Taxation - jewellery business - valuation of trading stock - writing down of trading stock - whether valuation system competent and proper - whether opening stock in first relevant year should be increased - whether additional ground of objection necessary - penalties under sections 226J and 226X of the Income Tax Assessment Act 1936

Income Tax Assessment Act 1936 - sections 28, 29, 31, 226J, 226X

Income Tax Assessment Act 1997

Taxation Laws Amendment (Self Assessment) Bill 1992 - Explanatory Memorandum

Pontifex Jewellers (Wholesale) Pty Limited v FC of T 2000 ATC 4642

Federal Commissioner of Taxation v Dalco [1990] HCA 3; (1990) 168 CLR 614

Liversidge v Sir John Anderson [1941] UKHL 1; [1942] AC 206

Federal Commissioner of Taxation v St Hubert's Island Pty Ltd (in liq) (1978) 138 CLR 210

J Rowe & Son Pty Ltd v Federal Commissioner of Taxation [1970] HCA 57; (1971) 124 CLR 421

Commissioner of Taxation v Citibank Ltd and Others (1993) 44 FCR 434

Kirkpatrick v Commissioner of Inland Revenue [1962] 13 NZLR 49

Commercial Union Australia Mortgage Insurance Company Limited v Commissioner of Taxation (1996) 69 FCR 331: (1996) 96 ATC 4854

Henderson v Federal Commissioner of Taxation (Cth) [1969] HCA 14; (1970) 119 CLR 612

Australasian Jam Company Proprietary Limited v Federal Commissioner of Taxation [1953] HCA 52; (1953) 88 CLR 23

Bob Jane T-Marts Pty Ltd v Commissioner of Taxation (1999) 99 ATC 4437

1. (a) The objection decisions which are under review in this matter are decisions by the Respondent disallowing objections dated 11 January 1999 against notices of amended assessment issued on 5 January 1999 in respect of the year ended 30 June 1996 (referred to as the "1996 year") and the year ending 30 June 1997 (referred to as the "1997 year"). The 1996 year and the 1997 year are collectively referred to as the "relevant years".

(b) In respect of the three Applicants (collectively the "Applicants"), the applications were heard together having regard to the fact that the issues are the same in respect of all three of them. The Applicants were at all relevant times the only partners in Jade Wholesalers ("Jade"). They were also and at all relevant times the only shareholders in and directors of Allay Pty Ltd ("Allay"). At all relevant times, Allay carried on business as a retail jeweller through two jewellery stores in Albany, Western Australia, and a third retail jewellery store in Katanning, Western Australia.

2. (a) Dr H R Sorensen of Counsel instructed by Dibbs Barker Gosling (previously Barker Gosling) solicitors appeared for the Applicants, while Messrs D B McGovern and I Young of Counsel instructed by Mr Matthew Walsh of the Australian Government Solicitor appeared for the Respondent.

(b) The Tribunal had before it the T documents lodged pursuant to section 37 of the Administrative Appeals Tribunal Act 1975. In respect of each of the Applicants, the T documents are for all practical purposes the same. References in these reasons should be construed as references to the T documents in respect of John Ciprian, who is one of the Applicants.

(c) The Tribunal also had before it a large number of exhibits; on the last hearing day, the Respondent furnished the Tribunal with a schedule detailing the exhibits; that schedule is annexed marked A. Annexure A has been amplified to include exhibits R15 and R16 and being a recent exchange (in June 2002) of correspondence between the representatives of the parties. That exchange of correspondence can be summarised in the following manner; having received the Applicants' written submissions the Respondent's solicitor wrote to the Applicants' solicitors drawing attention to the fact that a contention by the Applicants concerning opening stock for the 1996 year had not been raised in the objections referable to that year; the Respondent contended that that contention could not be raised without an amendment to those objections. The Applicants, through their solicitors, contended that their objections encompassed that contention, and stated that the Applicants did not intend to apply for an amendment to their 1996 year objections. Annexure A does not include a document (and being a questionnaire by the Valuation Centre of Australia dated 8 December 1997), which was marked for identification purposes only. I should also note, for the sake of completeness that the reference in annexure A to exhibit A17 has been corrected so as to reflect the fact that that letter was addressed to Mr Gibson.

3. (a) This matter was originally listed for hearing in November 2000; it was postponed that time and then re-listed before me in the first half of 2001.

(b) The matter was again postponed (for reasons not here relevant) and eventually commenced in July 2001.

(c) The first hearing took place on the following days in July 2001; 3, 4, 5, 6, 12, 13, 16, 17 and 18.

(d) The matter was then re-listed for further hearings later in 2001; it was postponed because the Applicants could not proceed without funding; at a subsequent directions hearing the Tribunal was advised that funding had been obtained and the matter was re-listed for resumed hearings in January and February 2002.

(e) The relevant dates in January and February 2002 on which hearings were held are 30 and 31 in January 2002 and 1, 4, 5, 6, 7, 11, 12 and 13 in February 2002.

