,396 190,935 43,357.06 39,021.35 90% 23,453.33 2007 102,787 205,107 307,894 93,014.11 83,712.70 90% 43,630.25 2008 126,136 277,814 403,950 127,990.31 115,191.25 90% 41,469.41 2009 145,973 155,692 301,665 73,492.87 66,340.85 90% 17,211.79

43 For the 2000 year, additional tax by way of penalty was imposed on Mr Townsing pursuant to s 226J and s 226R at a base rate of 75% for intentional disregard of a taxation law. Prior to making this penalty assessment, the Commissioner determined not to exercise his discretion under s 227(3) to remit this penalty. Such a decision is not an objectionable taxation decision separate from the penalty assessment itself. 44 For the 2001 to 2009 years, an administrative penalty was imposed on Mr Townsing pursuant to s 284-75(1) of Sch 1 to the TAA on the basis that Mr Townsing or his agent made a statement to the Commissioner that was false or misleading in a material particular because Mr Townsing did not include all of his income in his income tax returns. The base penalty amount is 75% for intentional disregard of a taxation law pursuant to item 1 in the table in s 284-90(1) and this was increased by 20% to 90% in each year pursuant to s 284-220 because Mr Townsing had been assessed for the base penalty amount of 75% under s 226J for a previous accounting period: s 284-220 of Sch 1 to the TAA; A New Tax System (Tax Administration) Act (No 2) 2000 (Cth) s 3 of Sch 1 "Transitional". Prior to issuing these penalty assessments, the Commissioner decided not to exercise his discretion under s 298-20 of Sch 1 to the TAA to remit the penalties. 45 In respect of Mr Townsing, the reviewable objection decisions before this Court in VID 1337 of 2013 are: (1) The disallowance of Mr Townsing's objections to his amended assessments of income tax (including shortfall interest charges for the years ended 30 June 2005 to 2009 inclusive) for the years ended 30 June 2000 to 2009 inclusive. (2) The disallowance of Mr Townsing's objections to his assessments of penalty tax for the years ended 30 June 2000 to 2009 inclusive, and the reviewable objection decisions before the Tribunal in AAT 2013/6563-6571 are the refusal to remit penalties for the years ended 30 June 2001 to 2009 inclusive and the refusal to remit shortfall interest charge for the years ended 30 June 2005 to 2009 inclusive.

Observations on Concepts and Principles Relevant to the Commissioner's Assessments

