[2010] HCA 10
Doggett v The Queen (2001) 208 CLR 343
[2001] HCA 46
King v The Queen (1989) 161 CLR 423
M v The Queen (1994) 181 CLR 487
Nasrallah v R
R v Sako [2001] NSWCCA 415
R v Jimenez [2000] NSWCCA 390
Rasic v R
Johnny Lee Vella v R
Source
Original judgment source is linked above.
Catchwords
[2010] HCA 10
Doggett v The Queen (2001) 208 CLR 343[2001] HCA 46
King v The Queen (1989) 161 CLR 423
M v The Queen (1994) 181 CLR 487
Nasrallah v RR v Sako [2001] NSWCCA 415
R v Jimenez [2000] NSWCCA 390
Rasic v RJohnny Lee Vella v R
Judgment (28 paragraphs)
[1]
Solicitors:
Blair Criminal Lawyers (Mr Osborne)
Commonwealth Director of Public Prosecutions (Crown)
File Number(s): 2010/49254; 2010/49257
Decision under appeal Court or tribunal: District Court of New South Wales
Jurisdiction: Criminal
Date of Decision: 30 October 2015
Before: Garling ADCJ
File Number(s): 2010/49254; 2010/49257
[2]
Judgment
LEEMING JA: Raymond Clifford Osborne was tried in the District Court of New South Wales before a judge and jury of twelve on an indictment brought by the Commonwealth Director of Public Prosecutions dated 29 August 2014. The conduct giving rise to the indictment related to Mr Osborne causing to be lodged the personal income tax returns of his (then) client, Dr Graham Kelly, for the financial years ended 30 June 1999, 2000, 2001 and 2002. Count 1 was that:
"Between about 8 July 2000 and 17 July 2000 at Sydney in the State of New South Wales and elsewhere, did defraud the Commonwealth by causing to be lodged with the Australian Taxation Office Graham Kelly's personal income tax return for the financial year ending 30 June 1999 in which Graham Kelly failed to disclose all income derived by him during the financial year ending 30 June 1999.
Contrary to section 29D of the Crimes Act 1914 (Cth) (Law Part Code: 10836)".
The second count was in identical terms, but related to lodging Graham Kelly's tax return for the following financial year.
The third and fourth counts reflected the commencement (with effect from May 2001) of s 135.1(5) of the Commonwealth Criminal Code. Count 3 was:
"Between about 6 August 2002 and 13 August 2002 at Sydney in the State of New South Wales and elsewhere, did dishonestly cause a risk of loss to the Commonwealth knowing or believing there was a substantial risk of the loss occurring by causing to be lodged with the Australian Taxation Office Graham Kelly's personal income tax return for the financial year ending 30 June 2001 in which Graham Kelly failed to disclose all income derived by him during the financial year ending 30 June 2001.
Contrary to subsection 135.1(5) of the Criminal Code (Cth) (Law Part Code: 41500)."
Count 4 was in materially identical terms for the following financial year.
Relevantly for the purposes of this appeal, it will be seen that an element of each count was that Graham Kelly's personal income tax return failed to disclose all of the income derived by him in that year.
Mr Osborne pleaded not guilty to all counts.
The trial occupied some 34 days, including a closing address by the Crown which lasted slightly more than 4 days. Significantly for present purposes, the evidence concluded on the 24th day of the trial, Mr Osborne's evidence having occupied the preceding five days. The 25th, 26th and 27th days of the trial were substantially consumed by submissions (in the absence of the jury) concerning whether the Crown could advance an alternative case that Graham Kelly had derived taxable income because he was a beneficiary of a trust, something which had at best only been implicit in the Crown case hitherto. The trial judge permitted the Crown to take that course. It will be seen that this new way of putting the Crown case formed the basis for many of the grounds of appeal, including those which I have concluded are dispositive.
The defence made two applications for directed verdicts of acquittal. Both were refused. I will return to these below.
The jury returned verdicts of guilty on each count. The trial judge sentenced Mr Osborne to terms of imprisonment of 18 months in respect of each of counts 1, 2 and 3 and two years in respect of count 4. All four sentences were to commence on 30 October 2015, and all were suspended, upon Mr Osborne entering into a recognisance in the amount of $1,000 on condition that he be of good behaviour for the balance of the sentence.
The Crown filed an appeal against sentence on 25 November 2015. The delay (in excess of 9 months) between the filing and hearing of that appeal is attributable to an appeal against conviction originally lodged on 12 August 2015 (before sentence was imposed). Initially there were two grounds of appeal, supported by lengthy submissions of 103 paragraphs filed 19 April 2016. Further submissions were filed on 3 June 2016 (of 117 paragraphs) in support of two additional grounds of appeal. Both appeals were heard concurrently. In those circumstances, no complaint was made, nor could one be made, about the delay in determining the Crown appeal.
As ultimately formulated, the appeal against conviction contained the following four grounds:
"Ground 1: The directions were inadequate on how the appellant's liability was to be established in respect of both cases advanced by the Crown.
Ground 2: The trial judge erred in failing to give a fair and balanced summing up and in failing to adequately state the defendant's case.
Ground 3: His Honour erred in his directions as to (and failed to direct adequately on) the existence of a trust.
Ground 4: That the verdicts in respect of all counts are unreasonable or cannot be supported having regard to the evidence, because:
1. It was not reasonably open to the jury to find the existence of the trust contended for by the Crown;
2. If the trust was found, it was not reasonably open to the jury to be satisfied beyond reasonable doubt that the impugned income ought to have been declared by Graham Kelly.
3. It was not reasonably open to the jury to find that the Leominister income was received by Graham Kelly for the purpose of income taxability, and
4. It was not reasonably open to the jury to be satisfied that the applicant knew the assessments were false."
The Crown denied any of the grounds were made out, and relied extensively upon r 4 of the Criminal Appeal Rules, particularly in relation to the directions given by the trial judge. If necessary, the Crown invoked the proviso in s 6(1) of the Criminal Appeal Act 1912 (NSW).
In its sentence appeal, the Crown contended that a full time custodial sentence was appropriate, maintaining that (a) the individual sentences were manifestly inadequate, (b) the absence of accumulation meant that the total effective sentence was manifestly inadequate, and (c) the decision to suspend the sentence rendered it manifestly inadequate.
It is appropriate to deal first with the appeal against conviction, to which the large majority of the parties' written and oral submissions were directed. Because the trial was long, because some of the facts were complex, and because some of the grounds were directed to what happened over the course of the trial, this judgment is correspondingly quite lengthy. However, the essential reasoning why I have concluded that the appeal should be allowed and the guilty verdicts quashed may be summarised quite succinctly:
1. it was an element of each charge that Graham Kelly's tax returns failed to disclose all of his assessable income;
2. for most of the trial, the Crown had not relied on Graham Kelly being the beneficiary of a bare trust in order to establish that he was presently entitled to funds received by Leominister (a company incorporated in the British Virgin Islands), and therefore had derived assessable income;
3. after both the Crown and the defence cases had closed (including after Mr Osborne had been cross-examined extensively), the Crown was permitted, over the objection of the defence, to submit that Graham Kelly was the beneficiary of a bare trust, and in closing address this became the primary way in which the Crown sought to establish this element of the charges;
4. over the objection of the defence, the Crown told the jury that in order to conclude that Graham Kelly was a beneficiary of a bare trust, it was sufficient for them to be satisfied beyond reasonable doubt that he controlled Leominister;
5. the trial judge left it to the jury to decide the legal question of the test to be applied on this aspect of the case;
6. in point of law, control is not sufficient to establish the existence of a bare trust;
7. the evidence did not otherwise entitle the jury to conclude, to the criminal standard, that Graham Kelly was the beneficiary of a bare trust; and
8. because (at least) one of the two bases put to the jury for why the funds received by Leominister were Graham Kelly's assessable income cannot be sustained, the jury verdict must be quashed.
Before dealing with the parties' submissions and resolving the grounds of appeal, these reasons address the following matters:
1. the statutory provisions giving rise to the charges and the way in which Mr Osborne was said to have contravened them;
2. three key aspects of the way the Crown case was run;
3. an overview of the factual background; and
4. the applications for directed verdicts and the change in the Crown case introducing the trust alleged by the Crown.
[3]
Relevant statutory provisions
As is plain from the different formulation of counts in the indictment, the offences created by s 29D and s 135.1(5) have different elements. In another case, this complexity might cause difficulty. In order to resolve this appeal, however, on the principal submission advanced at the hearing, it will be possible to pass over many of the details.
Section 29D of the Crimes Act 1914 (Cth) provided that:
"A person who defrauds the Commonwealth or a public authority under the Commonwealth is guilty of an indictable offence."
In each financial year, Mr Osborne had electronically lodged Graham Kelly's personal income tax return. Each of the tax returns disclosed zero assessable foreign‑sourced income and negatively answered the question:
"Did you own or have an interest in property (tangible/intangible) or in funds, valued at AUD$50,000 or more in total and located outside Australia during the year?".