(f) It was agreed, when the hearings ended in February 2002, that the parties would furnish written submissions setting out their contentions in relation inter alia to the voluminous documentation and evidence before the Tribunal, and that following written submissions the Tribunal would reconvene for three days in order to hear oral submissions. The time periods allowed in the original timetable proved to be insufficient, and written submissions were received later than had been anticipated. This resulted in yet another postponement; oral submissions were made in the result at hearings on 29 July 2002 and 1 August 2002 and 2 August 2002.

4. (a) I have previously referred to the list of exhibits which were tendered; in fact some of those exhibits proved in the result to be of minor relevance. Oral evidence was given by some, but not all, of those persons on whose behalf witness statements were tendered. In respect of Juneth Spouse (exhibit A9) it was agreed that she need not appear for cross-examination and that her statement could be accepted on the basis that it was agreed that she effected the entries referred to in that statement on instructions from the Applicants.

(b) The witness statements and other exhibits tendered were in aggregate of enormous length. The witness statement in respect of Boris Kosutic (exhibit R5) must (at least so far as I am concerned) constitute some sort of record; apart from the statement itself, it includes annexures consisting of fifteen large box files; each box file in turn contains many hundreds of pages of documents and including spread-sheets containing minute detail. The Tribunal notes that it proved necessary to set aside a specific conference room in which to house all of the documents, and in particular for the purpose of writing this decision.

(c) It is not necessary for me to refer to the large folders of documents produced in answer to summonses and which were not in the result tendered.

5. (a) It was made clear to me from the outset that the case to be heard by me should be regarded as a test case, in that the decision in this matter would affect many other jewellery businesses. (I note that I have been informed by a presiding member in Western Australia that there are matters in that state listed before him, which have been put on hold pending this decision; that presiding member has been in touch with me from time to time to inquire as to progress in this matter.)

(b) The written submissions received by me from the parties proved to be of great assistance. This was particularly so in the case of the submissions by the Respondent, more particularly because they dealt in detail with the very lengthy evidence given before the Tribunal. Given that this is a test case and that it may be significant to many other taxpayers, an appeal is a real possibility. I have accordingly decided that for this reason (but not only this reason) it is desirable for me to attach the written submissions, but as annexures. However, and particularly in relation to the Respondent's Outline of Submissions (annexure D) I have found it convenient to cross-refer to parts of it; in some cases and purely in order to endeavour to ensure that the body of this decision can be read (for the most part) without reference to annexures, I have included clauses extracted from annexure D in the body of the decision. In the case of one witness and for reasons set out later, I have decided that it is sufficient for me to cross-refer to written submissions. This is so also in relation to the history of certain tax legislation of which section 29 of the Income Tax Assessment Act 1936 (the "1936 Act") forms a part.

(c) The Applicants' Submissions (Revised) dated 30 April 2002 are annexed as annexure B. I intend, as the Respondent did, to follow the Applicants' system in respect of the transcript and which is contained in clause 60 of annexure B. This arises from the fact that the transcript for 3 July 2001 commences at page 1. So does the transcript for the 4 July 2001 but the pages in respect of that date and the remaining hearings in July 2001 were then numbered sequentially. Similarly the transcript for January and February 2002 commenced with page one and were then numbered sequentially thereafter. Accordingly "TA" refers to the transcript for 3 July 2001; "TB" refers to the transcript for all other hearing days in July 2001; "TC" refers to the transcript for all of the hearing days in January and February 2002.

It may be noted that annexure B is in fact a revised version of an earlier submission; it is not necessary for me to include the earlier version because it was replaced by annexure B.

(d) The Applicants also tendered a document dated 20 May 2002 entitled "Addendum To Applicants' Submissions" and it is annexed marked C. I draw attention in particular to clause 17 and 18 of annexure C which contain a list of amendments, amplifications and deletions. Annexure C in this respect should be considered (to the extent necessary) in conjunction with similar information contained in annexure A. It is to be noted though that there did not appear to be any issues between the parties as to the extent of amendments to or deletions from witness statements.

(e) The Respondent's Outline of Submissions dated 23 July 2002 is annexed as annexure D. As I have indicated, I found annexure D particularly helpful in relation to its analysis of the evidence. Having considered the annexures and in particular annexure D in relation to the transcripts I found that references contained in those submissions to transcripts were accurate.

(f) On the last hearing day the Respondent furnished me with a document entitled "Respondent's Supplementary Submissions" which deals in particular with Mr Kosutic's evidence; that document is annexed as annexure E.

(g) Similarly on the last hearing day the Respondent furnished me with a document entitled "Summary of Results Analysis", prepared by Mr Kosutic and which constitutes in effect a summary of his findings as given in evidence before me. That document is annexed as annexure F.

(h) I should perhaps note that both parties informed me of minor errors in their written submissions; those errors have been corrected in the manner specified. In particular minor corrections as directed by Dr Sorensen were made in respect of annexure B. Annexure D appears in the form of the corrected version supplied by the Respondent.