The Concept of "Sham" 46 As Lockhart J observed in Sharrment Pty Ltd & Ors v Official Trustee in Bankruptcy (1988) 18 FCR 449 at 453, "sham" is a word which, although not infrequently having attracted the attention of the courts, usually hovers on the periphery of cases. As in Sharrment, here it lies at the heart of the case. The principal basis upon which the Commissioner seeks to defend the assessments he has issued to the applicants, both in this Court and in the Tribunal, is that the payments contended by the applicants to be loans from entities overseas to entities in Australia, and the instruments, if any, said to evidence the terms on which these payments were made, are sham transactions and documents, a disguise or pretence for something else; that something else is identified as the bringing into Australia of funds held for Mr Townsing and/or entities association with him, with no obligation on the recipient to repay. Apart from Mr Townsing, the Commissioner does not identify the associated entity or entities for which the funds are held, nor the entity or entities holding them; rather, in the absence of the payments being found to be loans to and borrowings by the Australian entities, he puts the applicants to proof that the assessments are excessive, and contends that the applicants have not discharged the onus each carries: s 14ZZO(b) of the TAA. 47 In Sharrment, Lockhart J at 453 noted that the term "sham" is ambiguous and that ambiguity and uncertainty surrounds its meaning and application, a view which found resonance with the plurality in Raftland Pty Ltd v Commissioner of Taxation of the Commonwealth of Australia (2008) 238 CLR 516 at [35], who, because a finding of sham requires a finding of an intent to deceive, suggested the need for caution in adoption of the description "sham" (at [36]); a court will not find that a transaction is a sham if another inference is at least equally open: Sharrment at 461; see too Lewis v Condon (2013) 85 NSWLR 99 at [63] where Leeming JA, with whom McColl JA and Sackville AJA agreed, referred to the observations of Neuberger J in National Westminster Bank Plc v Jones [2001] BCLC 98 at [59] that there is a "strong and natural presumption against holding a provision or a document a sham". To like effect, see Coshott v Prentice (2014) 221 FCR 450 at [64]. 48 At the outset, there is a need to distinguish the way in which the courts in this country, and in the United Kingdom and Canada, have construed and applied the concept of "sham" to transactions and documents, and not confuse it, with the formulation and application of the sham doctrine in the United States, which grew out of the landmark decision of the United States Supreme Court in Gregory v Helvering 293 US 465 (1935). In delivering the judgment of the Court, Justice Sutherland at 469,470 said: Putting aside, then, the question of motive in respect of taxation altogether, and fixing the character of the proceeding by what actually occurred, what do we find? Simply an operation having no business or corporate purpose - a mere device which put on the form of a corporate reorganization as a disguise for concealing its real character, and the sole object and accomplishment of which was the consummation of a preconceived plan, not to reorganize a business or any part of a business, but to transfer a parcel of corporate shares to the petitioner. No doubt, a new and valid corporation was created. But that corporation was nothing more than a contrivance to the end last described. It was brought into existence for no other purpose; it performed, as it was intended from the beginning it should perform, no other function. When that limited function had been exercised, it immediately was put to death. In these circumstances, the facts speak for themselves and are susceptible of but one interpretation. The whole undertaking, though conducted according to the terms of subdivision (B), was in fact an elaborate and devious form of conveyance masquerading as a corporate reorganization, and nothing else. The rule which excludes from consideration the motive of tax avoidance is not pertinent to the situation, because the transaction upon its face lies outside the plain intent of the statute. To hold otherwise would be to exalt artifice above reality and to deprive the statutory provision in question of all serious purpose. 49 It has been suggested, see Postlewaite, Philip F, "The Status of the Judicial Sham Doctrine in the United States" (2005) 15(1) Revenue Law Journal 140, following the Fifth Circuit's decision in Compaq Computer Corp v Commissioner of Internal Revenue 277 F 3d 778 (5th Cir 2001) overturning the Tax Court's conclusion that the transaction in that case lacked both a business purpose and a pre-tax profit potential (113 TC 214 (1991)), as well as other recent cases, including that of the United States Supreme Court in Gitlitz v Commissioner of Internal Revenue 531 US 206 (2001), that the judicial sham doctrine in the United States may be on the wane, necessitating greater reliance on Congress to assume responsibility for preventing "excessive taxpayer behaviour". Whether or not this is so, may be put to one side, save to say that that doctrine has nothing to do with concept of "sham" in this country; nor in the United Kingdom or Canada. 50 In 1984, the Canadian Supreme Court, in Stubart Investments Limited v R [1984] 1 SCR 536, expressly rejected the proposition that a transaction may be disregarded for tax purposes solely on the basis that it was entered into by a taxpayer without an independent or bona fide business purpose (at [55]). In the course of delivering the principal judgment of the Court (concurred in by Beetz and McIntyre JJ; Wilson J agreeing, concurred in by Ritchie J), Estey J embraced the concept of sham as articulated by Diplock LJ in Snook v London & West Riding Investments Ltd [1967] 2 QB 786 at 802 (see [53] below) which he said had been "adopted by this Court" in MNR v Cameron, [1974] SCR 1062. At [28] Estey J noted that in the United Kingdom there was evidence that the courts were moving from the principles enunciated in the older cases to "something approaching the United States bona fide business purpose rule". This was a reference to the then recent decisions of the House of Lords in W T Ramsay Ltd v Inland Revenue Commissioners [1982] AC 300; CIR v Burmah Oil Co Ltd [1982] STC 30 and Furniss (Inspector of Taxes) v Dawson [1984] AC 474, a move which was applauded in the writings of some at the time: see Peter Millet QC, as his Lordship then was, in (1986) British Tax Review (Pt 6) 327-339, where the learned author concluded: So, after a journey that has taken 50 years, we have at last found a solution to the problem of artificial tax avoidance; and it turns out to be remarkably similar to that expounded by Learned Hand J. in 1934. It is not based merely on rhetoric or prejudice against the tax-avoider, but on sound logic and legal reasoning. It is in accordance with ordinary legal principles; and indeed restores the role of ordinary legal reasoning to tax cases, from which it had effectively been excluded. Above all, it makes the law accord with common sense; for it really would offend common sense if the taxpayer had won in Ramsay or Eilbeck v. Rawling, Helvering v. Gregory or Furniss v. Dawson. None of those taxpayers has any real cause for complaint. When he was first told of the scheme and that it would save tax, he must have been incredulous: it was too good to be true. It is only fitting that the answer given by the courts is: "Indeed, it is too good to be true.". 51 With the benefit of hindsight, it is easy to say that the applause was somewhat premature; subsequent decisions of the House of Lords cast such doubt on the efficacy of the so-called solution that recourse eventually had to be had to a statutory anti-abuse provision (Part 5 (ss 206-215) of the Finance Act 2013 (UK)) in the fight against artificial tax avoidance. But that too can be put to one side, because what is relevant for present purposes is that the concept of "sham" in the United Kingdom remains today, as it has always done, in the restated articulation that fell from Diplock LJ in London and West Riding Investments (see [53] below). 52 Prior to what fell from Diplock LJ in London and West Riding Investments, Windeyer J had occasion to consider the concept of sham in two different factual contexts. First, in Albion Hotel Pty Limited v The Commissioner of Taxation of the Commonwealth of Australia (1964-1965) 115 CLR 78, his Honour held that a written instrument, brought into existence some two years after a parent company started making advances to its wholly owned subsidiary, but back-dated to around the commencement of those advances, requiring the subsidiary to pay interest on the advances, in circumstances where no interest was paid or asked to be paid, was a sham and the claims for deductions disallowed, even though the moneys advanced by the parent to the subsidiary, and payments by the subsidiary to the parent, were to be treated as loans and repayments thereof respectively. Second, in Scott v Commissioner of Taxation of the Commonwealth (No 2) (1966) 40 ALJR 265, his Honour had occasion to consider whether a superannuation fund was established for the benefit of employees; he concluded that it was not, but if it was, his Honour concluded that it was not applied at any time for the purposes for which it was established. In the course of his reasons, his Honour said (at 279): The difficult and debatable philosophic questions of the meaning and relationship of reality, substance and form are for the purposes of our law generally resolved by asking did the parties who entered into the ostensible transaction mean it to be in truth their transaction, or did they mean it to be, and in fact use it as, merely a disguise, a façade, a sham, a false front - all these words have been metaphorically used - concealing their real transaction: see the cases referred to by Jordan C.J. in Perpetual Trustee Co. v. Bligh (1940), 41 S.R. (N.S.W.) 33, at p. 39, and Hawke v. Edwards (1947), 48 S.R. (N.S.W.) 21, at p. 23, and Collis v. Margroarty and O'Sullivan, [1913] S.R.Qd. 25, affirmed 15 C.L.R. 692. 53 Diplock LJ described the "popular and pejorative word " sham in London and West Riding Investments at 802 in these terms: 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. But one thing, I think, is clear in legal principle, morality and the authorities (see Yorkshire Railway Wagon Co. v. Maclure and Stoneleigh Finance Ltd. v. Phillips), that for acts or documents to be a "sham", with whatever legal consequences follow from this, all the parties thereto must have a common intention that the acts or documents are not to create the legal rights and obligations which they give the appearance of creating. No unexpressed intentions of a "shammer" affect the rights of a party whom he deceived. There is an express finding in this case that the defendants were not parties to the alleged "sham." So this contention fails. (Emphasis added) 54 In Miles v Bull (1969) 1 QB 258, Megarry J at 264 said: [A] transaction is no sham merely because it is carried out with a particular purpose or object. If what is done is genuinely done, it does not remain undone merely because there was an ulterior purpose in doing it. … Mere circumstances of suspicion do not by themselves establish a transaction as a sham; it must be shown that the outward and visible form does not coincide with the inward and substantial truth. So much was accepted as correct by Leeming JA in Lewis v Condon at [68] in reliance on the authorities and writings there referred to. 55 In Ramsay, Lord Wilberforce said at 323: [T]o say that a document or transaction is a "sham" means that while professing to be one thing, it is in fact something different. And Lord Fraser at 337, after referring with apparent approval to what Diplock LJ said at 802 in London and West Riding Investments said: Thus an agreement which is really a hire purchase agreement but which masquerades as a lease would be a sham. 56 Sixteen years after Sharrment, and twenty two years after Ramsay, the High Court of Australia endorsed what Lockhart J said in the former case, in Equuscorp Pty Ltd v Glengallan Investments Pty Ltd (2004) 218 CLR 471, at [46] in the following way: "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 consequence. 57 In Equuscorp at [46]-[51], the High Court criticised the application of the notion of sham to transactions which were legally effective, but where their economic effect was put in issue. The Court made it clear that any general principle - "that there is no 'loan' unless there is 'real' money lent" - was wrong and should be over-ruled (at [47]). As Lockhart J pointed out in Sharrment at 454 by reference to Perpetual Trustee Co Ltd v Barnett (1969) 90 WN (Pt 1) (NSW) 637, the fact that the transaction involved a round robin of cheques does not necessarily establish that the transaction is a sham, even when no party has funds to meet the cheques. 58 Just because one person or the same group of persons may be behind two corporate entities that enter into a contract does not mean that the contract is not genuine; that is, it is a document the parties do not intend to have its apparent legal effect. Moreover, just because a document described as a contract is unsigned or is only signed by one party does not by itself indicate that it is a sham. An unsigned contract can record the terms of an agreement that has been reached between parties: R v Dickson (No 18) [2015] NSWSC 268 at [47]. 59 In Sharrment, Lockhart J distinguished the characterisation of a transaction or document as artificial from a sham transaction or document and observed by reference to Coppleson v Commissioner of Taxation (1981) 52 FLR 95 at 100, that the complexity of a transaction does not in itself establish its character as a sham (at 454, 455). To like effect, Leeming JA in Lewis v Condon said (at [64]): Sham … is to be distinguished from other transactions to which legal opprobrium attaches, such as transactions entered into for an improper purpose, which have long been the subject of statutory attention, such as voidable settlements or conveyances to defraud creditors. Sham is also to be distinguished from the body of law (which ultimately turns on questions of statutory construction) as to whether apparently artificial transactions attract taxation advantages: see Fletcher v Federal Commissioner of Taxation (1991) 173 CLR 1 at 19 and Tower MCashback LLP I v Revenue and Customs Commissioners [2011] UKSC 19; [2011] 2 AC 457… 60 Even if an agreement was entered into for the sole purpose of obtaining favourable tax treatment or a tax benefit, it does not necessarily follow that it was not genuinely intended by the parties to have legal affect. Indeed, as was pointed out by Lehane J, albeit in dissent, in Richard Walter Pty Ltd v Commissioner of Taxation (1996) 67 FCR 243 at 267-268: Moreover, it must be borne in mind that it is of the essence of a structure intended to be effective to minimise tax that it be created by means of real transactions, giving rise to real rights and obligations, however "artificial" they may be, in the sense of being incapable of rational explanation except on the basis of their tax consequences. It cannot be said, I think, that there is anything more artificial in the transactions with which we are concerned than there was in those which, in a somewhat different context, confronted the Court in Sharrment Pty Ltd v Official Trustee in Bankruptcy (1988) 18 FCR 449. One expects, in a case such as this, that transactions are intended to have their apparent legal effect because it is only if they do that they are efficacious to achieve the desired consequences. In this particular case, it is no longer suggested that any of the transactions involved in the 1981 "re-structure" had any legal effect other than their apparent effect; it is suggested only that the "loans" to the taxpayer were not really loans at all but payments which were gratuitous and which were not intended to be recoverable. That, for reasons which I have given, seems to me a conclusion so surprising that one would be reluctant to accept it in the absence of cogent evidence. However, there is nothing in the documentary evidence which supports that conclusion: indeed, the documentary evidence is to the contrary effect. In Raftland at [56] the plurality observed that what Lehane J said in Richard Walter was "undoubtedly true" while at the same time pointing out that it did "not deny the possibility that in a particular case, documents might not be intended by the parties to have legal effect according to their tenor". I shall return to Richard Walter at [65] below. 61 In Accent Management Limited v Commissioner of Inland Revenue [2007] NZCA 230 at [63], the New Zealand Court of Appeal echoed what Lehane J had said in Richard Walter: Whether these transactions are shams depends primarily on the states of minds of Dr Muir and Mr Bradbury as to their genuineness. Given that it is not to their advantage that the transactions be shams, it might be thought a little perverse to attribute to them states of mind which are inconsistent with their best interests. 62 A finding that a term or terms of an instrument constituting a transaction is a pretence or sham is more likely to lead to a conclusion that the transaction so constituted is a sham than if the instrument merely evidences the transaction. But even where a court finds that a term of an instrument constituting a transaction is a sham, a court will not necessarily treat the underlying transaction as a sham. In Lewis v Condon, Leeming JA at [65] gave, as an example, the clause found by the House of Lords to be a sham in the otherwise valid lease in AG Securities v Vaughan [1990] 1 AC 417. To the same effect is the decision of the English Court of Appeal in Hitch v Stone (Inspector of Taxes) [2001] STC 214 at [86] where Arden LJ, with whom Kay LJ and Sir Martin Nourse agreed, concluded that cl 2 of the 1984 deed was capable of being a sham even if cl 1 of the same deed was valid and effective, and not a sham. 63 Such cases illustrate the point that it is possible for instruments to contain, in their terms, elements of pretence, but if those elements do not impugn the intentions of the parties to enter into a transaction of the kind asserted, for example, because the pretended terms do not touch the rights and obligations essential to or for a finding that the parties entered into a transaction of that kind, the transaction itself will not be a sham, even if the pretended terms are: see Accent Management at [54]-[64]. 64 In Hitch, Arden LJ summarised the principles relevant to sham transactions in the following way (at 229-230, [63]-[69]): [63] The particular type of sham transaction with which we are concerned is that described by Diplock LJ in Snook v. London & West Riding Investments Ltd [1967] 2 QB 786. It is of the essence of this type of sham transaction that the parties to a transaction intend to create one set of rights and obligations but do acts or enter into documents which they intend should give third parties, in this case the Revenue, or the court, the appearance of creating different rights and obligations. The passage from Diplock LJ's judgment set out above has been applied in many subsequent decisions and treated as encapsulating the legal concept of this type of sham. Mr Price referred us to Sharrment Pty Ltd v. Official Trustee in Bankruptcy (1988) 82 ALR 530 in which the Federal Court of Australia drew on Diplock LJ's formulation of sham in Snook's case. [64] An inquiry as to whether an act or document is a sham requires careful analysis of the facts and the following points emerge from the authorities. [65] First, in the case of a document, the court is not restricted to examining the four corners of the document. It may examine external evidence. This will include the parties' explanations and circumstantial evidence, such as evidence of the subsequent conduct of the parties. [66] Second, as the passage from Snook makes clear, the test of intention is subjective. The parties must have intended to create different rights and obligations from those appearing from (say) the relevant document, and in addition they must have intended to give a false impression of those rights and obligations to third parties. [67] Third, the fact that the act or document is uncommercial, or even artificial, does not mean that it is a sham. A distinction is to be drawn between the situation where parties make an agreement which is unfavourable to one of them, or artificial, and a situation where they intend some other arrangement to bind them. In the former situation, they intend the agreement to take effect according to its tenor. In the latter situation, the agreement is not to bind their relationship. [68] Fourth, the fact that parties subsequently depart from an agreement does not necessarily mean that they never intended the agreement to be effective and binding. The proper conclusion to draw may be that they agreed to vary their agreement and that they have become bound by the agreement as varied (see for example Garnac Grain Co. Inc v H.M.F. Faure and Fairclough Ltd. [1966] 1 QB 650, 683-4 per Diplock LJ, which was cited by Mr Price). [69] Fifth, the intention must be a common intention (see Snook). 65 Relevantly to the case at hand, one is drawn to the observations of the majority judgments in Richard Walter. At first instance (95 ATC 4,440) the primary judge found that loans claimed to have been made to the taxpayer by another company, the governing mind of both companies being a Dr Wenkart, were shams in the sense that it was never intended by the taxpayer and the lender that the taxpayer would repay the moneys which it received from the lender. On appeal to a Full Court, Lockhart J at 246, 247 said that there were two findings of the primary judge which were crucial to his Honour's conclusion. First, his Honour's rejection of the only witness (a Mr Holden), called to support the appellant's case that the payments were loans, as a credible witness and second, the failure to call other persons who could have contributed to the discussion on the true nature of the transactions, in particular Dr Wenkart, who the primary judge found to be "the governing mind of all relevant entities". Hill J made similar observations at 256, 257. After referring to the extract from Lord Diplock's judgment in London and West Riding Investments reproduced in [53] above, Hill J at 257, 258 said: I have set out the quotation from Snook having regard to a submission made by counsel for Richard Walter that a transaction could not be a sham unless there was shown to be some other real transaction for which the sham transaction was a disguise. While that will ordinarily be the case it is not invariably so. A transaction may, as the passage cited from Snook recognises, be found to be a sham where there is no real underlying transaction at all. Without in any way derogating from the views expressed by Lockhart J in Sharrment, I would prefer to define a transaction as being a sham transaction where it involves: A common intention between the parties to the apparent transaction that it be a disguise for some other and real transaction or for no transaction at all. … However, in a case such as the present where there have been real payments made by bills of exchange in the form of cheques cleared through the banking accounts of the parties and recorded as loans in relevant books of account, the transactions involving the bills of exchange can clearly not be a disguise for something which is not a transaction at all. Rather, for there to be a sham there will need, in such a case, to be a common intention of both the apparent lender and the apparent borrower, that the transaction which they have purported to have entered into disguises some real transaction. Last, but by no means least, his Honour made the following observations in relation to the respective obligations of the taxpayer and the Commissioner in relation to onus (at 259): Even if it had been necessary to determine whether the so-called loan transactions were shams, the onus could not have been on the Commissioner to show what the real transaction was, of which the payments formed part. Once sham is alleged by the Commissioner, he may then come under some factual obligation to identify the real transaction for which it is contended that the apparent transaction is but a disguise: Coppleson v Commissioner of Taxation (Cth) (1981) 52 FLR 95. But as that case itself illustrates, that is in the overall context of the statutory imposition of the burden of proof on the taxpayer and does not place upon the Commissioner an onus of satisfying the Court that there was a sham. The onus not being upon the Commissioner to show a sham, so too the onus cannot be on the Commissioner to show what the genuine transaction was which is said to have been obscured by that sham. As I have already sought to demonstrate, it was not necessary for his Honour to determine the matter by reference to sham in the sense of holding that the so-called loans were but a disguise for some other transaction. It was sufficient for his Honour to hold that the payments to Richard Walter were not loans. Once that finding had been made the question would then arise whether Richard Walter had satisfied the onus upon it of showing that the payments were not income. 66 Finally, and relevantly to the case at hand, it was made clear by the High Court in Raftland at [57] that it is the intention of the parties to the transaction or document that is relevant to a finding of sham and the fact that the legal or other professional advisers intend the transaction or document to take effect in accordance with its terms, will not save the document or transaction from a finding of sham if all the parties did not have that intention. Recently, this Court - see Millar v Commissioner of Taxation [2015] FCA 1104 - held that it was open to the Administrative Appeals Tribunal to reach the conclusion, as a matter of fact, that the subjective conclusion of the parties was not determinative and to find that the relevant intention in the arrangement was that of the professional adviser (at [53]). Whether or not that is correct in the face of what the plurality said in Raftland, need not be explored further; it is not this case. The intention of both, or at least one of the parties to the assailed transactions can be determined by reference to the evidence of Mr Townsing and the findings thereon; even if relevant, it is unnecessary to have recourse to some inference to be drawn as to the intention of a professional adviser who did not give evidence.