Each of the returns was accompanied by an electronic lodgement declaration, signed by Graham Kelly, declaring that all the information in the return was true and correct and that he had shown all income for tax purposes, including net capital gains, from sources in and out of Australia for the year of income. None of the "Leominister income" was disclosed - either as assets or income - in any of Graham Kelly's tax returns.
Each return was also signed by Mr Osborne and contained a tax agent's certificate in the following terms:
"I, Williams Hatchman & Kean [Mr Osborne's firm] having charged a fee directly or indirectly for preparing or assisting in the preparation of this tax return, hereby certify that this tax return has been prepared in accordance with the information and instructions supplied by the taxpayer."
The Crown alleged at trial that the lodging, or causing to be lodged, of that return contravened s 29D because Mr Osborne knew that there was assessable income of Graham Kelly which was not disclosed in it.
For the third and fourth counts, s 135.1(5) of the Criminal Code provided:
(5) A person commits an offence if:
(a) the person dishonestly causes a loss, or dishonestly causes a risk of loss, to another person; and
(b) the first-mentioned person knows or believes that the loss will occur or that there is a substantial risk of the loss occurring; and
(c) the other person is a Commonwealth entity.
Penalty: Imprisonment for 5 years.
There was no dispute that the Australian Taxation Office was a "public authority" for the purposes of s 29D and a "Commonwealth entity" for the purposes of s 135.1(5)(c).
It will be seen that para (a) of s 135.1(5) includes both a physical element (cause a loss or a risk of loss) and a fault element (dishonesty). Further, s 130.3 defines "dishonest" for the purposes of Chapter 7 of the Criminal Code to mean:
(a) dishonest according to the standards of ordinary people; and
(b) known by the defendant to be dishonest according to the standards of ordinary people.
Paragraph (b) of s 135.1(5) contains a further fault element (knowing or believing that the loss will occur, or that there is a substantial risk of the loss occurring). That element is different from the fault elements stated in s 5.1(1) (namely, intention, knowledge, recklessness or negligence). That an offence may have multiple, and different, fault elements is expressly authorised by s 5.1(2).
The Crown alleged that the lodging, or causing to be lodged, of Graham Kelly's tax returns contravened s 135.1 because Mr Osborne knew or believed that there was a substantial risk of loss to the Commonwealth because the tax returns were false. One way in which this was put was that by not disclosing Graham Kelly's interest in offshore assets, there was at least a substantial risk of loss to Commonwealth revenue.
The state of mind of Mr Osborne was important to some of the grounds of appeal. However, it will be sufficient for the most part to confine attention to a factual issue which was squarely raised at trial, and which was at the forefront of submissions on appeal, namely, whether it was shown not merely that Graham Kelly's returns were false, but also that they failed to disclose all of his assessable income.
[4]
Three aspects of the Crown case significant to this appeal
Before summarising the details of the evidence and the submissions, it is convenient to identify three aspects of the Crown case which directly bear upon the outcome of this appeal.
First, the case was not run on the basis that it was sufficient to prove beyond reasonable doubt that Graham Kelly's tax returns were false insofar as they did not disclose an interest in overseas assets. This case was instead run on the basis that Graham Kelly's return was false in that it did not disclose all of his taxable income. That reflected the language of the indictment and the way the Crown case was presented at trial. It is true that from time to time the Crown made submissions that the failure to declare an interest in Leominister was sufficient to sustain the conclusion that there was a risk to the revenue (one example will appear in the course of the submissions on the applications for a directed verdict). However, when it mattered - at the end of the trial, and on appeal in this Court - the Crown acknowledged that, by reason of the way the indictment was drafted, it was necessary to go further and establish that there was income which should have been disclosed on Graham Kelly's returns.
Thus, in the course of the Crown's address to the jury, it said:
"Graham Kelly had an obligation to declare, firstly, the existence of these overseas interests, and secondly, those gains as part of the income that he was obliged to put into his returns, and dishonestly did not do so ..."
The summing up by the trial judge included the following:
"Part of the prosecution case in relation to each of the four counts in the indictment is that Graham Kelly failed to disclose all income derived by him during the relevant financial years in two different ways. The first is [that a] trust relationship existed between Leominister and Graham Kelly and that assessable income was attributable to Graham Kelly from that trust. The second is that Graham Kelly received assessable income from Leominister."
In this Court, senior counsel for the Crown confirmed that:
"The Crown did have to prove that Graham Kelly failed to disclose in that income tax return all income derived by him during the financial year. That's a separate element which the Crown had to prove because [of] the way the indictment was set out."
On the view I take, that unequivocal tying of the Crown case to Graham Kelly's taxable income - reflecting the language of the indictment - is dispositive.
The second matter to be noted at the outset is the change in the Crown case towards the end of the trial. Ground 3, and parts of grounds 1 and 4, turn on the directions and verdict insofar as they related to the existence of a trust. Yet the existence of a trust forms no element of the offences, and indeed seems to have formed no part, or, at best, a very minor part, of the Crown case until late in the trial, after the evidence was complete.
Illustrative of this was the following exchange from the 28th day of the trial:
"CROWN PROSECUTOR: Your Honour, before the closing resumes, I said to my learned friend that in light of your Honour's ruling yesterday that my friend can raise trust in his closing and your Honour would give some directions on trust.
HIS HONOUR: Which I think we discussed.
CROWN PROSECUTOR: We did discuss it.
HIS HONOUR: Yes, and they're coming off the computer shortly.
CROWN PROSECUTOR: Yes, and I had said that I wouldn't mention trust in the closing, but I think now I've got to."
By the time the judge came to sum up, on the 33rd day of the trial, the existence of a trust was the first way in which the Crown case was described.
Thirdly, the Crown's submissions on appeal emphasised that the directions had been "settled" between bench and bar over several days after the close of evidence and the change in Crown case, and before closing addresses. That was a fair description of the process; ultimately, there was only one direction in relation to trusts on which his Honour was required to rule. On that basis, the Crown relied heavily on the absence of complaint at the time and r 4 of the Criminal Appeal Rules insofar as the grounds of appeal were directed to the adequacy of the directions.
Because of its importance to these grounds of appeal, I will address the change in the Crown case in some detail below. Before doing so, it is necessary to summarise the factual background.
[5]
Overview of factual background
The following description is intended to be uncontroversial. Graham Kelly and his wife were each 50 percent shareholders in a family company, Bende Holdings Pty Ltd. Graham Kelly was a research scientist who had spent many years researching and developing products for veterinary and medical uses. He had held between the early 1970s and around the mid‑1990s a number of research positions at the University of Sydney in the medical and veterinary science fields. He carried out research into isoflavones, substances considered to have commercial potential in the veterinary, medical and pharmaceutical fields. He left the University of Sydney in around 1994 to pursue the commercial development of his research.
By Deed of Assignment, Graham Kelly purported to assign to Bende Holdings "all rights in full including current and future intellectual property" in various areas of research relating, among other things, to isoflavone research. All parties proceeded at trial on the basis that the deed was effective in its terms (see for example para 15 of Mr Osborne's submissions and para 1 of the Crown submissions on Mr Osborne's first directed verdict application), and the same approach was adopted in this Court. That common ground ignores the fact that equity insists upon valuable consideration for an assignment of property not yet in existence to be effective. In equity, a deed does not suffice; that was the point of Buckley J's observation in Re Ellenborough [1903] 1 Ch 697 at 700 that "if the deed had been for value the trustees could have enforced it". It does not appear that any consideration moved from Bende Holdings. However, this point will not as it turns out affect the outcome of the appeals.
The Deed of Assignment was dated 19 August 1988. Subsequently, a public company named Novogen Ltd was floated on the Australian Stock Exchange, with Graham Kelly as the Chairman of its Board of Directors. Bende Holdings transferred its present and future intellectual property rights to Novogen in consideration for the issue of shares to Bende Holdings after the float. Bende Holdings became Novogen's largest shareholder. Most relevantly for present purposes, Novogen also issued 7 million options to Bende Holdings to purchase further Novogen shares at an exercise price of 50 cents each.
The market price of shares in Novogen rose. Mr Osborne was the accountant and tax agent for Graham Kelly and Bende Holdings from about 1996. Mr David Kelly, Graham Kelly's son and a director of Bende Holdings, was called by the Crown and gave evidence that his father sought advice from Mr Osborne in relation to the capital gains tax consequences of the exercise by Bende Holdings of the 7 million options. According to David Kelly, Mr Osborne advised that there were three options: (a) incurring a capital gains tax liability, for which Bende Holdings would be liable to pay tax; (b) living overseas as an offshore resident and (c) setting up an offshore structure. Mr Osborne denied that he gave that advice. However, there is no doubt that Graham Kelly established an offshore structure.