1. (a) As has already been noted, this case generated an astonishingly large quantity of oral and written evidence.

(b) Evidence was given at considerable length by each of Professor Walker and Mr S McClintock of Pricewaterhouse Coopers. That evidence related in particular to accounting concepts and the relevance of those accounting concepts to statutory provisions which are relevant in this case. However, and in the result their evidence proved to be of marginal (if any) significance; their evidence was not dealt with in any great detail in the written submissions. Neither party referred (otherwise than very briefly and in passing) to that evidence in their closing oral submissions. It is for this reason that this decision does not deal, (otherwise than briefly), with that evidence.

(c) Notwithstanding the huge quantity of evidence before me this case turns in the result, and in the main, on one important question of fact. Jade's stock-in-trade was written down for income tax purposes in respect of each of the relevant years in accordance with valuations by Mr Terry Mitchell. As matters transpired the question of most significance before me, and which occupied much time in evidence before me, was as to whether Mr Mitchell's valuation methodology (referred to in these reasons as the "Mitchell system") was properly or soundly based.

(d) Questions of law were raised and argued and are dealt with in this decision. There is also a relevant question as to whether penalties were correctly imposed. But this case, as matters transpired, proved to be, in the main, one of fact rather than one of law.

(e) There is one other (minor) matter of a preliminary nature. At a very early stage of this matter and long before I had seen any papers I presided at a directions hearing in order to set a timetable for the filing of statements, submissions and other documents. (At that stage the presiding member does not have a member's file of relevant documents). I asked in casual fashion what the matter was about and was told that it concerned the valuation of trading stock. I, in turn mentioned that I had previously decided a case involving the valuation of trading stock and that as I recollected that matter, there could be quite complex legal issues dealt with at some length in a learned article by Professor Marks. On the strength of that entirely casual and "off-the-cuff" remark the Applicants approached the Respondent for funding; that request was (correctly) denied; this case does not raise any matters of important legal principle.

7. In this clause 7, I set out a brief introduction; it could usefully be considered in conjunction with clauses 1 to 21 (inclusive) of annexure D, which do not appear to me to be in dispute.

(a) At all relevant times the Applicants were the only partners in Jade and also the only shareholders in and directors of Allay; (the subsequent introduction of another party or parties is not relevant for the purposes of this decision).

(b) It was a common practice amongst retail jewellers (and for that matter many other retail businesses) to utilise a "captive" wholesaler. In respect of the Applicants, Jade was the captive wholesaler; it purchased stock from third party suppliers and manufacturers at arm's length; it then placed that stock on consignment with Allay; when Allay sold an item of stock by retail that sale triggered a sale between Jade and Allay.

(c) The advantage of the captive wholesaler arrangement was that it postponed until the last possible moment the taxing point in respect of sales tax which was imposed on the last wholesale sale.

(d) The Mitchell system, which involved substantial stock write-downs offered, (in addition to income tax advantages) significant sales tax advantages because it reduced the amounts on which sales tax was paid. There was mention during the hearings of a sales tax case concerning the Applicants which was (and as I understood Mrs Ciprian on this point, reluctantly) settled.

(e) Once sales tax was replaced by GST (Goods and Services Tax), the efficacy of utilising captive wholesalers largely disappeared. Indeed, Mr Gerrard who gave evidence on behalf of the Applicants said that it was at this time that his use of a captive wholesaler ended.

(f) The Respondent accepted the use of captive wholesalers in this manner for sales tax purposes subject to what were referred to as the "safe harbour" rules. In general terms the Respondent was satisfied if the charge by the wholesaler to the retailer was cost plus six per cent. A more detailed explanation of the "safe harbour" system can be found in clause 9 of annexure D.

(g) Mr Peter Gibson was at all relevant times the principal of Australian Sales Tax Consultants, which as the name suggests advised on sales tax. Mr Gibson played an important part in the events which gave rise to this case.

(h) It was at all times clear that as between the three Applicants, administration was the province of Mrs Dianne Ciprian who is one of the Applicants and is referred to in these reasons as "Mrs Ciprian". Mrs Ciprian has a number of relevant qualifications which are set out in clause 2 of her affidavit which is exhibit A1, dated 28 April 2000 and reading as follows:

• Bachelor of Science degree from the University of Western Australia.
• Graduate Diploma of Education from the University of Western Australia.
• The Teachers Higher Certificate from the Education Department Western Australia.
• Registered Valuers Certificate from the Jewellers Association of Australia.
• Diamond Grading Certificate from the Gemmological Association of Australia.
• Synthetic & Immitation Gemstone Certificate from the Gemmological Association of Australia.
• Workplace Assessor Certificate from Regional Training Services.
• Microsoft Word Certificate from the Department of TAFE (Great Southern Regional College)."