What is a Loan? 67 It is not possible to characterise a bare payment of money without knowing whether it discharges an existing obligation of the payer; whether it creates an obligation on the part of the recipient; or neither, in which case, if it is annexed to an intent on the part of the payer to beneficiate the receiver, it will be a gift. 68 The character of the payment as income or capital of the recipient at general law will also depend on the nature of the obligation discharged or the nature of the obligation created; but even a bare payment can be deemed by statute to be a dividend and, in consequence, assessable income depending on the circumstances of the payment, the source out of which the payment is made and the relationship of the recipient to the payer: see Div 7A of Pt III of the 1936 Act. 69 In Prime Wheat Association Ltd v Chief Commissioner of Stamp Duties (1997) 42 NSWLR 505, Gleeson CJ said at 512G: "The essence of a loan is an obligation of repayment". 70 In Commissioner of Taxation v Radilo Enterprises Pty Ltd (1997) 72 FCR 300 at 313, Sackville and Lehane JJ referred to what Dr CL Pannam wrote, in similar terms, in The Law of Money Lenders in Australia and New Zealand (1965) at 6: A loan of money may be defined, in general terms, as a simple contract whereby one person (the lender) pays or agrees to pay a sum of money in consideration of a promise by another person (the borrower) to repay the money upon demand or at a fixed date. The promise of repayment may or may not be coupled with a promise to pay interest on the money so paid. The essence of the transaction is the promise of repayment. As Lowe J put it in a judgment delivered on behalf of himself and Gavan Duffy and Martin JJ: "'Lend' in its ordinary meaning in our view imports an obligation on the borrower to repay." [Ferguson v O'Neil [1943] VLR 30 at 32.] Without that promise, for example, the old indebitatus count of money lent would not lay. Repayment is the ingredient which links together the definitions of 'loan' to be found in the Oxford English Dictionary, the various legal dictionaries and the text books. In essence then a loan is a payment of money to or for someone on the condition that it will be repaid. … See also Brick & Pipe Industries Ltd v Occidental Life Nominees Pty Ltd [1992] 2 VR 279 at 321-323 per Ormiston J. 71 And in Commissioner of Taxation v Firth (2002) 120 FCR 450 at [74], Sackville and Finn JJ said: Where the lender's recourse is limited to particular funds or assets, the possibility that the funds or assets will be insufficient to recoup the advance in full is a risk incurred by the lender. That risk will ordinarily be reflected in the rate of interest charged on the moneys borrowed. Nonetheless, the limited recourse features of the transaction does not alter its character as a loan. (Emphasis added.) 72 In short, a loan is a payment of money to which there is attached an obligation of repayment upon demand or at a fixed date.

A Company's State of Mind 73 In Lennard's Carrying Co Ltd v Asiatic Petroleum Co Ltd [1915] AC 705, Viscount Haldane said: … A corporation is an abstraction. It has no mind of its own any more than it has a body of its own; its active and directing will must consequently be sought in the person of somebody who for some purposes may be called an agent, but who is really the directing mind and will of the corporation, the very ego and centre of the personality of the corporation. 74 In Bolton, Denning LJ at 172 said: A company may in many ways be likened to a human body. It has a brain and nerve centre which controls what it does. It also has hands which hold the tools and act in accordance with directions from the centre. Some of the people in the company are mere servants and agents who are nothing more than hands to do the work and cannot be said to represent the mind or will. Others are directors and managers who represent the directing mind and will of the company, and control what it does. The state of mind of these managers is the state of mind of the company and is treated by the law as such. 75 In Tesco Supermarkets Ltd v Nattrass [1972] AC 153, Lord Reid at 171 made the following observations on this extract from Lord Denning's judgment in Bolton: In that case the directors of the company only met once a year; they left the management of the business to others, and it was the intention of those managers which was imputed to the company. I think that was right. There have been attempts to apply Lord Denning's words to all servants of the company whose work is brainwork, or who exercise some managerial discretion under the direction of superior officers of the company. I do not think Lord Denning intended to refer to them. He only referred to those who "represent the directing mind and will of the company, and control what it does". 76 A little earlier, at 170, his Lordship said: A living person has a mind which can have knowledge or intention or be negligent and he has hands to carry out his intentions. A corporation has none of these. It must act through living persons, though not always one or the same person. Then the person who acts is not speaking or acting for the company. He is acting as the company and his mind which directs his acts is the mind of the company. There is no question of the company being vicariously liable. He is not acting as a servant, representative, agent or delegate. He is an embodiment of the company or, one could say, he hears and speaks through the persona of the company, within his appropriate sphere, and his mind is the mind of the company. If it is a guilty mind then that guilt is the guilt of the company. It must be a question of law whether, once the facts have been ascertained, a person in doing particular things is to be regarded as the company or merely as the company's servant or agent. In that case, any liability of the company can only be a statutory or vicarious liability. 77 In Hamilton v Whitehead (1988) 166 CLR 121, Mason CJ and Wilson and Toohey JJ at 127 recognised the validity of what Lord Reid said in Tesco and also referred to the statement of Denning LJ in Bolton, with apparent approval. 78 The learned authors of Ford's Principles of Corporations Law (15th ed, Butterworths Lexis Nexis, 2013) at 989, [16.180] write: Perhaps the clearest case of a human mind being treated as the company's mind is in a proprietary company where the mental state of a majority shareholder who is also a director and who treats the company's affairs and transactions as his own is imputed to the company. They refer to the case of Bernard Elsey Pty Ltd v The Commissioner of Taxation of the Commonwealth of Australia (1969) 121 CLR 119 where Windeyer J said (at 121): [Mr Bernard] Elsey was in complete control of the company's business. The company existed simply to do his bidding and to alleviate his liabilities. Indeed it was for him really only a name of convenience: he personally carried out the undertakings of the company with which this case is concerned. I assume that these undertakings were all within the powers of the company or within the powers the company had under its memorandum of association. When the purpose with which it entered into business transactions is to be considered, it is Elsey's purpose that is meant. His mind was the company's mind. Indeed when speaking of the affairs and transactions of the company he did so in the first person, regarding all its affairs and transactions as his. The same can be said of Mr Townsing in relation to Normandy Asia, Normandy Australia, Advant and Pilmora.

Normandy Australia: Years Ended 31 December 2007 to 2009 Inclusive 79 Normandy Asia commenced making payments to Normandy Australia shortly after Normandy Australia was incorporated in 1999. Since 2002, Normandy Nominees has held Normandy Australia's total issued capital on trust for Normandy Asia, and has at all times been a wholly owned subsidiary of Normandy Asia. 80 Normandy Australia's financial statement for the year ended 31 December 2001 indicates a loan from Normandy Asia with an opening balance of $179,018 and a closing balance of $412,047, representing a net increase of $233,029. The Commissioner has included the whole of this increase in the assessable income of Normandy Australia for the year ended 31 December 2001. 81 According to the Commissioner, Normandy Asia made the following aggregate payments to Normandy Australia during each of the years ended 31 December 2002 to 2009 which the Commissioner has included in Normandy Australia's assessable income in each of those years: Year Aggregate Amount ($) Number of Payments 2002 171,000 8 2003 158,300 12 2004 183,800 12 2005 132,000 7 2006 266,563 12 2007 264,000 9 2008 337,541 15 2009 196,647 4