[6]
Establishment of Leominister
In the British Virgin Islands, companies may have artificial persons as their directors and secretaries. Companies may also issue bearer shares, such that ownership and therefore company membership is determined by possession of the share certificate, rather than an entry on a company's share register. It is notorious that both these aspects of British Virgin Islands company law facilitate concealing the identity of the natural persons who in fact own and control the company.
Leominister Company Limited was incorporated in the British Virgin Islands. The company which was the subscriber to the Memorandum of Association (a Moore Stephens company) appointed as Leominister's director a company called HSPS Managers (BVI) Limited. (Moore Stephens was the accounting firm in Hong Kong used by Graham Kelly.) On the same day that that company was appointed, it issued a single bearer share. Leominister's secretary was First Island Secretaries Limited, with an address in Kowloon, Hong Kong.
[7]
Leominister's acquisition and exercise of the Novogen options
Leominister became the owner of the 7 million Novogen options in the following way. In around June 1997, Bende Holdings agreed to sell the 7 million Novogen options to Postlands Limited, a company incorporated in Hong Kong and administered by Moore Stephens Hong Kong, for $700,000. In around August 1998 Leominister purchased an option to purchase the 7 million Novogen options from Postlands for HK$100,000, and subsequently exercised that option. There was no dispute that, thereafter, Leominister became the legal owner of the 7 million options.
In December 1998, Leominister exercised all of the options. The exercise price was AUD$3.5 million. In order to make that payment, Leominister placed a sale order with stock brokers in Sydney for the forward sale of 1,500,000 Novogen shares, which realised some $3.7 million. That order was placed by Mr Osborne (acting on Graham Kelly's instructions) and Mr Osborne (again acting on Graham Kelly's instructions) directed that $3.5 million be paid to Novogen.
The difference between the exercise price of the options (50c) and the market value of the shares meant that by exercising all the options and selling around one fifth of the shares, Leominister could become the owner of the balance of the Novogen shares without requiring any additional finance.
It was common ground, at least for the purposes of these appeals, that Graham Kelly controlled Leominister. That is to say, he could cause, in short order, Leominister to perform any corporate act he saw fit. That was not something he wished to disclose at the time. For example, when, on 14 September 1999, Graham Kelly was asked whether Leominister should be noted as a company related to any of the directors of Solar Sailor Holdings Ltd (of which he was then a director), Graham Kelly responded:
"Leominister is not related to any director and should be changed immediately."
However, the Crown ultimately treated the question of Graham Kelly's control of Leominister as dispositive on the critical question of whether the tax returns failed to disclose his personal income. As will be seen below, according to the Crown, if the jury found beyond reasonable doubt that Graham Kelly controlled Leominister, it followed that it held the Novogen shares on trust for him, with consequences for Graham Kelly's assessable income when those shares were sold.
[8]
Sale of the remaining Novogen shares
Mr Osborne, acting on the instructions of Graham Kelly, thereafter placed sales orders with Sydney brokers for Novogen shares held by Leominister (in the case of some of those sales, the instructions came from David Kelly). Mr Osborne also gave instructions for the disbursement of the net sale proceeds in accordance with his instructions. The amounts realised, on the Crown case, were as follows:
1999 $4,203,733.36
2000 $754,596.09
2001 $951,257.79
2002 $2,003,408.60
The total sale proceeds were $7,912,995.84.
[9]
Disbursement of proceeds of sale, including to Graham Kelly and his family
Graham Kelly's broker received the proceeds from the sale of the Novogen shares from time to time. From there, the majority of the proceeds were transferred into one or other of two accounts opened by Moore Stephens in the name of Leominister with Standard Chartered Bank Honk Kong (a GBP account and an AUD account). A total of $AUD4,245,134 was transferred into the GBP account and a total of $AUD2,542,877 was transferred into the AUD account. Lesser amounts were transferred to other entities. For example, in April 1999, First Island Secretaries Limited executed a document on Leominister letterhead instructing a broker to sell 40,000 shares in Novogen Ltd, and to transfer AUD100,000 to a nominated account in the name of Solar Sailor Pty Ltd, with the balance to be deposited into a Kowloon branch of Standard Chartered Bank in the name of Leominister. The instruction stated that it was to be copied to Mr Osborne and gave his fax number. When, on 27 April 1999, Mr Osborne received an email from Moore Stephens concerning the sale of the shares, he responded:
"Please refer to my previous message dated 20 April which gave details as follows $100,000 to be transferred to the account of Solar Sailor Pty Ltd [details were then set out] with the balance of the fund to be transferred to the Leo Minster's [sic] account."
Some of the disbursement of the "Leominister income" was directly traceable into the hands of Graham Kelly and his family. For example, on Friday 14 September 2001, David Kelly sent an email to "Rachel" at Strachans SA as follows:
"Just a quick note to say that our debit card will be drawn upon over the next 4 weeks from UK, Italy and US.
Could you please advise balance of account by return email. I will be forwarding further funds to top up the account next week, but will advise when these have been sent."
Rachel advised on the same day that the balance of the debit card was USD11,400.36, and gave account details for an account in the name of Cabas Investments Limited at a National Westminster Bank branch in London.
The following Monday, David sent a fax to Ms Cordelia Tang at Moore Stephens, re "LCL", asking to arrange a transfer of all funds from the pound sterling account, leaving just one thousand pounds, and directing that the funds be transferred to the Cabas Investments Limited account with National Westminster Bank nominated by Rachel from Strachans.
On the same day, Moore Stephens caused a letter on Leominister letterhead to be hand delivered to the Manager of the Standard Chartered Bank in Hong Kong, referring to Leominister's pound sterling account, and instructing:
"Please debit the above account and transfer all balances on account after retaining £1,000.00 (Pounds Sterling one thousand only) on account, and net of your bank charges, please remit as follows [then the Cabas Investments account details were given]".
On 19 September, David Kelly emailed Rachel at Strachans advising that:
"The funds were remitted from Leominster Company Limited account in Hong Kong. This is a british pound sterling account and a total of 7,731.77 pounds were transferred. At todays rates this should equate to approximately $11,323 US Dollars."
On 1 October, a credit of $11,191.10 was made to the Ferndale account on which the debit card operated (and from which Strachan's fees were debited).
Just as David Kelly had anticipated, there were a series of withdrawals on that account, in the United Kingdom, Italy and the United States, as follows:
15 September £200 Barclays ATM, Bond St London
17 September £200 Lloyds, Hanover Sq, London
18 September ITL500,000 Banca Pop Di Verona, Venice
21 September ITL500,000 Cassa Risp Di Firenz, Florence
25 September ITL500,000 Cassa Risp Di San Miniato, Siena
26 September ITL500,000 Credito Emiliano, Naples
30 September ITL500,000 Banco Di Sicilia, Sicily
2 October ITL500,000 Banco Di Sicilia, Sicily
5 October ITL500,000 Banco Pop Etruria, Rome
6 October ITL150,000 Largo Del Nazareno, Nazareno
7 October USD240 PDN Bank, JFK Int'l
8 October USD261.50 5th Avenue, New York
Mr James Kelly, another of Graham Kelly's sons, had left Australia on 14 September and returned on 13 October.
Other amounts of money sourced from the sale of shares by Leominister passed into the hands of Graham Kelly and his family. For example:
1. The statements of the Ferndale account discussed above record international cash withdrawals and hotel payments coinciding with the overseas travel of members of the Kelly family, such as a payment made to the Ballynahinch Castle in Galway while David Kelly was overseas.
2. David Kelly gave evidence that he arranged for Leominister to make available "in the order of 10 to $15,000" in cash for when his father was in Hong Kong in 1998 or 1999. David Kelly sent an email to Mr Philip Egglishaw on 1 November 2000 arranging for £8,000 in cash to be made available for his parents to pick up in London in November 2000.
3. David Kelly also gave evidence of instructing Leominister to pay tens of thousands of dollars to his sister Kathryn's bank account in London: his "father wanted to pay her rent while she was there so I arranged for that to occur". David Kelly sent a fax to Moore Stephens arranging for £20,000 to be transferred from the GBP Hong Kong Account to a London bank account on 2 November 2000.
4. A cash withdrawal of £5,000 was made from the GBP Standard Chartered account on 4 December 2001, when Graham Kelly and his wife were in Hong Kong (again, arranged in advance by David Kelly).
That said, the vast majority of the proceeds of sale of the Novogen shares were received by Bende Holdings. What is more, the Crown acknowledged that it had not established that Mr Osborne was aware of the debit card withdrawals made by members of Graham Kelly's family. However, the fact that (a small minority of) the proceeds of sale of Leominister's Novogen shares were received directly by Graham Kelly and his family was relevant, on one aspect of the Crown case, to whether Graham Kelly had personally derived assessable income from them.
The Court was told, without objection, that Graham Kelly had been charged with fraud offences concerning his 1999, 2000, 2001 and 2002 tax returns, but the proceedings had been discontinued because of what was said to be a terminal illness. The Court was also told, without objection, that he has survived that illness. He was not called by either side at trial.