It may be noted that her major subject for her Bachelor of Science degree was mathematics. As a subsequent affidavit revealed, she taught mathematics for some years and was for a year the acting head of Mathematics at a high school in Albany. The activities of Mr Harry De Jonge were conducted outside the area of administration and so that his evidence was largely irrelevant to this case. This is so, but to a lesser extent also in respect of Mr John Ciprian, who although experienced in jewellery generally, left matters of administration and accounting to his wife, Mrs Ciprian.

(i) On 20 January 1993 Mrs Ciprian wrote to Mr Gibson inquiring as to whether stock could be written down for tax purposes. That letter reads as follows:

As advised for showcase it is possible to depreciate old stock for tax calcs. Can you please advise us of (i) the formula (if there is one!)

(j) Mr Gibson sought valuation advice from Mr Terry Mitchell of The Valuation Centre of Australia. Mr Mitchell provided a stock assessment on 22 February 1993. That stock assessment which appears as annexure DC04 to Mrs Ciprian's affidavit dated 28 April 2000 (exhibit A1) reads as follows:

NOTE: Valuation based upon information supplied. Goods not personally seen nor tested. (emphasis added)"

It is perhaps relevant to note that Mr Mitchell did not recommend any stock write-down in respect of, inter alia, pearls (category 21).

(k) It is convenient at this stage to note that stock was categorised for the Applicants in forty separate categories; I include clause 5 of annexure D which reads as follows:

"5. Jade purchases quantities of goods for ultimate sale by the three retail stores owned and operated by Allay. The goods fall within 40 separate categories including, inter alia, diamond rings greater than $500 (category 1), diamond rings less than $500 (category 2), eternity rings greater than $500 (category 5), eternity rings less than $500 (category 6), wedders (category 7), watches Seiko, Pulsar, Citizen, Classique (categories 12-15), gold jewellery (category 17), silver jewellery (category 18), fashion jewellery (category 19), opal jewellery (category 20), pearl jewellery (category 21), earrings (category 22), gold chains (category 23), charms and ingots (category 25), bracelets and bangles (category 27), clocks and barometers (category 29), leather (wallets) (category 30), crystal (category 32), silverplate (category 33), pewter (category 34), China and figurines (category 35), miscellaneous gifts (category 37), trophies (category 38), loose stones and metal (category 39), repairs (category 40) (see generally BK 90, 91 and 92 at folder 13 to the witness statement of Boris Kosutic)."

(l) In November 1993 Mr Gibson wrote to his clients, and including the Applicants, advising them that the Respondent "will not accept the sale of aged stock on or after 1 November 1993 at the revalued amount... It remains our opinion that an independent valuation is the most appropriate mechanism to establish the true arms length value of aged stock."

(m) Notwithstanding the provisions of the preceding sub-clause Mr Gibson on 21 November 1994 wrote a letter entitled "Its Time! Stock Revaluation". That letter is dealt with in clause 456 of annexure D which reads:

"456. The first paragraph of the letter referred to the previous valuation on 5 February 1993 and continued as follows "As it has been some time you should now repeat the exercise. Similarly, if you stopped revaluing stock late last year you should consider restarting as there are considerable advantages". Those advantages includes, for example, that watches were now being written down at 12 months of age and stock over three years old was now being reduced by up to 90%."

(n) The Applicants elected to accept Mr Gibson's recommendation. This lead to the issue of a "Stock Re-assessment" dated 20 June 1995 by Mr Mitchell which appears at pages 73 and 74 of exhibit A1, and which reads as follows:

The following percentage write downs should apply to the computer printout.

Goods not personally seen nor tested (emphasis added)."

8. It was common cause that the reference in the stock re-assessment to "pre May 1993" was mistaken and should be read as a reference "pre May 1992". It will again be noted that pearls (category 21) were not written down.

It should be noted also that the write-downs recommended were substantial and that in effect the Mitchell system differentiated between stock which was 18 months old and stock which was 36 months old. The recommended write-down percentage for stock aged 18 months is set out in the right hand column whereas the higher percentage in respect of stock aged 36 months appears in the middle column. (The right-hand column percentages are in accord with the figures in annexure DC04 to exhibit A1). It will be noted also that in respect of watches, a further recommendation was made and so that they could be written down by 30 per cent after 12 months. The 12 month, 18 month and 36 month anniversaries of purchase (in relation to Jade's stock-in-trade) are referred to in these reasons as "milestones".

9. Mr Gibson's evidence was that he was remunerated on the basis that he received a percentage of amounts written down; put in other words his fees increased as the write-down increased. Mr Mitchell's evidence was that he received a fee for service in accordance with his normal charging procedure; (the actual amounts paid to Mr Mitchell for his services were not in evidence before me). It should be noted though Mr Mitchell performed a valuation service of this nature (on instructions from Mr Gibson) for numerous jewellery businesses; the actual figure as referred to in the evidence varied but was apparently at least 40 valuations and probably more. By contrast, Mr Bill Sechos who performed the same service on instructions from Mr Gibson did so on one occasion only.