82 In addition, in the year ended 31 December 2007, Normandy Asia provided Normandy Australia with vendor finance, in the form of allowing the purchase price of shares in Cyclopharm Ltd, an Australian public company, purchased by Normandy Australia from Normandy Asia, to remain outstanding. The Commissioner has included the amount outstanding in the sum of $2,220,000 as assessable income of Normandy Australia for the year ended 31 December 2007. 83 Normandy Australia contends that the aggregate payments which the Commissioner contends it received from Normandy Australia in each of the years ended 31 December 2002 to 2009 inclusive were borrowings by Normandy Australia from Normandy Asia and that the net increase in the opening and closing balances of $233,029 as disclosed in Normandy Australia's financial statements for the year ended 31 December 2001 also represents borrowings by Normandy Australia from Normandy Asia in that year. 84 It is common ground that there is no written agreement evidencing the terms and conditions upon which Normandy Asia made the payments to Normandy Australia until an instrument dated 7 May 2008 was brought into existence (as to which see [87]-[89] below), but I accept the evidence of Mr Townsing that these payments were made on terms that they carried no interest. Equally, his evidence was that repayment of the payments was not secured over any property of Normandy Australia or that there was any fixed date for repayment of the payments. Indeed, the notes to the financial accounts of both Normandy Asia and Normandy Australia confirmed these terms. But none of this is surprising in a relationship between a parent company and its wholly owned subsidiary. 85 The financial accounts of Normandy Australia over the years ended 31 December 2001 to 31 December 2009 consistently disclosed amounts owing to Normandy Asia and Normandy Asia's accounts consistently disclosed amounts owing by Normandy Australia. Because Normandy Australia's accounts were kept in Australian dollars and Normandy Asia's accounts were kept, initially in Malaysian ringgit and subsequently in Singapore dollars, it is not possible to undertake a detailed reconciliation of opening and closing balances for each company; but I find that they are proximate. Nor is it possible to undertake a detailed reconciliation of the opening and closing balances with the aggregate annual payments which the Commissioner contends were paid by Normandy Asia to Normandy Australia each year - see the table at [81] above - because the evidence is clear that over the same period (31 December 2001 to 31 December 2009) substantial payments, totalling in excess of $500,000, were made by Normandy Australia to Normandy Asia, which each party respectively claims or concedes were by way of repayment of moneys paid by Normandy Asia to Normandy Australia by way of loan. Moreover, the Commissioner did not contend that any of these payments from Normandy Australia to Normandy Asia did not occur, nor that they were not repayments of payments by Normandy Asia to Normandy Australia by way of loan, but were something else. 86 With little or no hesitation, I find that the payments from Normandy Asia to Normandy Australia over this period were intended by both parties to be subject to an obligation of repayment by Normandy Australia to Normandy Asia at the time each payment was made; that being the relevant time to determine whether the payments were truly loans or something else. My finding in this regard is predicated not just on the evidence of Mr Townsing, but on the evidence Mrs Glover, Mr Yunus and Mr Ross, as well as the relevant circumstances outlined in [84] and [85] above in relation to the making of the payments. That said, the evidence of Mr Townsing, as the driving mind and will of both companies, is paramount as to the finding of subjective intent on the part of each party at the times of making the payments. It was never put to Mr Townsing that Normandy Australia never intended, at the time each payment was made to it by Normandy Asia, to repay the payment. Having regard to the transcript of Mr Townsing's cross-examination at T 825/10 to T 826/5, I reject the Commissioner's submission to the contrary. The reference to "any of these loans" at T 826/5 is clearly limited to the loans to Pilmora and Advant. Normandy Australia is not mentioned in any part of the transcript that proximately precedes that reference. 87 What was put to Mr Townsing was that the instrument dated 7 May 2008 ("HGT 100", Ex 31), executed nearly seven years after the payments first commenced, was not intended to govern the relationship of the parties going forward, but he disagreed (T 825/10-12). It was signed on behalf of Normandy Australia by Mr Townsing and on behalf of Normandy Asia by both directors, including Mr Townsing. It was also put to Mr Townsing that the instrument was back-dated, but he said that he did not believe it was (T 824/1). Even if it was, it would not improve the Commissioner's case on this issue. 88 The instrument recited: WHEREAS the Lender and the Borrower entered into an agreement on or about 1 July 1999 where by the Lender agreed to loan moneys to the Borrower. The initial amount loaned was A$20,000 in July 1999. AND WHEREAS the amount outstanding and due for repayment by the Borrower to the Lender on 14 April 2008 was A$1,283,153.87 ("Loan") as confirmed in the Borrower's letter to the Lender dated 14 April 2008. And then provided: NOW IT IS HEREBY AGREED as follows: 1. The Lender, at the request of the Borrower agrees to enter into this Agreement to allow the Borrower to repay the total indebtedness, as provided in this Agreement. 2. Interest charged on the Loan shall be at the rate of seven per cent (7%) per annum. The interest rate may vary following a yearly review and in the Lender's reasonable opinion as it deems fit. Interest payable on the Loan may be capitalised by mutual agreement of the Lender and the Borrower. 3. The Borrower agrees to provide security for the Loan in the form of a fixed and floating charge over its assets. 4. The whole of the said Loan shall become due and repayment immediately in any of the following events: (a) If Borrower becomes bankrupt, insolvent or has failed to pay any amounts which have become payable to the Lender; and (b) at any time on demand of the Lender after a period of three years from the date of this Agreement. 89 Notwithstanding the terms of cl 2 providing for the payment of interest (although from when, the agreement is silent), Mr Townsing's evidence was that it was subsequently agreed between the parties, both of which he was the directing mind and will, that no interest would be charged (T 823/26-40). That does not make the provisions of cl 2 a sham: Raftland at [149] per Kirby J; see too, Hitch v Stone (Inspector of Taxes) [2001] STC 214 at 230, [68], and while the provisions of cl 3 seem to be devoid of factual content, this was not explored with Mr Townsing. But even if cll 2 and 3 were a pretence or a sham going forward because both Normandy Asia and Normandy Australia did not intend them to have effect according to their terms, that would not render the anterior payments by Normandy Asia to Normandy Australia over the years since 1999 anything other than loans to and borrowings by Normandy Australia if that was the common intent of both parties at the time the payments were made, which I find it was. 90 The Commissioner's written submissions in relation to the payments from Normandy Asia to Normandy Australia are contaminated by persistent references to "the Trustee" or "Pilmora" (see paras 30, 32, reasons (8) and (9) of the headings to paras 42 and 43 and para 47.3, all behind Tab L). None of these references are relevant. 91 At L 10 of the Commissioner's written submissions, 12 reasons are given as to why I should find that the payments from Normandy Asia to Normandy Australia over the period 2001 to 2009 are not what they purport to be, namely, loans. These are listed hereunder, together with my responses: (1) Interest on the loan agreement could not be paid: But it is common ground that the loans were interest free, and even when the instrument of 7 May 2008 came into existence, no interest was sought or was paid. (2) The loan agreement (of 7 May 2008) was executed at a time when Normandy Australia was winding down its operations: This is totally irrelevant to the payments made over the preceding six years; and, indeed, to subsequent payments. (3) Interest was accrued in Normandy Australia's accounts but not in Normandy Asia's accounts: Mr Townsing was the directing mind and will of both Normandy Australia and Normandy Asia and his undisputed evidence was that notwithstanding the provisions of cl 2 of the instrument dated 7 May 2007, he had decided that, consistently with what had occurred in earlier years, no interest would be paid. (4) No real negotiations of the loan agreement: One would not expect such "real negotiations" between a parent company and its wholly owned subsidiary, where both are under the directing mind and will of the same individual. (5) No real negotiations for further drawdowns under the loan agreement: The same reasons in (4) above are equally relevant. (6) The parties never intended the loan to be repaid within three years as contemplated in the agreement: No evidence. (7) Money transfers continued even as Mr Townsing wound down Normandy Australia: See (2) above. (8) The use that Pilmora made of the funds is inconsistent with a third party funding business entities: Irrelevant. Normandy Australia was the borrower. (9) Pilmora had no ability at any time [to] repay the transfers from Normandy Asia: Irrelevant. See (8) above. (10) Descriptions in Normandy Australia's accounts do not cause the transfers to be a loan: So much may be accepted. (11) Relationship between the parties: Mr Ross acted entirely on Mr Townsing's instructions: All the more reason why I found as I did: both Normandy Asia and Normandy Australia intended the payments to be by way of loan from the former to the latter. (12) Mr Townsing's offshore interests: Irrelevant. 92 As noted in [82] above, the transaction there referred to led the Commissioner to include the sum of $2,220,000 in Normandy Australia's assessable income for the year ended 31 December 2007. The basis on which he did this is not clear. This was part of a larger transaction the terms of which were contained in a letter from Normandy Asia to Normandy Australia dated 23 July 2007 which read as follows: Normandy Finance & Investments Asia Ltd (NFIA) is entitled to approximately 4,329,612 Rights Issue Shares (A$865,922.40) and we seek Normandy Finance & Investments Asia Pty Ltd's (NFIAP) assistance to fund the purchase of 3,000,000 Rights Issue Shares or A$600,000 worth. It is agreed the terms for NFIAP providing the A$600,000 to purchase the Rights Issue Shares are as follow: Loan : NFIAP will advance NFIA A$600,000 for the purchase of 3,000,000 Rights Issue Shares at A$0.20 per share. The loan proceeds shall be made available to NFIA before 10 August 2007 and be for a term of 2 years from the date hereof. Interest on the loan shall be at the rate of 10% per annum and payable on repayment of the loan. Security / : NFIA agrees to transfer the 3,000,000 Rights Issue Shares to NFIAP within 3 days of there [sic] allotment by VLS. NFIAP agrees to hold the 3,000,000 Rights Issue shares as security for the A$600,000 loan. Transfer of Rights Issue Shares Sale of : NFIA agrees to sell the 6,000,000 CYC shares (CYC Shares) to NFIAP for A$2,220,000 (A$0.37 per share) upon the signing of this agreement. NFIA agrees to loan NFIAP the A$2,220,000 necessary to purchase the CYC Shares on an unsecured basis. Cyclopharm Ltd (CYC) shares No charge : NFIAP shall own the CYC Shares free and clear. over CYC Shares Profit / Loss : NFIA and NFIAP shall share realised profit or loss, as the case may be, arising from the sale of the Rights Issue Shares and CYC Shares in the proportion 75 : 25 respectively. Sharing The realised profit may arise from the sale of the Rights Issue Shares and CYC Shares through the ASX or by the exercise of the call option described below. The profit or loss shall be determined having regard to: • the cost of a Rights Issue Share being A$0.20; • the cost of a CYC Share being A$0.37; and • interest on a A$600,000 loan being deducted from profit or added to the loss arising from the sale of the Rights Issue Shares and the CYC Shares, as the case may require. Call Option : NFIAP grants NFIA an option to acquire the Rights Issue Shares and or CYC Shares on the following terms: • NFIA to pay NFIAP an option fee of A$1.00; • the option to commence upon the latter of the transfer of the CYC Shares and the transfer of the 3,000,000 Rights Issue Shares to NFIAP; • the option to be for a period expiring 23 July 2009; • the exercise price of the option for each Rights Issue Share shall be 7 day average weighted marked price of a VLS share immediately preceding the exercise of the option; • the exercise price of the option for each CYC Share shall be 7 day average weighted marked price of a CYC share immediately preceding the exercise of the option. • the option may only be exercise if; - NFIA has repaid the A$600,000 loan to NFIAP; - if the weighted market price of a Rights Issue Share is greater than A$0.20 per VLS share; - if the weighted marked price of a CYC share is greater than A$0.37 per CYC share.