David Kelly was charged with and pleaded guilty to fraud offences concerning Bende Holdings, relating to claims made for deductions for interest on a sham loan. He was sentenced to a term of imprisonment of two years, discounted by 15 percent by reason of an undertaking to give evidence in the case against Mr Osborne, which sentence was wholly suspended. He was called in the Crown case, and his evidence was the subject of a warning to which no objection was, or is, taken.
It is unnecessary to summarise all of the (voluminous) documentary evidence adduced by the Crown. Much of the evidence was directed to the so-called "Pall Mall loan", which was conceded to be a "phony" transaction designed to return to Australia the proceeds of sale of the Novogen shares. The generation of this transaction included correspondence between Mr Osborne and Mr Philip Egglishaw of "Pall Mall Finance Company Limited" in London in 2002 following a request from the ANZ bank that Bende Holdings' loan facilities be refinanced. Bende Holdings entered into a loan agreement with Pall Mall Finance Company for $2 million, later extended by a further $750,000, with Novogen shares and a mortgage on residential property provided as security for the loan. Bende Holdings drew down a total of $2,480,632 on the loan. The ultimate source of Pall Mall Finance Company's funds was Leominister's GBP Standard Chartered Account. Mr Osborne maintained he was not aware that the loan was phony at that time.
It is sufficient for present purposes to observe, from what has been said already, that there is an overwhelming inference that the proceeds of the sale of Leominister's Novogen shares were directed on instructions from David and Graham Kelly, via companies established by Moore Stephens and Strachans, to an account from which (among other things) personal expenses of the Kelly family were drawn.
The defence case at trial was that Mr Osborne believed that Leominister was a company controlled by Mr Malcolm Logan, who was not a client of Mr Osborne's practice but referred clients to it. He said that he believed that, in causing the various orders concerning Novogen shares to be placed, he was following the instructions of Mr Logan.
It was said that Mr Osborne had no motive to commit the offences, that he was a man of impeccable character, and that there was evidence that Mr Logan, Graham Kelly and David Kelly actively concealed their activities from him. Most relevantly for this appeal, Mr Osborne also relied on the proposition that the Crown could not prove to the criminal standard that Graham Kelly had to disclose the "Leominister income" on his tax return.
[10]
First directed verdict application
The first application for a directed verdict was made on the 16th day of the trial, and anticipates one of the grounds of appeal. It was said there was no evidence that Graham Kelly failed to disclose all of income derived by him during the relevant years (T 812.22). Against this, the Crown made the point (correctly) that the failure to disclose any asset or interest in Leominister supported its case that Commonwealth tax revenue was imperilled (T 826.35). However, that does not squarely respond to the deficiency identified by the defence. The Crown pointed to the sales of Novogen shares which generated millions of dollars, and said (T 833.10):
"Now whether they are capital profits or income profits if they are profits of effectively beneficially Dr Kelly hidden under the Leominister offshore entity it doesn't really matter. All one can say is that beyond reasonable doubt a jury is entitled to find that there would have been moneys declarable in his returns beyond his Australian income as [Chairman of] Novogen because of the volume, the amounts of money and so on. There is strong evidence of that."
What precisely was meant by "capital profits" or "income profits", and what precisely was their tax treatment, was not otherwise articulated by the Crown. On the second day of argument, the judge directed the Crown to the difficulty in this submission as follows (T 850.43)
HIS HONOUR: So the process is that the gain is actually made by Leominister selling shares. They sell them.
CROWN PROSECUTOR: Leominister sells them.
HIS HONOUR: Leominister sells them and there is a gain.
CROWN PROSECUTOR: Yes.
HIS HONOUR: It's a company, isn't it? There is no doubt about that.
CROWN PROSECUTOR: It is a company.
HIS HONOUR: It is incorporated in the Virgin Islands.
CROWN PROSCUTOR: But the beneficial interest in its property on the Crown case is that of Graham Kelly. That is step 1. When it pays the proceeds of sales out of its bank accounts to Graham Kelly or at his direction he then directly enjoys the fruits of the gains, whether they are income or capital gains.
HIS HONOUR: Therefore, it is liable to at least declare them.
CROWN PROSECUTOR: If an inference is available beyond reasonable doubt that some or all of those moneys must have fallen within ordinary income concepts or capital profit concepts then there is a failure to declare all income for the year."
The judge refused the application, and gave short reasons. After summarising the submissions, his Honour concluded:
"Having heard all the submissions, I have concluded, taking the Crown's case at its highest point, that there is evidence that Graham Kelly should have advised in his tax return that he had interest in foreign companies, including Leominister, and that would have given notice to the taxation department that there was every chance that tax which should have been assessable was not put in his return.
It would have allowed the taxation department to investigate, especially as his return was done on a self-assessment basis and not all information was supplied. I am further of the view that there is an argument the Crown can make to the jury that Graham Kelly was required to disclose in his return the moneys from Leominister and from the other sources and disclose that as income.
Having reached those conclusions, I have no basis to direct a verdict and I refuse the application."
No application was made for any explanation of what precisely "the argument the Crown can make to the jury" that led to the conclusion that Graham Kelly's returns did not disclose all of his personal income, to which the trial judge had referred in the second last sentence reproduced above.
[11]
Second directed verdict application
A second application for a directed verdict was made on the 26th day of the trial, after the conclusion of the evidence and the change in the Crown case. This time the submission was based on the newly formulated trust aspect of the Crown case. In response, the Crown said this:
"The Crown case is, in practical terms, Graham Kelly owned and controlled Leominister, which simply means he had a beneficial interest in it. Why that bears on the tax law is that it seems clear, at least to the Crown ... that if a tax payer has a beneficial interest in property outside of Australia that has to one way or another be reflected in his tax returns. ...
HIS HONOUR: And that is sufficient to require him to declare?
CROWN PROSECUTOR: Yes. We've set out the bare trust not to cause confusion to our friends or to your Honour but because it appears to us to be an available legal analysis on the facts we now have in the case of a bare trust arising, and when your Honour looks at the authorities on it, it arises effectively because Graham Kelly is presently entitled to call upon Leominister to do with its property what he wants it to do on demand. That basically seems to be what a bare trust is. There's no suggestion he was under any legal disability, and that's the only other requirement."
That this submission was bad in law was put with clarity by defence counsel immediately thereafter:
"One can be ultimately behind a company, has effective control of a company or own and control a company as a director or shareholder, but that's just not the same thing as being a beneficiary, it's quite factually different. ... [T]he bare trust hypothesis, which having [been] in the matter for a few years, hasn't come up before. That's something different actually, factually. I appreciate your Honour may or may not agree with my learned friend's submissions on the law, but each of sham, normal corporate personality and bare trust are each factually quite different situations."
The trial judge refused the application. His Honour said that "I'm not going to give reasons now. I would like to read the submissions and do it in due course." It was common ground that his Honour never did so. Once again, so far as I can see from the record, his Honour was not subsequently asked to do so.
As will be seen below, in closing addresses to the jury, the Crown maintained that it was sufficient in order to conclude that Graham Kelly was the beneficiary of a bare trust for the jury to be satisfied that he controlled Leominister. The defence maintained that this was wrong:
"But the difference between a company and a trust, members of the jury, in short, in my submission, is this: a trust will only exist where, relevantly ... there's an obligation on the trustee to deal with trust property for the benefit of the beneficiary or beneficiaries. So that's not the same thing as controlling a company."
[12]
The changing nature of the Crown case at trial
It will have been seen that most of Mr Osborne's grounds of appeal were directed to that aspect of the Crown case which turned upon there being a trust. That reflected a change in the way the prosecution case was presented.
In order to reach a guilty verdict on each count, the jury had to be satisfied beyond reasonable doubt that Graham Kelly - personally - had taxable income which he did not declare in that year. The Crown ultimately contended that the jury could reach that conclusion in two quite different ways. The first was that Graham Kelly was presently entitled, within the meaning of s 97 of the Income Tax Assessment Act 1936 (Cth), to some of Leominister's income; that conclusion turned upon the existence of a trust relationship between Leominister and Graham Kelly. The second was that some of the payments made by Leominister to Graham Kelly or at his direction were assessable income of Graham Kelly on ordinary principles. The Crown denied that it was an element of any of the counts for the Crown to establish any particular amount of income which Graham Kelly had failed to declare.
The fact that the Crown's case changed is uncontentious. The following is taken from the Crown's summary of how its case had changed at trial (written submissions paragraph 107).
The Crown case had sought to prove imperilment/risk of loss by the intentional failure to include overseas interests of the taxpayer.
The defence then raised the point that the indictment included "Kelly failed to disclose all income derived" and submitted it was not enough that the appellant answered "No" on the form ("I am not sure the Crown can just point to some N that should have been a Y on a tax return to make out the offences as particularised"). In this Court, the Crown accepted that the defence had been correct to make that submission (written submissions, para 107(2)).