10. The Mitchell system was effected by Mr Mitchell in accordance with the following broad principles;

(a) He did not ever see or view the stock, notwithstanding the provisions of the standard test as to the methodology to be used by valuators in preparing jewellery valuations (referred to in the hearings as the "Silver Book"). The following excerpt from TC 47 to 48 is illustrative of this point:

"Mr McGovern: As a registered valuer you are required to follow valuation guidelines and to comply with ethical standards, are you not?

Mr McGovern: Those guidelines are principally the standards in the Australian Jewellery Valuers Council Manual?

Mr McGovern: That's commonly referred to as the Silver Book, is that right?

Mr McGovern: For the purposes of valuation you are also authorised to use the NCJV price guide?

Mr McGovern: But the price guide is applicable only to items of jewellery that contain gold or silver, is that not right?

Mr Mitchell: Yes . Well, I am sorry , of course it does do pearls and things like that.

Mr McGovern: Pearls as well, I am sorry, thank you. The recognised approach of a registered valuer to the valuation of jewellery is to arrive at a retail replacement value for the item, is it not?

Mr McGovern: In order to embark upon that process it is necessary to conduct a physical examination of the item to be valued, is it not?

Mr McGovern: The age of the item being valued is not addressed at all in ascertaining the retail replacement value, is it?

Mr Mitchell: Not unless it is actually an antique."

(b) The mere fact that a stock item reached a milestone resulted automatically in a write-down by the recommended percentage; the fact that that item was one of a large or larger number the remainder or some of the remainder having been sold, made no difference at all. Nor was there any qualification as to the fact that the same item might be (and indeed was) bought again before or after the relevant milestone.

(c) The Mitchell system did not have regard to demographics and geographical location; the same percentages applied regardless of the type of customers of the jeweller and the area in which the business was located.

(d) Mr Mitchell in his evidence said that he based his stock valuation methods on two fundamental principles in relation to the Applicants; in the first place he assumed that Jade and Allay were parties at arm's length and not associated with each other and in the second place that where an item was not sold within the prescribed period, it could be resold only as scrap and thus back up the distribution chain to the precious metals or precious stone dealer from which it had been bought by Jade in the first place. (Leaving aside the fact that the evidence before the Tribunal revealed that this did not ever happen, it could only have been of relevance to some only of the relevant categories, and more particularly because many of the relevant categories do not relate to precious metals or precious stones).

11. I deal in this clause 11 with the relationship between Jade and Allay and certain other ancillary matters.

(a) It is relevant in particular that Jade had no offices or staff; it was run entirely from the premises of Allay. Apart from the fact that it had its own bank account, it could be regarded for all practical purposes as a "post box" entity.

(b) Jade for all intents and purposes had one customer only and that was Allay. There was one other sale to House of Fraser in the 1997 year and none at all in the 1996 year. I refer in this context to clause 7 of annexure D which reads as follows:

"7. Jade sold its goods to Allay almost exclusively. The one exception was de minimus. Notwithstanding the assertion in Mrs Ciprian's affidavit that Jade "sells predominately to Allay [however], it can, and it has previously made sales to other retail and wholesale entities" in fact, there were no such sales at all in 1996 (TB page 57.5) and one sale only to the House of Fraser occurred in the 1997 year (TB page 58.2; 58.4 and 58.9-60.1)."

(c) Jade did (as I have previously said) for some reason conduct its own bank account. Again as set out previously in these reasons, sales as between Jade and Allay occurred only as and when Allay sold at retail; this then triggered a sale between Jade and Allay but at the written down value and as will have been noted, the written down percentage was in many cases substantial. This had two relevant consequences; in the first place the sale of the written down value resulted in a sharp reduction of the sales tax paid; secondly the fact that the sale took place at so sharp a reduction resulted in Jade incurring ever-increasing losses. There was evidence before me (which I need not set out in detail) that from 1993 onwards, Jade incurred large losses and so that only a few years later it was no longer solvent. As to why Jade needed its own bank account given that it was financed in respect of all of its purchases by Allay was not clear.

(d) There was evidence before me in respect of one year as to an interest charge to Jade but the reason for that interest charge was not clarified.

(e) One concomitant of the sales between Jade and Allay at the reduced values was that because of the lower sales tax burden, Allay actually derived larger profits out of sales of the aged stock simply because the overall cost to the economic entity as a whole was reduced because of the sharp reduction in sales tax.

(f) The evidence of Mr Kosutic was that in relation to Allay, the milestones prescribed by Mr Mitchell were irrelevant, and that stock did sell even though at times after a number of years. Mr Kosutic in an exhaustive analysis found that the number of items sold below actual cost (that is cost to Jade) was very small. Mr Kosutic's evidence was that of 4,132 items of aged stock sold in the 1997 and 1998 financial years, only 18 were sold at a loss, that is, for an amount less than retail cost. Mrs Ciprian in her evidence said that the starting point was to ticket an item at what the market would stand (sometimes 300 per cent of cost) and then to discount it as time went on. Allay conventionally and in the ordinary course of its business, held sales in which it reduced the retail ticket prices. But the fact that an item was discounted in a sale did not mean that it did not thereafter sell at the retail ticket price. The evidence before me established that although some aged items were discounted below retail ticket price many of them achieved retail ticket price, and the discounts were in any event such that it was in a very few cases only that aged stock items did not achieve at least cost.