Please do not hesitate to contact us if you have any further queries. If you are in agreement with the terms detailed above please confirm your acceptance by signing this letter in the space provided below. Yours faithfully Normandy Finance & Investments Asia Ltd [Signature] Daud Yunus Authorised Representative ____________________________________________________________________ We accept the funding arrangements as described above [Signature] …………….. Henry Townsing Director - Normandy finance & Investments Asia Pty Ltd. 93 The financial accounts for Normandy Australia for the year ended 31 December 2007 brought an asset on to the balance sheet: "Shares - Cyclopharm Pty Ltd … 2,220,000"; as well as a liability: "NFIA loan - re Cyclopharm … 2,220,000", neither of which had been there before. This latter description of the liability as well as the reference in the letter reproduced in [92] above to "NFIA agrees to loan NFIAP the $2,220,000 necessary to purchase the CYC shares" may provide the basis for the Commissioner's treatment of the amount of the liability as income; the Commissioner, as late as his Amended Appeal Statement [124], treated the amount as a loan by Normandy Asia to Normandy Australia to be dealt with on the same basis as the other payments from Normandy Asia to Normandy Australia by way of loan. But there is no evidence that there was any payment by Normandy Asia to Normandy Australia such as to give rise to an obligation of repayment. Indeed, the only evidence is to the contrary: Ex 31 [69]. All that occurred was a granting of time to pay the purchase price of the Cyclopharm shares giving rise to an indebtedness from Normandy Australia to Normandy Asia equal to the purchase price. Nothing came in by way of payment capable of being characterised as income. As a Full Court (Brennan, Deane and Toohey JJ) said in Federal Commissioner of Taxation v Cooke and Sherden (1980) 29 ALR 202 at 213: If … an item saves a taxpayer from incurring expenditure, the saving is not income; income is what comes in, it is not what is saved from going out. 94 And as Gleeson CJ said in Prime Wheat at 512B-G: Not all forms of financial accommodation are loans: see, e.g. Chow Yoong Hong v Choong Fah Rubber Manufactory [1962] AC 209. The fact that the transaction in question could (subject, perhaps, to constraints to which we are unaware) have been set up in a form involving a loan of money from the vendor to the purchasers is beside the point. The parties (including, be it noted, the Crown), chose to give their arrangements a certain form, and that form did not involve a loan of money … Here there was no advance of money… There was here no forbearance to require payment of money owing… A sale on terms giving the purchaser time to pay is not a disguised loan. The essence of a loan is an obligation of repayment. Here what was involved on the part of the purchasers was payment, not repayment: cf., Handevel Pty Ltd v Controller of Stamps (Vic) (1985) 157 CLR 177 (at 193-194). 95 But even accepting that there is no apparent obligation of repayment because there was no loan, only an apparent obligation of payment of the purchase price of the CYC shares, for the first time in his closing submissions, the Commissioner's case was re-articulated; that the payment obligation is a sham and therefore no consideration was agreed to be paid for the transfer of the CYC shares; their value ($2,220,000) (not any loan payment of that amount by Normandy Asia to Normandy Australia) is assessable to Normandy Australia because Normandy Australia has not proved otherwise, or because the amount represents consideration for services provided by Normandy Australia to Normandy Asia. I reject both grounds for reasons similar to those given in [86] above. I find that the obligation of Normandy Australia to pay the purchase price of the CYC shares to Normandy Asia was a genuine obligation because both parties, through Mr Townsing as the directing mind and will of both companies, intended the transfer of the CYC shares to give rise to an obligation of payment by Normandy Australia to Normandy Asia and a right to payment in Normandy Asia from Normandy Australia. That was Mr Townsing's evidence, and it was never put to him that this was not the case. As to the second ground, additionally there is no evidence to support such a conclusion. For these reasons, the amount of $2,220,000 is not income of Normandy Australia for the year ended 31 December 2007. 96 It follows that the Commissioner's objection decisions on Normandy Australia's objections against its income tax assessments for the years ended 31 December 2007-2009 inclusive must be set aside and the objections allowed in full. It also follows that the Commissioner's decisions on Normandy Australia's objections against its penalty assessments for the same years and shortfall interest charge for the year ended 31 December 2007 must be set aside and the objections allowed in full.

Advant: Years Ended 30 June 2002 and 2003 97 In September 2001, Normandy Asia made two payments to Advant totalling $650,000. On 14 September, a payment of $395,116 was received and on 20 September, a further payment of $254,884 was received. 98 It is common ground that Advant used the whole of the 14 September receipt in part payment of the balance of the purchase price ($725,000) to acquire the real property known as 6 Normandy Road, Elwood, Victoria ("6 Normandy Road"). It is also common ground that 6 Normandy Road was acquired and held by Advant for income producing purposes, in the form of rental income, and that during the years of income ended 30 June 2002 and 2003, Advant derived rental income from 6 Normandy Road. 99 It is also common ground that Advant used the whole of the 20 September receipt as follows: (1) On 28 September 2001, $72,500 was paid to Pilmora to repay Pilmora the deposit it paid on Advant's purchase of 6 Normandy Road; (2) on 28 September 2001, $177,500 was paid to Pilmora by way of loan and then paid by Pilmora in part satisfaction of an alleged unpaid entitlement of Mr and Mrs Townsing to a non-assessable capital gain of the Townsing Family Trust of an earlier year (see [125(5)] below); (3) $1,295 was expended on general expenses; (4) $2,958 was expended on interest; and (5) $631 is unaccounted for. 100 In March 2002, Normandy UK paid Advant $500,000 which, after payment of bank commission of $6.00, was received into Advant's account with Bank of Melbourne on 15 March 2002. 101 It is common ground that Advant used the whole of the 15 March receipt as follows: (1) $472,000 was paid to Pilmora as an interest-free loan; (2) $25,048 was expended on interest - $7,056 was paid to Westpac Banking Corporation in payment of interest on a Westpac borrowing by Advant and $17,992 was paid to Normandy Asia in payment of interest on Advant's Normandy Asia loan (see [97]-[99] inclusive above); (3) $1,999 was paid to the Australian Taxation Office ("ATO") in payment of GST/PAYG liabilities; and (4) $953 was expended on general expenses. 102 As indicated in [27] and [28] above, Advant contended that both the amounts received in September 2001 from Normandy Asia and the amount received in March 2002 from Normandy UK were received by way of loan from Normandy Asia and Normandy UK respectively, while the Commissioner contended that both were sham borrowings, a disguise for the bringing into Australia of funds held for Mr Townsing and/or entities associated with him, with no obligation on Advant of repayment; and were assessable income of Advant in the year ended 30 June 2002. The Commissioner also disallowed claims for deductions for interest and borrowing expenses in the years ended 30 June 2002 and 2003 as follows: Year Interest Expense Borrowing Costs Total $ $ $ 2002 70,078 3,333 73,411 2003 117,509 3,333 120,842

on three alternative bases: (1) There were no borrowings by Advant from Normandy Asia or Normandy UK in respect of which interest and/or borrowing expenses could have been incurred; (2) the claimed deductions for interest did not satisfy the criteria for deductibility under ss 8-1 or 25-25 of the Income Tax Assessment Act 1997 (Cth) ("1997 Act"); (3) the claimed deductions for borrowing costs was not in respect of moneys used by Advant for a purpose of producing income. 103 In a statement of Supplementary Agreed Facts dated and filed 7 July 2015 after the parties had closed their respective cases and before I heard their respective submissions, it was agreed that at least 73% of the money paid by Normandy Asia to Advant, and at least 4% of the money paid by Normandy UK to Advant, was applied by Advant to income-producing purposes.