The Crown's response was to point to the concept of beneficial interest. It was said:
"The way the Crown seeks to put it is that you would find that Graham Kelly on the evidence was entitled, if he wished, that is, presently entitled, to call upon Leominister to deal with its property and assets in the way he demanded, and in fact he did so and Leominister dealt with the assets in that way.
HIS HONOUR: That's on the basis of a bare trust?
CROWN PROSECUTOR: That's on the basis of a bare trust."
The trial judge then ruled that it was open to the Crown to address the jury on the basis that there was a bare trust. The ruling including the following passage:
"There was significant discussion about how Kelly got the benefits from Leominister and how they [became] taxable. The Crown, in some written submissions, argued that in accordance with the existing law, that, among other things, Leominister did not obtain equitable title to various shares, such title was held by Kelly under a bare trust in which Leominister was the trustee and Kelly was the beneficiary. I was referred to a number of cases and I will not go into those at this stage. It is [sufficient] to say that I concluded that the Crown's argument was correct and that they could address the jury on the basis which they set out."
No further reasons were given. Nor, so far as I can see, was the trial judge requested to provide them.
The judge summed up the case to the jury:
"Part of the prosecution case in relation to each of the four counts in the indictment is that Graham Kelly failed to disclose all income derived by him during the relevant financial years in two different ways. The first is [that] the trust relationship existed between Leominister and Graham Kelly and that assessable income was attributable to Graham Kelly from that trust. The second is that Graham Kelly received assessable income from Leominister. As they are different ways of committing the offences, the prosecution does not have to prove both of these for you to return a guilty verdict on this charge. Proof beyond reasonable doubt on one or the other is enough. But in order to return a guilty verdict all twelve of you must agree the same one has been proved."
The trial judge returned to this at the conclusion of the summing up. He reminded the jury of the two pathways in the Crown case, and that although they could choose either, they had to be unanimous in order to return guilty verdicts. His Honour referred to formal and informal trusts, and continued as follows:
"The Crown says there is a trust of an informal kind in this case. It is not evidenced in writing nor signed by the parties to it, but it is real and it is effective and it is operative as if it had been put into the written deed of trust. There is no evidence of the formalised trust relationship between Leominister and Graham Kelly, there is no evidence of it, but if certain things are proved by the evidence there is a trust between them and it is really quite simple. What the evidence has to prove in the Crown submission is that Graham Kelly at all times relevant to this trial had the effective control of Leominister. The effective control of its money, its assets and its property. Leominister was holding these assets in its name and on behalf of Graham Kelly, and that is all you need on the Crown's submission."
His Honour went on to remind the jury of the Crown submission that Leominister was carrying on the business of share trading, and that the proceeds of sale of the Novogen shares were income of that business, therefore trust income, which should have gone into Graham Kelly's income tax return in each of the four years.
[13]
The appellant's written submissions against conviction
Mr Osborne made lengthy written submissions in support of four grounds of appeal. The first tranche of submissions were 102 single spaced paragraphs occupying 25 pages. The second were 117 single spaced paragraphs occupying 27 pages, with 153 footnotes, some of which were discursive. The second did not replace the first; instead, it purported to expand on the new grounds of appeal now sought to be relied on. As will be seen below, there was a deal of overlap, particularly in relation to the trust issue.
The first three grounds challenge the directions and summing up of the trial judge. Mr Osborne's written submissions acknowledged that counsel took no objection at trial, and so leave to rely on this ground of appeal is required under r 4 of the Criminal Appeal Rules. It is to be borne in mind that Mr Osborne was represented at trial by experienced counsel, that three days were occupied after the close of evidence on settling the directions to the jury, and that the judge's summing up was extensive.
As I consider the fourth ground to be dispositive, I set out the first three grounds briefly.
[14]
First ground - Inadequate directions to jury as to establishing appellant's liability
Mr Osborne identified four related deficiencies in the directions, which were all said to arise because of the way the Crown put the two alternative bases for why the "Leominister income" was Graham Kelly's assessable income. First, Mr Osborne submitted that the jury was not sufficiently directed as to the need to be satisfied that Graham Kelly falsely stated his income in one of the two ways and the appellant's knowledge of the particular falsity for each of the relevant tax years. Secondly, Mr Osborne submitted that the directions failed to make clear that, in the event the jury did not find that Leominister received income held on trust for Graham Kelly, the jury would need to be satisfied beyond reasonable doubt (a) that Graham Kelly directly received income in each of the relevant financial years, and (b) that Graham Kelly had knowledge of those particular receipts. This failure was said to assume importance because of the limited evidence of direct receipt at trial. Thirdly, the oral directions were said to conflate distributions to Graham Kelly (and his taxable income) with distributions to corporate entities owned or controlled by Graham Kelly (and the taxable income of those entities). Fourthly, Mr Osborne submitted that the directions were inadequate because they did not require unanimity with respect to the appellant's knowledge of the relevant falsity in Graham Kelly's tax return, which was contrary to the approach taken in Pratten v R [2014] NSWCCA 117 at [33] and [79].
[15]
Second ground - Failure to give a fair and balanced summing up
Mr Osborne submitted that the trial judge erred in failing to give a fair and balanced summing up and in failing adequately to state the defendant's case, occasioning a miscarriage of justice. Mr Osborne pointed to several passages in the summing up that were said wrongly to represent what was agreed between the parties (at SU 20) and undermine or obscure the appellant's central argument at trial that the jury could not exclude the reasonable possibility that Bende Holdings was the relevant taxpayer (at SU 23 and SU 121). Mr Osborne also submitted that the summing up lacked judicial balance in terms of the language used to address the defence case as compared with the Crown case, thereby undermining the strength of the defence case.
Finally, Mr Osborne took issue with the trial judge's use of his opinion given in cross‑examination that, on the evidence before the court, Graham Kelly seemed to have committed tax fraud. The jury were invited to apply this opinion as evidence towards their own conclusion as to whether Graham Kelly had failed to declare all of his income (at SU 20 and 140-142). This was said to be unfair, in ways which it is unnecessary to summarise further.
[16]
Third ground - Error in directions as to existence of a trust
Mr Osborne's submissions outlined that the Crown case only asserted the existence of a trust at a late stage in the trial, after all evidence had been adduced. Until the ruling by the trial judge that the jury should be directed as to the elements of a trust, the Crown's case was based on Graham Kelly having a beneficial interest in Leominister's assets, established by Graham Kelly's control of Leominister.
In essence, the complaint on the third ground was that, although the jury were given written and oral directions on the general nature of trust income and trusts (see MFI 57 and SU 12), they were not given any directions that sought to relate the evidence to the required essential features of a trust. It was said that the trial judge erred in leaving Graham Kelly's control of Leominister to the jury as the decisive issue on taxation liability (see SU 109), thereby conflating control and beneficial ownership.
[17]
Fourth ground - Verdicts unreasonable or cannot be supported having regard to the evidence
Mr Osborne submitted that the verdicts in respect of all counts were unreasonable or could not be supported having regard to the evidence for four reasons. In the course of his submissions, Mr Osborne noted that defence counsel had sought two directed acquittals on the basis of the insufficiency of the evidence.
First, Mr Osborne submitted that it was not reasonably open to the jury to find the existence of the trust contended for by the Crown. Mr Osborne dealt with this ground together with the submissions on ground 3, set out above.
Secondly, Mr Osborne submitted that, if a bare trust existed with Leominister as trustee, a finding that Graham Kelly was a beneficiary could not be supported by the evidence. He submitted that the evidence was incapable of supporting findings beyond reasonable doubt that a trust existed between Leominister and Graham Kelly personally because the evidence gave rise to an inference of equal strength that any obligation to declare the Leominister income brought back to Australia should have been so declared by Bende Holdings. It was submitted that the evidence adduced either treated Graham Kelly and Bende Holdings interchangeably or failed to distinguish between them. Accordingly, evidence that Graham Kelly provided instructions in respect of the sale of shares by Leominister was said to be incapable of determining whether Graham Kelly provided those instructions personally or on behalf of Bende Holdings.
Thirdly, in relation to the direct receipt basis of taxation liability, Mr Osborne submitted that it was not reasonably open to the jury to find that the Leominister income was received as assessable income of Graham Kelly. It was said that the evidence could equally have supported a finding that Graham Kelly conducted share transactions on behalf of Bende Holdings, and that the income was received for Bende Holdings' purposes.
In relation to monies directly received by Graham Kelly or the Kelly family, it was submitted that the vast bulk of the income so received was transferred back to Bende Holdings or through Bende Holdings (although some funds moved from Leominister to other companies and then to Graham Kelly and David Kelly). It was submitted that evidence of cash withdrawals of Leominister money by Graham Kelly overseas did not establish whether those funds were used for Bende Holdings' purposes or for Graham Kelly personally. In response to the evidence that Leominister monies were used to pay for Graham Kelly's daughter's rent in London, Mr Osborne submitted that as the daughter was a shareholder of Bende Holdings during the relevant period, this might have been an informal dividend payment from Bende Holdings and created no additional basis upon which to conclude that Graham Kelly was the personal beneficiary of Leominister income.