(g) Jade and Allay were of course two separate legal entities. However, and for economic purposes they could and should be regarded as one economic entity.

(h) Was Mr Mitchell, as he contended, unaware of the fact that Jade and Allay constituted one economic entity? It is not easy to accept that he did not know of the practice whereby retail businesses used captive wholesalers given that he received numerous instructions from Mr Gibson. Mr Kosutic in his analysis found that in a survey of ten businesses in which Mr Mitchell furnished valuations on instructions from Mr Gibson, and although the categories were often numbered differently, the write-down percentages across the board and regardless of location or demographics, were approximately the same.

(i) The relationship between Mr Gibson and Mr Mitchell was clearly an enduring one. Mr Gibson instructed Mr Mitchell in relation to numerous (at least 40) valuations. Given the fact that Mr Gibson was remunerated by results it may be possible to infer that Mr Gibson expected results from Mr Mitchell in the form of write-downs. It does not seem very likely that when Mr Mitchell would have received a stream of instructions from Mr Gibson if he had valued in such manner that Mr Gibson received no remuneration whatever because there were no write-downs. Nor does Mr Mitchell's task appear to have been a very onerous one given that he saw no need to inspect the stock and that his valuations across the board (having regard to the business survey by Mr Kosutic) were constant.

12. I turn in this clause 12 (and also clause 13) to deal with the evidence of Mr Mitchell.

(a) In his original affidavit dated 26 April 2000 (exhibit A5) Mr Mitchell specified that the market with which he had been concerned was the market in which a wholesaler sells to another arm's length wholesaler. In his affidavit dated 6 June 2001 (exhibit A15) he sought to amend clauses 39 and 60 of exhibit A5 by amending the reference to "another arms length wholesaler" so as to refer to its "another arms length retailer". It would seem that from the outset there was confusion in Mr Mitchell's mind as to the market which was relevant for his purpose.

(b) I note in general terms that I had originally thought that it might be desirable, and perhaps even necessary, when referring to oral evidence before me, to include numerous extracts from the transcript. I have decided on reflection that to do so is unnecessary and would indeed have the effect of lengthening an already lengthy decision; it is for this reason that this decision incorporates only two transcript extracts, one referable to Mr Mitchell and the other to Mr Kosutic. In dealing with Mr Mitchell's evidence, I propose to confine myself to some of the more important or prominent points. A detailed analysis of Mr Mitchell's evidence is contained in clauses 222 (and following) of annexure D. It should be noted that the Tribunal accepts that that analysis is apposite in relation to the evidence given by Mr Mitchell in the hearing.

(c) Mr Mitchell's evidence as regard pearls was particularly contradictory. As set out previously in these reasons, his recommendations to the Applicants in 1993 and 1995 did not call for any write-down for pearls (TB 634 and 635). However, he was confronted with an analysis which indicated a reduction in values. He was asked whether there had been a drastic decline in the pearl market since 1995 and he answered in the manner specified in clause 253 of annexure D which reads as follows:

"253. Mr Mitchell, of course, twice asserted that in the case of pearls there was in fact no write down (TC page 634.31 and 635.25). He was then confronted with his own analysis writing down pearls 50% after 18 months and the same percentage again after 36 months (TC page 635.18-636.7). He allowed himself to be drawn to a point of ridicule when he agreed with the suggestion "do you say there was some rapid decline in the pearl market since 1995" to which he answered, "yes I'm afraid there has, yes, there has" (TB page 637.11-637.12)."

It may be noted that in clause 42 of exhibit A5 Mr Mitchell said:

"42. Since 1995 pricing levels in the wholesale jewellery industry have been generally static. Changes in pricing levels has occurred at the retail level and have involved a reduction in the retail selling price. Wholesale pricing levels are the same as they were in 1995 and as such the percentage mark downs being applied to particular lines of stock in 1995 continue to be relevant and applicable today."

(d) Still on the subject of pearls, Mr Mitchell agreed that to value pearls it is necessary to know about size, lustre and match, all of which require visual examination (TB 634 and 635). That evidence was in conflict with other evidence by him to the effect that it was perfectly in order for him to value stock (which included pearl and diamond jewellery) by references to stock sheets without visual examination. The Tribunal notes that Mr Mitchell had in fact provided a stock assessment in February 1993 and a stock re-assessment in June 1995 for the Applicants without any testing or visual inspection.

(e) Mr Mitchell said that his valuations were based on surveys although it was never clear (and he was himself very uncertain) about whether he was referring to surveys in the wholesale or in the retail markets (TC 23). Despite a notice to produce he was unable to produce any records of any surveys of any nature made by him (TC 29 and TC 20).