The Normandy Asia Payments 104 Again, with little or no hesitation, I find that the two payments from Normandy Asia to Advant in September 2001 were intended by both parties to be subject to an obligation of repayment by Advant to Normandy Asia at the time each payment was made; that being the relevant time to determine whether the two payments were truly loans or something else. My finding in this regard is predicated not just on the evidence of Mr Townsing, but on the evidence of Mrs Glover, Mr Yunus and Mr Ross, as well as other relevant circumstances outlined in [107] below. That said, the evidence of Mr Townsing, as the driving mind and will of both companies, is paramount as to the finding of subjective intent on the part of each party at the time of making the payments. That was Mr Townsing's evidence and while the contrary was put to him, he denied it and there is no reason not to accept his evidence. 105 What was also put to Mr Townsing was that a number of the terms of an instrument dated 12 April 2002 between Normandy Asia as lender, Advant as borrower and Mr Townsing as guarantor setting out the terms and conditions upon which a revolving credit facility of $650,000 between Normandy Asia and Advant was to operate were pretences or shams and that therefore the two payments by Normandy Asia to Advant some seven months before were sham loans to and borrowings by Advant. Mr Townsing refused to accept that the relevant terms of the instrument to which he was taken in cross-examination by senior counsel for the Commissioner were pretences, but I do not accept his evidence in this regard. Clearly they were pretences, either because the payments from Normandy Asia to Advant had already occurred some seven months beforehand and the terms, insofar as they were conditions precedent to the making of loans thereunder, were "redundant", or because the terms were not complied with and were never intended to be complied with. 106 In my view, the relevant terms were pretences or "window dressing" in the sense that they were intended to create the impression or disguise to a third party observer that the parties were dealing with each other on an arm's length basis when in fact they were not. Such pretended terms did not, however, impugn the intention of the parties, manifested through Mr Townsing as the directing mind and will of both, that the payments from Normandy Asia to Advant at the time they were made in September 2001 were anything but loans to and borrowings by Advant from Normandy Asia. The terms and conditions on which those loans were made is not to be determined by reference to the terms and conditions of the instrument dated 12 April 2002, and while there is little evidence otherwise as to what those terms and conditions were, I accept that such payments by way of loan carried interest at the rate of 10% per annum. 107 The finding in [104] above that the two payments which Normandy Asia made to Advant in September 2001 were by way of loans is reinforced by the clear evidence that between May 2002 and August 2008 there were substantial payments made by Advant to Normandy Asia totalling over $304,000 in repayments of principal and payments of interest. The Commissioner did not contend that any of these payments from Advant to Normandy Asia did not occur, nor that they were not repayments of payments by Normandy Asia to Advant, but were something else. 108 At J 9 of the Commissioner's written submissions, 20 reasons were given as to why I should find that the two payments from Normandy Asia to Advant in September 2001 are not what they purport to be, namely, loans. At least seven of these are common to the 12 reasons given as to why I should have found that the payments from Normandy Asia to Normandy Australia are not what they purport to be, namely, loans, but which I declined to do (see [91] above). The reasons are listed hereunder, together with my responses: (1) The loan agreement was executed after the transfers had occurred: I agree this indicates that the transfers were not made pursuant to the terms of the instrument dated 12 April 2002, but this does not make the payments anything other than what both parties intended them to be, namely loans from Normandy Asia to Advant. (2) No real negotiations of the loan agreement: One would not expect such "real negotiations" between lending and borrowing companies under the directing mind and will of the same individual. (3) No negotiations of transfers: Not unexpected for the reason in (2) above. (4) Normandy Asia directors' resolution of 12 March 2002 inconsistent with what happened: Not critical - by this time the payments had been made some seven months beforehand. (5) The parties never intended significant clauses in the written loan agreement to govern the relationship between them: So much may be accepted. Many of these clauses were mere "window dressing" and I agree that the parties never intended to be bound by them. (6) The third mortgage over 26 Olive Street, East Malvern was also security under the Normandy Asia loan to Pilmora. (7) The mortgage over 26 Olive Street, East Malvern could not be enforced against Mrs Townsing. (8) There was never a mortgage over 26 Olive Street, East Malvern. (9) 26 Olive Street, East Malvern was sold in June/July 2002. (10) No security was taken in replacement of the Olive Street property after it was sold. (11) No fixed and floating charge ever taken over assets. (12) No care taken to ensure adequate security was maintained under the loan facility: The response made to (5) above is equally applicable to each of these reasons. (13) Part X dividend payment not applied to loan balance: Irrelevant. (14) The use that Advant made of the funds is inconsistent with the third party funding business ventures: Irrelevant. (15) Advant had no ability to repay the transfers from Normandy Asia: Irrelevant. (16) Annual accounts do not cause the transfers to be a loan: So much may be accepted. (17) Relationship between the parties: Mr Ross acted entirely on Mr Townsings' instructions: All the more reason why I found as I did: both Normandy Asia and Advant intended the two payments to be by way of loan from the former to the latter. (18) Mr Townsings' offshore interests: Irrelevant. (19) After receiving a payment from Mr Townsing pursuant to his personal insolvency agreement, Normandy Asia permitted Mr Townsing to increase his borrowing: It was not Mr Townsings' borrowing; it was Advant's borrowing. The references at paras 62 and 63 of the Commissioner's written submissions behind Tab J to Normandy Asia permitting Normandy Australia to increase its loan facility are also irrelevant. (20) Normandy Asia's purported loan was used to defeat a genuine third party debtor: Irrelevant. 109 In the face of the agreement of the parties referred to in [103] above, 73% of the interest incurred by Advant to Normandy Asia in the years ended 30 June 2002 and 30 June 2003 should be allowed as deductions against the assessable income of Advant in those years, as well as 73% of any borrowing costs so incurred. Nothing further should be allowed because Advant has not established that any greater portion of the moneys I have found were so lent by Normandy Asia to Advant were used by Advant for income producing purposes.

The Normandy UK Payment 110 Again, with little or no hesitation I find that the payment by Normandy UK to Advant on 15 March 2002 was intended by both parties to be subject to an obligation of repayment by Advant to Normandy UK at the time the payment was made; that being the relevant time to determine whether the payment was truly a loan or something else. Advant's intention in this regard was manifest through the directing mind and will of Mr Townsing. That was Mr Townsing's evidence and while the contrary was put to him, he denied it and there is no reason not to accept his evidence. Normandy UK's like intention is to be inferred from the findings made at [16] above that Mr Gould would not have acted contrary to Mr Townsing's instructions or interest in relation to transactions Normandy UK had with entities in Australia economically associated with Mr Townsing or his family and as such, the parties to those transactions could not be regarded as being, or as dealing with each other, at arm's length. Even if it was not open from the findings made at [16] above to infer a like intention on the part of Normandy UK that the payment it made to Advant on 15 March 2002 was subject to an obligation of repayment by Advant to Normandy UK at the time the payment was made, the payment would not constitute a sham loan to, and borrowing by, Advant in the face of my finding that Advant, through Mr Townsing, had such an intention. As Diplock LJ said in London and West Riding Investments in the extract reproduced in [53] above, "… for acts or documents to be a 'sham', with whatever legal consequences follow from this, all the parties thereto must have a common intention that the acts or documents are not to create the legal rights and obligations which they give the appearance of creating" (emphasis added). See, too, Richard Walter per Hill J at 257, 258 reproduced in [65] above; and Arden LJ in Hitch at [69] reproduced in [64] above. 111 What was also put to Mr Townsing was that a number of the terms of an instrument dated 15 March 2002 between Normandy UK as lender, Advant as borrower and Mr Townsing as guarantor setting out the terms and conditions upon which a revolving credit facility of $500,000 between Normandy UK and Advant was to operate were pretences or shams and that therefore the payment by Normandy UK to Advant was a sham loan to and borrowing by Advant. Mr Townsing refused to accept that the relevant terms of the instrument to which he was taken in cross-examination by senior counsel for the Commissioner were pretences, but I do not accept his evidence in this regard. Clearly they were pretences, either because the payment from Normandy UK to Advant had already occurred at the time the instrument was executed, in other words the instrument was back-dated, and the terms, insofar as they were conditions precedent to the making of a loan thereunder, were "redundant", or because the terms were not complied with and were never intended to be complied with. 112 In my view, the relevant terms were pretences or "window dressing" in the sense that they were intended to create the impression or disguise to a third party observer that the parties were dealing with each other on an arm's length basis when in fact they were not. Such pretended terms did not, however, impugn the intention of the parties, manifested through Mr Townsing as the directing mind and will of Advant, and through Mr Gould's acquiescence with the instructions and interests of Mr Townsing on behalf of Normandy UK, that the payment from Normandy UK to Advant on 15 March 2002 was anything but a loan to, and borrowing by, Advant from Normandy UK. The terms and conditions on which the loan was made is not to be determined by reference to the terms and conditions of the instrument dated 15 March 2002, but there is no evidence otherwise as to what those terms and conditions were. 113 In such a factual context, the interest and borrowing cost expenses claimed by Advant as allowable deductions in the years ended 30 June 2002 and 2003 respectively were voluntary payments; they were not paid under any contractual obligation to Normandy UK which Advant has proved it was subject to and, subject to what is said in [115] below, the Commissioner was correct in disallowing those claims. 114 At para 10 of the Commissioner's written submissions, 21 reasons were given as to why I should find the payment from Normandy UK to Advant on 15 March 2002 is not what it purports to be, namely, a loan. At least eleven of these are common to the 20 given as to why I should have found that the payments from Normandy Asia to Advant are not what they purport to be, namely, loans, but which I declined to do (see [108] above). The reasons are listed hereunder, together with my responses: (1) The loan agreement was executed after the transfer of $500,000 on 14 March 2002: I agree this indicates that the transfer was not made pursuant to the terms of the instrument dated 15 March 2002, but this does not make the payment anything other than what both parties intended it to be, namely, a loan from Normandy UK to Advant. (2) During the course of the audit, Advant maintained to the Commissioner that the loan agreement was signed on 15 March 2002: Irrelevant. (3) Mr and Mrs Townsing's signatures were not witnessed: Irrelevant. (4) The parties never intended significant clauses in the written loan agreement to govern the relationship between them: So much may be accepted. Many of these clauses were mere "window dressing" and I agree that the parties never intended to be bound by them. (5) The mortgage over 6 Normandy Road was never registered. (6) The mortgage over 6 Normandy Road was kept with the Townsings' solicitors rather than by Normandy UK. (7) No fixed and floating charge ever taken over assets. (8) No care taken to ensure adequate security was maintained under the loan facility: The response made to (4) above is equally applicable to each of these matters. (9) Negotiating the loans agreement prior to 15 March 2002: It was said that there was no documentary evidence of any negotiation in relation to the loan agreement prior to the initial transfer of $500,000 on 15 March 2002. I do not understand the use of the word "initial" because there was only ever one transfer. Having regard to the relationship between the parties, in particular Mr Townsing and Mr Gould, and the findings at [16] above, it is not at all surprising that there was no negotiations. (10) Errors in the calculation of interest and repayments show a lack of care inconsistent with parties administering a binding agreement: I have already found that the instrument of 15 March 2002 was not intended to govern the terms and conditions on which the loan from Normandy UK to Advant was made. (11) Part X payment not applied to loan balance: Irrelevant. (12) The use that Advant made of the funds is inconsistent with the third party funding business ventures: Irrelevant. (13) The lack of repayments is inconsistent with a genuine loan intended by the parties to be repaid: I do not agree. The Commissioner accepts that there was at least one repayment in excess of $100,000. If there had been further repayments over the period of the loan, this would strongly support a finding that the payment by Normandy UK to Advant on 15 March 2015 was by way of loan: as to the findings made in respect of the payments from Normandy Asia to Normandy Australia and Advant (see [85] and [ 107] above). But otherwise, the absence of further repayments is neutral as to the intention of the parties at the time the payment was made. (14) Advant had no ability at any time to repay the transfers from Normandy UK: Irrelevant. (15) Annual accounts do not cause the transfers to be a loan: So much may be accepted. (16) Relationship between the parties: Susan Beach acted entirely on Mr Gould's instructions and Gould is Townsing's business associate. Available inference: that Mr Gould was acting in Mr Townsing's interests: I agree: see the findings at [15] and [16] above. All the more reason why I found as I did: both Normandy UK and Advant intended the two payments to be by way of loan from the former to the latter. (17) Normandy UK's accounts do not show a loan: This is a reference to the working capital accounts filed with the UK Companies House and not in Normandy UK's full financial statements. The working capital accounts are confined to current assets and current liabilities; the receivable due by Advant was anything but a current asset. (18) Mr Townsings' offshore interests: Irrelevant. (19) Normandy UK foreshadowed legal action to recover its loan but did (not) then seek to recover its loan: This exemplifies the earlier findings at [15] and [16] above that while Mr Gould may have been the directing mind and will of Normandy UK and Mr Townsing the directing mind and will of Avant, their dealings with each other were conducted otherwise than on an arm's length basis. (20) After foreshadowing that it would seek to recover the loan and not doing so, Normandy UK increased the facility: Irrelevant. (21) Normandy Asia's purported loan was used to defeat a genuine third party debtor: Irrelevant. 115 It follows that the Commissioner's objection decisions on Advant's objections against its income tax assessments for the years ended 30 June 2002 and 2003 must be set aside and the objections allowed to the extent indicated in these reasons. It also follows that the Commissioner's decisions on Advant's objections against its penalty assessments for the same years must be set aside and the objections allowed to the extent indicated in these reasons. In the face of the agreement of the parties referred to in [103] above, 4% of the interest incurred by Advant to Normandy UK in the years ended 30 June 2002 and 30 June 2003 should be allowed as deductions against the assessable income of Advant in those years, as well as 4% of any borrowing costs so incurred. Nothing further should be allowed because Advant has not established that any greater portion of the moneys I have found were so lent by Normandy UK to Advant were used by Advant for income producing purposes.