In relation to monies going to other entities, it was submitted that the fact the majority of the Leominister share sale proceeds went to Bende Holdings indicated that Bende Holdings was the beneficiary of those funds. Mr Osborne noted that it was not suggested that Bende Holdings, or any other corporate recipient, was a sham company designed to hide Graham Kelly's personal assets.
Fourthly, Mr Osborne submitted that the evidence could not support findings that the appellant knew of either bases of income tax liability.
1. For direct evidence of the appellant's knowledge, the Crown principally relied on the evidence of David Kelly. Noting that David Kelly was properly the subject of an unreliability warning because he had avoided custody by his undertaking to cooperate with the investigation against him, Mr Osborne went on to say that even if David Kelly's evidence were accepted, it was equally suggestive of knowledge that a trust existed with Bende Holdings as beneficiary or that income was received by or on behalf of Bende Holdings, not Graham Kelly personally.
2. On the alternative (direct receipt) basis of Graham Kelly's taxation liability, Mr Osborne submitted that the evidence could not support a guilty verdict because on the Crown case the appellant was not aware of the payments going directly to Graham Kelly and his family. Further, even if it were found that Graham Kelly knew of these payments, they were not made in each of the time periods for the four counts.
[18]
The Crown's written submissions and Mr Osborne's reply
I shall follow the same approach adopted by Mr Osborne and focus on the submissions directed to the existence of a trust. In light of the conclusions I have reached on this aspect of the appeal, it will not be necessary to summarise all aspects of the Crown's submissions.
In relation to ground 4(i), that it was not reasonably open to the jury to find the existence of a trust, paragraph 113 of the Crown's submissions was as follows (the emphasis is mine):
"In its address, the Crown pointed to evidence of a trust beginning AB4:1519, including from AB4:1522.
'In this trial, the Crown says there is a trust of an informal kind. That is, not evidenced in writing, not signed by the parties to it but as real and as effective and as operative as if it had all been put into a written deed of trust. There's no evidence that the formalised trust relationship between Leominister and the taxpayer but if certain things are proved by the evidence, there is a trust between them. It's really quite simple, members of the jury. What the evidence has to prove in the Crown's submission is that the taxpayer, at all times relevant to this trial, had the effective control of Leominster.
The effective control of its monies, its assets and its properties. Leominister was holding those assets in its name but on behalf of the taxpayer. That's all you need, in the Crown's submission. There's a couple of other technical requirements I will mention, no doubt is [sic] Honour will give you appropriate directions but that's the essence of it. ...
I need to be a little more specific about what the Crown submits in relation to this trust relationship between Leominister and the taxpayer. I need to put some submissions in the context of Leominister's assets and what was done with them and what the evidence tells you about that.
Then at 1524.13:
The Crown submission is that because on the evidence the taxpayer was the beneficiary of the assets held by Leominister, a requirement for there to be at least one beneficiary of a trust is satisfied. There is such a requirement the trust has to have a beneficiary. The Crown case is it's the taxpayer. You only need one. He was it. The Crown also submits on the evidence because of the events that happened, Leominister had an obligation to deal with its property for the benefit of the taxpayer and that obligation attached to or annexed to the trust property of Leominister which was the whole of Leominister's assets at any particular time.
Why that obligation existed is because on the evidence Leominister did not hold any of its property for itself or on its own behalf and it did hold that property, beneficially, that is, for the benefit of the taxpayer and the Crown says this is established by the evidence that Leominister never used any of its property for its own benefit. There's no evidence in the whole trial of Leominister using any of its property, whether its money or shares or anything else, for its own benefit, but there is a mountain of evidence that those assets were used by Leominister for the benefit of the taxpayer and we don't understand that to be an issue but if it is, again we submit the evidence that that is the case is overwhelming.
Leominister only used its property for the benefit of the taxpayer as he demanded, either personally or through agents acting on his behalf, such as David Kelly, and they were acting with his authority, and the Crown points to this, if there was no trust relationship between Leominister and the taxpayer, that is, if Leominister was not under the effective direction and control of the taxpayer and was independent of him and at arm's length from him, it would not have dealt with its property as the taxpayer directed and for his benefit but it would have dealt with its property at the direction and for the benefit of those who are entitled to the property and no-one can be identified in that category in the whole of the evidence but the taxpayer.
As noted the primary judge summed up the trust alternative at SU 107-115.63:
It is not to the point that control and beneficial ownership might be two different things - AWS2 [31]. What is to the point is that the evidence exactly met what was set out in the agreed written directions for the existence of a trust in the factual matrix of this case - AB8:459 [12]. Hence, it was open to the jury to find the existence of a trust as (belatedly) contended for by the Crown."
Mr Osborne was critical of the submission reproduced above:
"The Crown makes no substantive submissions and no attempt to articulate the basis on which a trust is established, other than referring to indicia of 'control' (RWS [113]). It is the appellant's submission that the failure to establish a trust is fatal to the entire case."
[19]
The appellant's oral submissions
Mr Game SC, who with Ms Hutchinson appeared for Mr Osborne on appeal but not at trial, commenced his oral submissions with grounds 3 and 4(i), both of which dealt with the existence of a trust. He maintained the position taken at trial that there was no trust and no evidence of a trust.
Mr Game proceeded to work through the course of the trial in some detail to show how the Crown case changed from contending that Graham Kelly effectively controlled Leominister to contending that Leominister held the Novogen shares on trust for Graham Kelly. Mr Game sought to demonstrate that the Crown failed to establish the existence of a trust. Mr Game clarified that, by the end of the trial, it was not in issue that Graham Kelly effectively controlled Leominister. However, it was "very much" in issue that Graham Kelly was beneficially entitled to its assets.
Mr Game's chief complaint was that during the trial, no adequate explanation was given as to how the bare trust held for the benefit of Graham Kelly was said to arise. Mr Game submitted that if a trust existed, it must have been between Leominister and Bende Holdings. His argument was as follows. There was no dispute that Bende Holdings had legal and equitable title to the Novogen shares before any assignment to Postlands. On the Crown case, Leominister never took a beneficial interest in the Novogen shares. Accordingly, so it was said, the only possible trust would be a resulting trust in which Leominister held the Novogen shares for the benefit of Bende Holdings.
Further, Mr Game submitted that evidence of Graham Kelly's control of Leominister was insufficient to demonstrate the existence of a bare trust, and no other argument or evidence was put forward by the Crown.
In relation to Ground 1, Mr Game submitted that the summing up failed adequately to direct the jury as to what knowledge the appellant was required to have about Graham Kelly's failure to disclose taxable income in order to make out the dishonesty elements of the charges. The jury was told, in response to a question about the meaning of 'defrauding' that arose during deliberation, that "suspicion plays no part in this case, not even strong suspicion". Mr Game said this direction was not sufficient, because it failed to tell the jury exactly what knowledge was required. It was said that the appellant had to know Graham Kelly failed to disclose all his assessable income, and more specifically whether the undisclosed taxation liability was trust income or income directly received. Further, he submitted that the jury should have been directed that a unanimous conclusion was required as to the nature of Graham Kelly's knowledge.
[20]
The Crown's oral submissions
Mr McHugh SC, who likewise appeared in this Court but not at trial, accepted that the defence had "quite properly" raised the question whether the evidence was capable of supporting the new case based on a trust at the end of the trial (transcript, 16 September 2016, p 27). He responded to Mr Osborne's criticisms of the failure to engage with the assertion that control entailed the existence of a trust, indicating (correctly) that the directions had been more substantial:
"With respect, senior counsel for the Crown at trial had set out a number of matters over a number of pages and explained what a trust was. ...
Once it was accepted that - I think it's on the transcript at some point Mr Neil said, 'I wasn't going to talk about trusts but I think I have to' and he did and he set out, the Crown says, in addition from those written submission that he'd supplied to his opponent and to the Court as to how he was going to put that which includes the references to an authority … but at para 113 of our written submissions they begin with the Crown pointed to evidence of a trust beginning at 1519 including from 1522 but at 1521 there's some other material there as well which the Crown says is important and then the Crown went through what we say were the elements of the trust and that the evidence met it."
There was no suggestion but that there was ample opportunity to be heard in relation to those directions. The trial judge said:
"If at any break you want to raise any matter, you say I'm incorrect, then don't hesitate to do that because it's better to correct it straightaway than let it go."
In relation to the directions, the Crown relied on what Gleeson CJ had said in Doggett v The Queen (2001) 208 CLR 343; [2001] HCA 46 at [2]:
"The manner in which a trial is conducted and in which the issues are shaped especially where (as in the present case) an accused is represented by experienced and competent counsel has a major influence upon the way in which the case is ultimately left to the jury and upon the directions, comments and warnings from the trial judge to the jury that may be appropriate or necessary. Directions are not ritualistic formularies, their purpose is to assist the jury in the practical task of resolving fairly the issues which have been presented to them by the parties."