"29. "The information obtained through our market research process was collated and considered with the figures released by the NCJV and the results consolidated into a two-page summary table which was used to calculate the write-downs. Annexed hereto and marked TM08 is a copy of that table."

Annexed to exhibit A5 is annexure TM08 which is alleged to have been the table used to calculate the write-downs in February 1993 and June 1995 (TB 602). (TM08 is explained in verbal terms in exhibit A17).

13. (a) Mr Mitchell's evidence was that annexure TM08 to exhibit A5 was a contemporaneous record of the methodology used to calculate the discount percentages of all categories of stock. That contention was categorically impossible; annexure TM08 refers to break-up values for some categories only. It cannot possibly apply to the numerous categories (figurines, wallets, etc.) which cannot be broken up and sold back up the distribution chain. Not only was the statement untruthful but the Tribunal does not accept that Mr Mitchell ever seriously believed that jewellers (such as the Applicants) break up jewellery in order to sell the stones or the precious metal content back to the original suppliers. (It should be noted that the Applicants did not operate in the "top end" of the jewellery market; sales of very valuable or very costly items were the exception rather than the rule.)

(b) Clause 29 of exhibit A5 clearly suggests that exhibit TM08 was prepared contemporaneously with the write-downs in 1993 and 1995. Mr Mitchell agreed that this was not so; (TB 603) Mr Mitchell then said that TM08 must have been prepared contemporaneously with the preparation of his affidavit exhibit A5 that is in the year 2000. It was then put to him that annexure TM08 is identical to annexure D to his affidavit in the Pontifex proceedings (Pontifex Jewellers (Wholesale) Pty Limited v FC of T 2000 ATC 4642 at page 4648 clause 16 that "...on occasion, old stock, did sell for full original retail price, but this was not usual, ... In general I am satisfied the retail sales could only have be effected at very substantial reductions.") Mr Mitchell again asserted that it was prepared in 2000 (TB 605).

It was at this stage that it was put to Mr Mitchell that annexure TM08 must have been prepared at an earlier date; annexure TM08 contains an arithmetical error which is identical to an error appearing in annexure D to his affidavit in the Pontifex proceedings and the two annexures are clearly identical. It was suggested to him that he had used the figures extracted from the Jewellery Association Publication of June 1997. Finally and reluctantly he conceded that annexure TM08 must have been compiled in June 1997 (TB 668, TB 670, TC 27, TC 28).

(c) There is only one possible conclusion and that is that annexure TM08 was in no way contemporaneous with the write-downs in 1993 and 1995. Mr Mitchell did not remember any contemporaneous records in respect of the valuations made in those years. The manner in which he shifted ground on this important and relevant aspect must cause the Tribunal to have serious doubts as to his credibility.

(d) When hearings resumed in January 2002, Mr Mitchell was asked whether he would have effected valuations in the same way if he had known that Jade was a captive wholesaler to Allay and his answer was "if they were one entity, sir, no" (TC 21).

(e) He contended that he was instructed to value on the basis that Jade and Allay were at arm's length (TC14 and TC15). He said that if had known that Jade and Allay were associated he would have treated the two entities as one rather than as two. To him they would have been a "whole different ball game" (TC9). This was so in particular because the need of a the wholesaler to dispose of stock at a discount of 70 to 80 per cent of the retail price without incurring a loss did not arise (TC11). Mr Mitchell's evidence before the Tribunal was dotted with apologies and withdrawals referred to in some detail in clauses 222 and following of annexure D.

(f) The admissions by Mr Mitchell as to false assumptions came in January 2002. Mr McGovern suggested in argument that Mr Mitchell was glad to be given a way out after he had fared badly in cross-examination in the hearings in July 2001. The Tribunal considers that there may be merit in that contention. (The difficulty for the Applicants is that all of their contentions as to the Mitchell system are founded upon assumptions acknowledged to have been incorrectly made. Once the foundations were found to be fallacious, the Mitchell system could not stand).

(g) Mr Mitchell had great difficulty when giving evidence as to the alleged "integral nexus". Clauses 269, 270 and 271 of annexure D accurately record:

"269. Mr Mitchell referred in paragraph 59(b)(ii) to the concept of "integral nexus". He then said that the first that he knew of integral nexus was when he read the affidavit (TC page 55.17). In fact when he was first confronted with the words "integral nexus" when they appeared in his affidavit in the statement "there's an integral nexus between retail selling price and the wholesale where goods are sold on consignment" he was asked "what do you say the nexus is" he answered (somewhat plaintively) "dear". After a stammering utterance he then (not for the first or last time) said "I would have to refer back to - I do apologise, I am a bite vague there" (TB page 611.10 - TB 611.17)

1. It quickly emerged that he didn't have a clue what integral nexus meant (TB page 612-613.10) and it is as plain as a pike staff that this whole concept is something that infiltrated the affidavit. This is somewhat dramatically demonstrated when he was questioned about paragraph 59(b)(ii) and (iii) which forced him to admit that paragraph 59(b) was diametrically opposed to what he had been saying "a moment or two ago". When asked to face up to it, Mr Mitchell said "it would appear to be" (TC page 616.24)

2. In terms of Mr Mitchell's expertise as a valuer, it was put to him that "integral nexus" it was not a concept that was "relevant or referred to in valuation" to which Mr Mitchell replied "No, sir" (TC page 56.13)."