Pilmora: Years Ended 30 June 1994 to 1997 Inclusive and the Year Ended 30 June 2001 116 As noted in [35] above, the Commissioner no longer seeks to defend the assessments to Pilmora, as trustee of the Trust, on account of Mrs Townsing, for the years ended 30 June 1994 to 1997 inclusive, in reliance on former s 98(4) of the 1936 Act. 117 As noted in [38] above, nor does the Commissioner any longer seek to defend the assessment to Pilmora, as trustee of the Trust, in respect of the sum of $41,579 for the year ended 30 June 2001, in reliance on s 99A (4A) of the 1936 Act. 118 This leaves the income tax assessments to Pilmora, as trustee of the Trust, on account of Mr Townsing, for the years ended 30 June 1994 to 1997 inclusive in reliance on former s 98(4) of the 1936 Act.

Capital Loss in Respect of Disposal of Receivable 119 As noted in [33] above, Pilmora, as trustee of the Trust, claimed that in the year ended 30 June 1994 it disposed of a receivable in the sum of $4,999,998.50 owing by Jarell and incurred a capital loss of that amount for the purposes of Part IIIA (repealed) of the 1936 Act. 120 As also noted in [33] above, the Commissioner has disputed this claim on a number of bases, both alternatively and cumulatively, and cumulatively they are compelling. I shall return to these below. 121 Before doing so, I should set out the basis upon which Pilmora, as trustee of the Trust, has applied the benefit of the alleged capital loss against capital gains of the Trust in the 1994 and subsequent years, because that goes to explain, in part, the Commissioner's re-calculation of the s 95 net income of the Trust in the years ended 30 June 1994 to 2009 inclusive: YEAR CAPITAL LOSS APPLIED ($) 1994 4,265 1995 597,735 1996 0 1997 0 1998 0 1999 0 2000 0 2001 30,693 2002 0 2003 0 2004 0 2005 35,318 2006 84,445 2007 24,165 2008 4,493 2009 311 Total Capital Loss Applied 781,425

The relevant facts concerning the disposal of the receivable are not inherently complex, but they are complicated by a lack of contemporaneous written evidence relating to: the alleged acquisition of the receivable; and if it was acquired, the time of its acquisition; its cost base; its alleged disposal; and last, but by no means least, that it was an asset of Pilmora's, as trustee of the Trust, to dispose. 122 By way of background, the following findings are open on the evidence and are not in dispute: (1) As at 30 June 1984, the shares in Aust-Wide Management Ltd ("AWML") were held by: Ronald Thomas Kerr 1 share Henry George Townsing 1 share Powzam Pty Ltd 84,999 shares Pilmora 84,998 shares Townsing & Clubb Real Estate Pty Ltd* 1 share Total 170,000 shares

• A company under the control of Mr Townsing. (2) Each share had been acquired by the entity that held it for $1. (3) As at 30 June 1986, the shares in AWML were held by Jenolan Innovations Ltd ("Jenolan"), then a listed public company, which subsequently became Aust-Wide Group Ltd ("AWG"). (4) In consideration of acquiring the shares in AWML, Jenolan issued to Jarell 10,000,000 ordinary shares of 20c each plus a premium of 50c, and undertook to pay $3 million to Jarell. 123 At least until its closing submissions, Pilmora has consistently maintained that the following transactions occurred: (1) In the year ended 30 June 1986, Pilmora, as trustee of the Trust, sold its shares in AWL to Jarell for $4,999,998.50, which was not paid, but left outstanding as a receivable due to Pilmora; (2) After this occurred, but in the same income year, Jarell on-sold its shares in AWML (not only those it acquired from Pilmora, but also those acquired from Mr Kerr's interests) to Jenolan in exchange for the sum of $3 million and 10 million shares in Jenolan; (3) In the year ended 30 June 1994, Pilmora wrote off, and then released, its receivable from Jarell, claiming that it thereby incurred a capital loss on the disposal of an asset acquired on or after 20 September 1985. 124 In its closing submissions (at para (30)), Pilmora put forward an alternative truncated transaction as to how the receivable may have come into existence: "[T]here could have been a tripartite contract between Pilmora, Jarell and Jenolan under which Pilmora was obliged to transfer the AWML shares to Jenolan, in exchange for Jarell paying $4,999,998.50 to Pilmora". The difficulty with this alternative, apart from the lack of any evidence to support such a finding, is that Mr Townsing expressly denied that Pilmora transferred the AWML shares direct to Jenolan (T 664.15). 125 In my view, Pilmora has not proven, on the balance of probabilities, that it incurred a capital loss of $4,999,998.50 on the disposal of a receivable due to it by Jarell in the year ended 30 June 1994 and there was, therefore, nothing to apply against the capital gains derived by the Trust in the years indicated in the table in [121] above. My reasons for being of this view are as follows: (1) Pilmora has not proved that it acquired a receivable due from Jarell in the sum of $4,999,998.50 because it has not proved that it sold the AWML shares to Jarell for that sum. The instrument of transfer is not in evidence. No other instrument evidencing or recording the alleged sale is in evidence. According to the applicants' counsel, the share register of AWML does not show Jarell as having been the registered holder of the shares at any relevant time and there is no other instrument in evidence showing it to be the owner of the shares at any relevant time. There are no minutes of meetings of directors of either Pilmora or Jarell, recording resolutions passed in relation to such matters, in evidence. The oral evidence that Pilmora sought to adduce in relation to such matters did not prove anything; it amounted to nothing more than total reconstruction on the part of the witnesses. (2) By reason of the same lack of contemporaneous written evidence, even if I was to find that Pilmora had acquired a receivable from Jarell in the sum of $4,999,998.50, Pilmora has not proved that the receivable was acquired on or after 20 September 1985; and the oral evidence Pilmora sought to adduce in relation to this matter, did not prove that fact. Such a finding is critical to a conclusion that a subsequent disposal of the receivable attracted the application of Part IIIA (repealed) of the 1936 Act. (3) And even if I was to find that Pilmora had acquired a receivable from Jarell in the sum of $4,999,998.50, Pilmora has not proved its cost base in the receivable is equal to its alleged face value. First, if s 160ZH(4)(b) (repealed) of the 1936 Act is applicable, it has not proved that the AWML shares it transferred to Jarell had, at the time of their acquisition by Jarell (whenever that was), a market value equal to the alleged face value of the receivable. Second, and because s 160ZH(4) was expressed to be "subject to the following provisions of this section", if subparas (i)(B) and (ii) of s 160ZH(9)(c) (repealed) of the 1936 Act are applicable because Jarell did not dispose of the receivable as a result of Pilmora's acquisition of it, and Pilmora and Jarell were not dealing with each other at arm's length - they were certainly not at arm's length - Pilmora has not proved that the receivable it acquired had, at the time of its acquisition (whenever that was), a market value equal to its alleged face value. (4) And even if I was to find that Pilmora had acquired a receivable from Jarell in the sum of $4,999,998.50, Pilmora has not proved that it disposed of the receivable. The alleged deed of release is not in evidence and the oral evidence that Pilmora sought to adduce as to the content of that instrument - its date, recitals and operative parts - amounted to nothing more than speculation. (5) Finally, but by no means least, Mr Townsing gave evidence that shortly after Pilmora acquired the receivable from Jarell, but prior to 30 June 1986, Pilmora as trustee of the Trust, by Mr Townsing, executed a resolution resolving to make a distribution of capital to Mr and Mrs Townsing in the sum of $4,999,998.50. Again, there is a difficulty with this transaction because there is no contemporaneous written evidence to support it. The executed resolution is not in evidence. It has been consistently pressed that the subject of this resolution was the capital gain made by the Trust on the sale of the AWML shares to Jarell, but without the benefit of the executed resolution, it is not possible to make any relevant finding. This is made all the more difficult by the fact that insofar as any record of this transaction has been made in financial accounts and otherwise, it is recorded at a figure of $4,999,998.50, the amount of the receivable, not the capital gain which, on Pilmora's own case, could not be more than $4,914,998.50: the receivable of $4,999,998.50 less Pilmora's cost base in the AWML shares of $85,000. The inference is undoubtedly open, an inference which has not been dispelled by any evidence to the contrary, that the subject of any resolution that might be found to have been made by Pilmora as trustee of the Trust in favour of Mr and Mrs Townsing, was the Jarell receivable; and at that point in time the receivable ceased to be an asset of, and subject to, the Trust and became an asset of Mr and Mrs Townsing. Any such finding would be fatal to Pilmora's claim that it disposed of the receivable in the year ended 30 June 1994 because it would not be an asset of the Trust which Pilmora, as trustee, could dispose. 126 It is not necessary to come to any findings in respect of the difficulties raised in [125(5)] above; it is sufficient to say that I find these issues also contribute to my view, expressed in the chapeau to [125] above, that Pilmora has not proven, on the balance of probabilities, that it incurred a capital loss of $4,999,998.50 on the disposal of a receivable due to it by Jarell in the year ended 30 June 1994 and there was, therefore, nothing to apply against the capital gains derived by the Trust in the years indicated in the table in [121] above.