The Crown denied any obligation to prove exactly how the bare trust, if there was a bare trust, was established.
[21]
Resolution of the appeal against conviction: ground 4
I start with ground 4, for three reasons. First, unlike the remaining grounds, it reflects a point which was squarely taken at trial, and in a trial where the accused took a great number of points, but acquiesced in many of the matters now sought to be complained of on appeal, the operation of r 4 looms large. Secondly, it reflects the focus of oral submissions on appeal. Thirdly, if ground 4 is made out, then the result is an acquittal, whereas the remaining grounds would lead to a retrial. Indeed ground 4 recalls what Deane J said in King v The Queen (1989) 161 CLR 423 at 429:
"To order a new trial in these circumstances would be to give the Crown a second chance to secure a conviction of the applicant for the murder of his wife, after its election to present its case in a particular way at the trial should have led to an acquittal. The Crown could not have challenged such an acquittal by seeking to retry the applicant and present its case in a different way. It should not be permitted now to achieve a similar result when the first trial would have resulted in an acquittal, had it not been for the Crown's wrongful conduct in persuading the trial judge to leave a different case to the jury. Put differently, the jury's verdict of guilty against the applicant on the basis of a Crown case which was not raised against him until the evidence had been completed, addresses had been made and the summing up was in progress was a miscarriage of justice."
Ground 4 invokes the first limb of s 6 of the Criminal Appeal Act 1912 (NSW). Because this ground is not confined to a question of law alone, leave is required: s 5(1)(b) and see for example Rasic v R; Johnny Lee Vella v R; Damien Charles Vella v R [2009] NSWCCA 202 at [12] and Phillips v R [2016] NSWCCA 159 at [23]. It will be seen that there are issues of substance as identified in at least parts of this ground of appeal, and so a grant of leave is, in my view, appropriate.
The question was whether, upon the whole of the evidence in the trial, it was open to the jury to be satisfied beyond reasonable doubt of the elements of each offence: M v The Queen (1994) 181 CLR 487 at 493. It will be unnecessary for the purposes of resolving this appeal to address the nuances in subsequent decisions, some of which are addressed in Silva v R [2016] NSWCCA 284.
Given the way the indictment was drafted and the way the case was run, the Crown accepted it had to show that Graham Kelly had derived assessable income in each of the four years which was not disclosed on the tax return signed and lodged on his behalf by the appellant. The Crown advanced two alternative ways of reaching that conclusion, and the subgrounds reflect those alternatives. Subgrounds (i) and (ii) contend that it was not open to the jury to be satisfied beyond reasonable doubt that Graham Kelly was presently entitled to income in each year by reason of Leominister being a trustee. Subground (iii) contends that it was not open to the jury to be satisfied beyond reasonable doubt that Graham Kelly derived income on ordinary concepts in each year which was not disclosed in the return. Subground (iv) is distinct; it relates to Mr Osborne's knowledge.
It seems to me that these grounds of appeal are to be approached on the following footing. First, it was and is quite plain that if Bende Holdings had itself exercised the Novogen options and then sold the listed shares, it would have generated a large capital gain, and (in the absence of offsetting capital losses) there would also have been a large tax liability.
Secondly, it was amply open to the jury to be satisfied beyond reasonable doubt that the choice of a company incorporated in the British Virgin Islands, with a corporate director controlled through a Hong Kong company, and with a single bearer share, was selected in order to conceal the identity of the persons who controlled Leominister. That inference may be derived from the structure itself, and is confirmed by some of the evidence summarised above, not least the extremely expensive service (expensive compared to the fees charged by ordinary financial institutions) made available to the Kelly family when seeking to use the debit card. The evidence does not suggest any other explanation for the elaborate and costly structure. Moreover, the inference is supported by Graham Kelly's contemporaneous attempts to distance himself from any connection with Leominister.
Thirdly, as the Crown submitted, the foregoing tends to suggest a risk to the revenue. But that does not of itself entail that Graham Kelly's income was understated on his personal tax returns.
Fourthly, contrary to some of Mr Osborne's submissions, in order for the jury to be satisfied beyond reasonable doubt that Graham Kelly was beneficially entitled to the proceeds of the sale of Leominister's Novogen shares, it was not necessary to conclude that there needed to be a formal deed of trust. I accept the Crown's submission that there was no obligation upon the Crown to prove beyond reasonable doubt the particular way in which a trust was established. In principle, it is open to the Crown to prove the existence of a trust as a conclusion from other extrinsic facts, irrespective of whether, say, the trust was created by oral declaration or formal deed.
Fifthly, and speaking in general terms, the net income of a trust estate is deemed to be the assessable income of the beneficiaries: Division 6 of the Income Tax Assessment Act 1936 (Cth). Moreover, a capital gain which is treated by a trustee as income available for distribution and was distributed to beneficiaries who are presently entitled should be included in those beneficiaries' assessable income: Commissioner of Taxation v Bamford (2010) 240 CLR 481; [2010] HCA 10.
Sixthly, there is no dispute that Graham Kelly personally controlled the actions of Leominister, in selling the Novogen shares and dealing with the proceeds. That was entirely consistent with the Crown case based on a bare trust. But, once again, it does not entail that there was a bare trust.
Those matters are insufficient to establish, even to the civil standard, that Graham Kelly was beneficially entitled to the proceeds of sale of the Novogen shares.
[22]
Control insufficient to establish a trust relationship
It is one thing for a person to control the legal owner of property. It is quite another for that legal owner to hold that property on trust for that person. This was the point squarely made by defence counsel during the trial in support of the second application for a directed verdict. It is, with respect, fundamental.
There must be many thousands of Australian private companies, with the same natural person being their sole shareholder and director, which hold property other than on trust for that person. One familiar example is the special purpose corporate vehicles regularly established for particular property developments, which are wholly owned and controlled by the property developer. Another is the company through which a tradesperson or professional person conducts his or her business, which is often wholly owned and controlled by the person. Examples could readily be multiplied. Obviously, a sole shareholder can (by member's resolution) rapidly cause the company to perform any corporate act. Obviously, a sole director can (by a director's resolution) rapidly cause the company to perform most corporate acts.
But that does not make the company a bare trustee for its director or shareholder. Still less does it achieve the result for which the Crown contended in the present case, namely, that the director or shareholder is presently entitled to any income derived by the company as trustee.
Thus, it was quite wrong in law for the Crown to submit to the jury that:
"There's no evidence that the formalised trust relationship between Leominister and the taxpayer but if certain things are proved by the evidence, there is a trust between them. It's really quite simple, members of the jury. What the evidence has to prove in the Crown's submission is that the taxpayer, at all times relevant to this trial, had the effective control of Leominister. The effective control of its monies, its assets and its properties.
Leominister was holding those assets in its name but on behalf of the taxpayer. That's all you need, in the Crown's submission."
Not only was the question of the existence of a trust left to the jury, but so too was the legal test to be applied. The trial judge reiterated the Crown's submission, in summing up to the jury:
"The Crown says there is a trust of an informal kind in this case. It is not evidenced in writing nor signed by the parties to it, but it is real and it is effective and it is operative as if it had been put into [a] written deed of trust. There is no evidence of the formalised trust relationship between Leominister and Graham Kelly, there is no evidence of it, but if certain things are provide by the evidence there is a trust between them and it is really quite simple. What the evidence has to prove in the Crown submission is that Graham Kelly at all times relevant to this trial had the effective control of Leominister. The effective control of its money, its assets and its property. Leominister was holding these assets in its name and on behalf of Graham Kelly, and that is all you need on the Crown's submission."
It is true that the trial judge summed up the defence case, including on the distinction between control and trust as follows:
"But the difference between a company and the trust, in short in his submission, was that a trust will only exist where relevantly there are a number of matters but this is a relevant one in his submission in this case, there is an obligation on the trustee to deal with the trust property for the benefit of the beneficiary or beneficiaries. So that [is] not the same thing as controlling a company."
It was not for the jury to decide the legal question of whether control is sufficient to establish a trust, or whether it is necessary to establish that the trustee must deal with the trust property for the benefit of the beneficiary. It was wrong in law for the jury to have been permitted to determine this primary aspect of the Crown case in a way which is contrary to law.
This is not a case to which the point made by Gleeson CJ in Doggett applies. The trial judge gave other directions to the jury on the question of a trust, which were agreed between the parties. There were inaccuracies in aspects of those directions, and if that were a matter of which complaint was made on appeal, then the principle stated in Doggett might apply. But at no stage did the defence acquiesce in the proposition that control was sufficient to establish a trust. As noted above, the defence submission to the contrary, made in support of the second application for a directed verdict, promptly after this aspect of the Crown case was first advanced, was rejected by the trial judge, who did not give reasons (and appears not to have been asked to do so). When the defence addressed the jury, counsel (correctly) maintained that control was not sufficient.
It should not have been left to the jury to determine the question of law, whether, as the Crown submitted, control was sufficient to conclude that there was a bare trust, or whether, as the defence submitted, it was necessary to establish an obligation on the trustee to deal with the trust property for the benefit of the beneficiary or beneficiaries. Indeed, with the benefit of hindsight it is hard to see how there could have been a dispute about this fundamental proposition of the law of trusts. By way of explanation, it may be said that this was an issue which was far from the forefront of a long and complicated trial, in which senior counsel prosecuting for the Crown acknowledged in open court that "I don't hail myself out as a tax expert".
For these reasons I would also grant leave under r 4 and allow the appeal on ground 3, which turned on the directions given at trial concerning a trust.
[23]
Existence of a trust in favour of Graham Kelly cannot be supported by the evidence
Moreover, it was not open to the jury to be satisfied beyond reasonable doubt that the Novogen shares were held by Leominister on trust for Graham Kelly. It was entirely possible, consistently with all of the evidence, not to mention consistently with most of the Crown case prior to closing addresses, that Graham Kelly controlled Leominister but that its assets were not held on trust for him. Further, as contended by Mr Osborne, the evidence does not exclude the possibility that Bende Holdings, not Graeme Kelly, was beneficially entitled to the Leominister income.
Thus, the first of the two alternative ways in which the Crown ultimately presented its case cannot be sustained. It is not possible to say which of the two paths relied on by the Crown was applied by the jury in reaching their verdicts in respect of each count on the indictment. It follows, in my opinion, on the facts of this case, that that of itself is sufficient to render the jury's verdicts unsafe, subject perhaps to the operation of the proviso: see for example the reasoning in R v Esho; R v Sako [2001] NSWCCA 415 at [64]-[66].
[24]
Income directly received by Graham Kelly?
Ground 4(iii) was that "it was not reasonably open to the jury to find that the Leominister income was received by Graham Kelly for the purpose of income taxability". This was a reference to the other of the two ways in which the Crown had advanced the case at trial, namely, that Graham Kelly's taxable income was understated, either because he was presently entitled to Leominister income under s 97, or else it was income in his hands according to ordinary concepts.
The trial judge gave a direction to the jury about income according to ordinary concepts:
"Some characteristics of ordinary income can be summarised as follows. An item of ordinary income is derived when it has come home to the taxpayer. The fact, if it be the fact, that income [was] earned illegally, immorally or invalidly does not preclude the derivation of income. There is no gain unless an item is derived by the taxpayer beneficially. An item of gain is derived by the taxpayer beneficially if the taxpayer is presently entitled to call on a party, such as a company, whether incorporated in Australia or not, that holds the gain to convey it to him or her on demand. A gain that is one of a number derived periodically has the character of income. A gain derived from property has the character of income. A gain that arises from an act done in carrying on a business has the character of income. A capital gain does not ordinarily have the character of income."
How was the "Leominister income" income according to ordinary concepts? It was the proceeds of sale of the Novogen shares, which had been acquired pursuant to the exercise of an option in December 1998. There was no element of regular work performed by Graham Kelly that contributed directly to those proceeds. To the extent that there were periodical receipts, that was simply a consequence of the fact that parcels of Novogen shares were sold into the market from time to time and the proceeds distributed (in the intricate ways referred to above) at the direction of members of the Kelly family.
Plainly enough the sales of parcels of shares crystallised a capital gain, for the sale proceeds were considerably more than the option exercise price. But that does not make the gain income according to ordinary concepts. To the contrary, as the trial judge directed, a capital gain does not ordinarily have the character of income.
True it is that where a trustee treats a capital gain as income available for distribution and does distribute it to presently entitled beneficiaries, then it is income in the hands of those beneficiaries: Commissioner of Taxation v Bamford (2010) 240 CLR 481; [2010] HCA 10. But that reasoning turns upon the existence of a trust and of trust property to which the beneficiaries are presently entitled.
It is also true that (very small amounts of) interest was received on funds in the offshore accounts into which the proceeds of sale were transferred. But that is not sufficient either, because it is not established that it was not interest forming part of the assessable income of Bende Holdings.
The position was that Leominister, acting in accordance with the instructions of Graham Kelly and his son, realised a series of capital gains, which were remitted in accordance with their directions. To some (relatively small) extent, the funds were received directly by Graham Kelly and other members of his family. To a large extent, the funds were received by the family company, Bende Holdings, or by entities in which Graham Kelly had made investments.
Although it was not suggested that the money was received by way of loan from Leominister (this was disavowed: transcript, 16 September 2016, p 18), it does not follow that it was income in the hands of any of the recipients according to ordinary concepts. Nor does it follow that it was income in the hands of Graham Kelly according to ordinary concepts.
Relevantly to another ground of appeal, Mr Osborne was critical of reliance which had been placed on his statement in cross-examination that Graham Kelly had personally committed major tax fraud in each of the four years in question. It was entirely open to the jury to conclude that Graham Kelly had done so. But it does not follow that, at the time the tax returns were lodged, Graham Kelly had a personal tax liability. (That is not to deny power on the part of the ATO to issue an amended notice of assessment to Graham Kelly, but that is not presently to the point.)
It is not necessary to reach a concluded view on sub-ground 4(iii), in light of the success of grounds 4(i) and (ii), which were, after all, the primary way in which the Crown case was advanced to the jury. I have only addressed this sub-ground because, in theory, it might perhaps be possible to sustain the guilty verdicts if this Court could be persuaded beyond reasonable doubt that Graham Kelly had derived income according to ordinary concepts in each of the relevant years (something which would have in large measure reflected the way the Crown case was advanced until shortly before the conclusion of the trial). What has already been said suffices to explain why I do not consider this is a case where the proviso is available.
[25]
Mr Osborne's knowledge
The remaining aspect of this ground, sub-ground 4(iv), contended that it was not open to the jury to find that Mr Osborne knew the assessments lodged by him were false.
I would not accept this aspect of ground 4. Mr Osborne plainly knew that his client was able to cause Leominister to sell millions of Novogen shares and distribute the proceeds of sale. It was amply open to the jury to conclude that Mr Osborne knew that it was false for Graham Kelly to lodge a return denying that he had any interest in property valued at AUD50,000 located outside Australia. As noted at the outset, the fact that the indictment was drafted such that the Crown was required to prove that Graham Kelly derived assessable income which was not disclosed in his personal tax returns is critical to this appeal.
[26]
Grounds 1 and 2
Grounds 1 and 2 were not at the forefront of the appeal. While they were not superseded by the amended statement of grounds of appeal, and subsequent written submissions, they were scarcely pressed in oral address, save insofar as ground 1 overlapped with grounds 3 and 4.
Both grounds 1 and 2 require leave pursuant to r 4 of the Criminal Appeal Rules, which relevantly provides that no direction or omission to direct given by the judge presiding at the trial shall, without the leave of the Court, be allowed as a ground for appeal unless objection was taken at the trial to the direction or omission. As previously noted, the directions were the subject of extensive debate at first instance.
The applicable principles were conveniently and recently summarised by N Adams J (with whom Hoeben CJ at CL agreed) in Phillips v R [2016] NSWCCA 159 at [37]-[38]. They include that the requirement for leave is not a mere technicality, and that it is necessary to be satisfied of an arguable case that the trial judge has made an error of law or that the appellant's conviction is otherwise a miscarriage of justice.
There is much force in the Crown's submission that leave should be refused. However, I am of the view that it is inappropriate to determine the question of leave, or to consider these grounds of appeal in any more detail, for the following reasons.
First, nothing turns on them. Taken at their highest, success on these grounds would give rise to a retrial, which is academic in light of the acquittals that I propose be entered in light of ground 4.
Secondly, although not abandoned, they were scarcely pressed, in light of the later tranche of written submissions and the approach taken in oral address.
Thirdly, if these grounds were to be determined, it would be necessary also to have regard to the discretion under r 4, which, in the circumstances of this trial, would be, to say the least, far from straightforward.
Fourthly, it is not clear on the material available to this Court whether there might not be some pending or future prosecution in relation to the same evidence (including, for example, Graham Kelly). In those circumstances, it seems desirable not to determine issues which are not necessary to the disposition of this appeal.
[27]
Orders
For those reasons, I propose that leave be granted and the appeal against Mr Osborne's convictions be allowed, the convictions quashed, and verdicts of acquittal on each count be entered. The Crown appeal against sentence does not arise, and should be dismissed, as occurred in (for example) in R v Cox [1999] NSWCCA 62, R v Jimenez [2000] NSWCCA 390 and Nasrallah v R; R v Nasrallah [2015] NSWCCA 188.
HARRISON J: I agree with Leeming JA.
WILSON J: I agree with Leeming JA.
[28]
Amendments
17 February 2017 - [109] - In quotation, "a practical task to resolving fairly" changed to "the practical task of resolving fairly".
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Decision last updated: 17 February 2017