Alleged Glossolalia Payment 127 As noted in [34] above, the Commissioner has included the sum of $1,784,450 in the s 95 net income of the Trust for the year ended 30 June 1994. The basis on which he has done this is not clear. In his Amended Appeal Statement dated 30 April 2015 (p 67) he says that the amount of $1,784,450 was paid by Glossolalia to Pilmora as trustee of the Trust in the 1995 year purportedly by way of loan, but in reality was a repayment of assessable profits to the trustee that are beneficially owned by the trustee. This, the Commissioner says, was the real transaction entered into between the parties and the payment is assessable to the Trust in calculating its s 95 net income. What is not explained is why, if the payment was made "in the 1995 year", it was included in the s 95 net income of the Trust for the year ended 30 June 1994 nor why, if it represented assessable profits "beneficially owned" by Pilmora, it was included in the s 95 net income of the Trust at all. These are matters which were not touched upon by the Commissioner, either in cross-examination, by his senior counsel, of Mr Townsing, or in his closing submissions. 128 More fundamentally, there is absolutely no evidence whatsoever that Glossolalia made a payment to Pilmora by way of loan or otherwise in the year ended 30 June 1994, nor that it had the funds to do so. Indeed, all the evidence is to the contrary. The Commissioner, in his closing submissions, does not contend that there was any such payment; rather, he contends "that the Trust has not proven that the amount assessed to it with respect to the 1994 year is not assessable income". 129 With respect, I cannot agree with this contention. As I observed at [34] above, while the evidence is not optimal, it does, in my view, prove, on the balance of probabilities, that the assessments to Pilmora as trustee of the Trust, pursuant to s 98(4) of the 1936 Act, for the year ended 30 June 1994, on account of Mr Townsing and Mrs Townsing (already conceded) are excessive, because the s 95 net income of the Trust for that year did not include the amount of $1,784,450. It is necessary that I explicate my reasons for this conclusion. 130 Glossolalia was only incorporated on 9 February 1990. 131 While the full 1990 income tax return for Glossolalia is not in evidence, a summary document (styled "STAC Capture") is in evidence. It discloses as income returned, gross dividends (including franking credits) of $1,821.105, gross tax of $710,231 (equal to the franking credits) and assets of $1,110,498. It disclosed no other income, and no business activity. 132 Something was sought to be made in cross-examination of Mr Townsing that the disclosure in Glossolalia's returns was shown as "dividends" and not as "trust distribution" or "income attributable to dividends", but there were no such categories of income provided for in the returns. In any event, such evidence as there is makes it clear that the franked dividends it returned as assessable income in the year ended 30 June 1990 came through the Trust. 133 The Financial Statements (Revenue Account) of the Trust for the year ended 30 June 1990 disclose "Dividends received" of $1,134,421.49 out of "Total income" of $1,498,570.61 and "Total expenses" of $388,075.01 leaving "Net income for the year" of $1,110,495.60, followed by the words: Distribution to beneficiaries - H G TOWNSING - G P TOWNSING - Glossolalia Pty Ltd $1,110,495.60 This latter amount is within $2.00 of the amount of the assets disclosed in the summary tax return referred to in [131] above. Clearly, the only inference open is that the assets so disclosed represent the unpaid present entitlement of Glossolalia to the net income of the Trust for the year ended 30 June 1990. 134 The full 1991 tax return for Glossolalia is also not in evidence, although the "STAC Capture" tax return for that year is in evidence. It discloses as income returned, gross dividends (including franking credits) of $1,134,517, gross tax of $442,461.63 (equal to the franking credits) and assets of $1,802,549 - the unpaid present entitlement in respect of the 1990 year ($1,110,498) and the unpaid present entitlement in respect of the 1991 year ($692,051). The veracity of this latter figure is confirmed by comparing it to the difference between $1,134,517 and $442,461.63, namely, $692,055.37, a discrepancy of less than $5.00. The "STAC Capture" tax return for 1991 discloses no other income, and no business activity. 135 What is in evidence through the "STAC Capture" tax returns of Glossolalia for the years ended 30 June 1990 and 1991 and the Financial Statements (Revenue Account) of the Trust for the year ended 30 June 1990, is also consistent with the material in evidence relating to Jarell and the dividends it paid to the Trust in the years ended 30 June 1990; and the material in evidence relating to AWG, formerly Jenolan, and the dividends it paid in those years. In addition to Jarell's majority holding of shares in Jenolan, Pilmora, as trustee of the Trust, also held shares in Jenolan directly. 136 As noted in [133] above, the Trust received fully franked dividends of $1,134,421.49 during the year ended 30 June 1990. The Financial Statements for Jarell for the year ended 30 June 1990 disclosed that it paid a fully franked dividend of $1,947,000 in the same year, 50% of which ($973,500) would have been paid to Pilmora, as trustee of the Trust; and the Annual Report of Jenolan (by then AWG) for the year ended 30 June 1991 disclosed that it paid fully franked dividends of $3,335,046 and $667,009 in the years ended 30 June 1990 and 1991respectively of which 57.2% would have gone to Jarell and 4.6% to Pilmora, as trustee of the Trust. 137 In these circumstances, it is open for me to find, and I do so find, that: (1) The only asset of Glossolalia at 30 June 1991 was its unpaid present entitlements to the income of the Trust for the years ended 30 June 1990 and 1991 (totalling $1,802,549); (2) the amount did not increase in subsequent years, suggesting that no other assets were acquired, relevantly for present purposes by the making of a loan to Pilmora, as trustee of the Trust; (3) indeed, the amount of the assets in subsequent years decreased to the point that, as at 30 June 1995, they were recorded at $1,784,452; again suggesting that the assets of Glossolalia as at that date consisted of no more than its unpaid present entitlements to the income of the Trust in the years ended 30 June 1990 and 1991. 138 In the face of these findings, the underlying premise to the Commissioner's inclusion of $1,784,450 in the s 95 net income of the Trust for the year ended 30 June 1994, and its assessment to Pilmora on account of Mr Townsing and Mrs Townsing (the latter already conceded), namely, that there was a payment of such an amount, otherwise than by way of loan, cannot be accepted. It is true that when examined in chief (see T 655-656.26), Mr Townsing described the existence of the Trust's obligation to Glossolalia in respect of the unpaid present entitlements as being loans by the latter to the former, but in the vernacular of a lay person, that is totally comprehensible; and he did go on to say that there was no transfer of money. Mr Townsing's characterisation does not convert equitable obligations of Pilmora, as trustee of the Trust, to Glossolalia into a debt in respect of a loan which was never made. 139 The income tax assessments issued to Pilmora on account of Mr Townsing and Mrs Townsing (the latter already conceded) for the years ended 30 June 1994 to 30 June 1997 inclusive and the year ended 30 June 2001 have been shown to be excessive, and the objection decisions in respect of the objections to those assessments must be set aside and the objections allowed to the extent indicated in these reasons. It also follows that the Commissioner's decisions on Pilmora's objections against the penalty assessments for the same years must be set aside and the objections allowed to the extent indicated in these reasons.

Henry George Townsing: Years Ended 30 June 2000 to 30 June 2009 Inclusive 140 As noted at [41] above, the Commissioner re-calculated the s 95 net income of the Trust for the years ended 30 June 2000 to 2009 inclusive by including as assessable income of the Trust amounts which Pilmora claims it borrowed from Normandy Asia, Normandy UK and HWBB and disallowing amounts claimed as deductions for interest and borrowing costs in respect of such alleged borrowings. The Commissioner took the view that such borrowings were sham borrowings, a disguise for the bringing into Australia of funds held for Mr Townsing and/or entities associated with him, with no obligation on Pilmora of repayment. 141 Again, with little or no hesitation, I find that the four payments from Normandy Asia to Pilmora referred to in [41(1)] above were intended by both parties to be subject to an obligation of repayment by Pilmora to Normandy Asia at the time each payment was made; that being the relevant time to determine whether the four payments were truly loans or something else. My finding in this regard is predicated on reasons similar to, albeit not coterminous with, my reasons for coming to a similar finding in relation to the payments (two) made by Normandy Asia to Advant: see [104] to [108] inclusive above. 142 Similarly, I find that the four payments from Normandy UK to Pilmora referred to in [41(2)] above and the two payments from HWBB to Pilmora referred to in [41(3)] above were intended by both respective parties, or if not by both, at least by Pilmora, to be subject to an obligation of repayment by Pilmora to Normandy UK and HWBB respectively at the time each payment was made; that being the relevant time to determine whether the payments were truly loans or something else. My findings in this regard are predicated on reasons similar to, albeit not coterminous with, my reasons for coming to a similar finding in relation to the payments made by Normandy UK to Advant: see [110] to [114] inclusive above. 143 It follows that the Commissioner's objection decisions on Mr Townsing's objections against his income tax assessments for the years ended 30 June 2000 to 30 June 2009 inclusive, must be set aside and the objections allowed in part. It also follows that the Commissioner's decisions on Mr Townsing's objections against his penalty assessments for the same years must be set aside and the objections allowed to the extent indicated in these reasons. 144 In a statement of Supplementary Agreed Facts dated and filed 7 July 2015 after the parties had closed their respective cases and before I heard their respective submissions, it was agreed that at least 13% of the money paid by Normandy Asia to Pilmora, 3% of the money paid by Normandy UK to Pilmora and 5% of the money paid by HWBB to Pilmora, were applied by Pilmora to income-producing purposes. In the face of this agreement, 13% of the interest and borrowing costs incurred by Pilmora to Normandy Asia in the relevant years of income; 3% of the interest and borrowing costs incurred by Pilmora to Normandy UK in the relevant years of income; and 5% of the interest and borrowing costs incurred by Pilmora to HWBB in the relevant years of income should be allowed as deductions against the assessable income of Pilmora in calculating the s 95 net income of the Trust for those years. Nothing further should be allowed because Pilmora has not established that any greater respective portions of the moneys I have found were so lent by Normandy Asia, Normandy UK and HWBB to Pilmora were used by Pilmora for income-producing purposes.

The Objection Decisions on Penalty Assessments in this Court 145 As indicated at [96], [115], [139] and [143] above, the Commissioner's objection decisions on Normandy Australia's objections against its penalty assessments for the years ended 31 December 2007 to 2009 inclusive; the Commissioner's objection decisions on Advant's objections against its penalty assessments for the years ended 30 June 2002 and 2003; the Commissioner's objection decisions on Pilmora's objections against its penalty assessment (on account of Mr Townsing and Mrs Townsing) for the years ended 30 June 1994 to 1997 inclusive and its penalty assessment for the year ended 30 June 2001; and the Commissioner's objection decisions on Mr Townsing's objections against his penalty assessments for the years ended 30 June 2000 to 2009 inclusive, should be set aside, and the objections allowed in full, or to the extent indicated in these reasons. 146 Any allowance of an objection to a penalty assessment, either in full or to the extent indicated in these reasons, should recognise the non-inclusion of an amount in the assessable income of the applicants which was previously included and the allowance of an amount as an allowable deduction which was previously excluded. Otherwise, the penalties should stand at the rate previously determined by the Commissioner.

Proposed Orders 147 Because of the multiplicity of issues, the fact that on some issues I have found for the applicants and on other issues I have found for the Commissioner, it is not possible to frame orders with a sufficient degree of specificity to give effect to these reasons in respect of all applicants. Rather, the matters before the Court should be remitted to the Commissioner to raise assessments of income tax, if any, for the relevant years of income in accordance with these reasons for judgment and to raise assessments of penalty tax, if any, consistent with those primary tax assessments. I certify that the preceding one hundred and forty-seven (147) numbered paragraphs are a true copy of the Reasons for Judgment herein of the Honourable Justice Edmonds.