(h) Dr Sorensen asked me to regard Mr Mitchell as a good valuator but as a poor witness. I do not agree; he was quite remarkably self-possessed before and even (although perhaps to a lesser extent) after his evidence was found to be so fundamentally flawed and indeed in important respects untruthful.

(i) In general terms, the Mitchell system was, as the evidence revealed, fundamentally flawed and unsound. If it was indeed based on market surveys that evidence would and should have been available; there was no such evidence. The Tribunal considers it significant that a stock item should be written down in value simply because it passed a given milestone; there must be a difference between an item which is the last of a number the remainder having been sold and an item in respect of which only one was ever bought. It was suggested during the course of the hearings, that the fact that, in relation to a given item, there was one remaining out of an original larger number, could be so because the sales of the remainder saturated the available market. Such a suggestion is contradicted by the evidence of Mr Kosutic that aged stock items were often bought again by the Applicants either before or after the relevant milestones. The Tribunal considers also that demographics and location must be relevant. A jewellery store in Albany should surely be regarded as being significantly different from a jewellery store in the eastern suburbs of Sydney (and Double Bay was mentioned in evidence as an example). The types and values (and prices) of items available for sale are likely, apart from other considerations, to differ to some extent. But the Kosutic survey of ten stores in different locations indicated that the write-down percentages (in accordance with Mr Mitchell's valuations) were very nearly the same throughout. It is unnecessary for me to go into further detail as to the unsatisfactory nature of Mr Mitchell's evidence before me. In January 2002, he in effect disavowed the Mitchell system on the basis that he had formulated it in accordance with basic and fundamental principles which were wrong. On this basis alone, the whole of the Applicants' case as to the fact that they had valued closing stock in accordance with its market selling value, based as it was on the Mitchell system, became equally flawed and unsound, and of course could not stand.

14. I turn next to deal with the Applicants' contentions that the Respondent deprived them of one of their rights under section 31(1) of the 1936 Act. It is convenient at this point to set out sections 28, 29, 31 of the Income Tax Assessment Act 1936 as follows:

(1A) This section does not apply to the 1997-98 year of income or a later year of income.

Note: Subdivision 70-C (Accounting for trading stock you hold at the start or end of the income year) of the Income Tax Assessment Act 1997 applies to those years of income.

(1) Where a taxpayer carries on any business, the value, ascertained under this subdivision, of all trading stock on hand at the beginning of the year of income, and of all trading stock on hand at the end of that year shall be taken into account in ascertaining whether or not the taxpayer has a taxable income.

(2) Where the value of all trading stock on hand at the end of the year of income exceeds the value of all trading stock on hand at the beginning of that year, the assessable income of the taxpayer shall include the amount of the excess.

(3) Where the value of all trading stock on hand at the beginning of the year of income exceeds the value of all trading stock on hand at the end of that year, the amount of the excess shall be an allowable deduction.

(1) The value of live stock and of each article of other trading stock to be taken into account at the beginning of the year of income shall be its value as ascertained under this or the previous Act at the end of the year immediately preceding the year of income.

(2) This section does not apply to the valuation of live stock or other trading stock at the beginning of the 1997-98 year of income or at the beginning of a later year of income.

Note: Section 70-40 (Value of trading stock at start of income year) of the Income Tax Assessment Act 1997 applies to the valuation of trading stock at the beginning of those years of income. Section 70-40 (Value of trading stock at the start of the 1997-98 income year) of the Income Tax (Transitional Provisions) Act 1997 is also relevant.

(1A) This section does not apply to the valuation of trading stock at the end of the 1997-98 year of income or at the end of a later year of income.

Note: Section 70-45 (Value of trading stock at end of income year) of the Income Tax Assessment Act 1997 deals with the valuation of trading stock at the end of those years of income. Section 70-70 (Valuing interests in FIFs) of that Act provides special rules for valuing interests in FIFs for those years of income.

(1) Subject to this section, the value of each article of trading stock (not being live stock) to be taken into account at the end of the year of income shall be, at the option of the taxpayer, its cost price or market selling value or the price at which it can be replaced.

(2) Where the Commissioner is satisfied, in relation to any trading stock of a taxpayer, that, by reason of obsolescence of, or any other special circumstances relating to, the trading stock, the value of the trading stock to be taken into account at the end of the year of income should be an amount, being less than the amount that is the lowest value that could be applicable under subsection (1), determined by the Commissioner to be the fair and reasonable value of the trading stock having regard to:

(a) the quantity of the trading stock on hand at the end of the year of income;

(b) the quantity of the trading stock sold, exchanged or used in manufacture by the taxpayer after the end of the year of income and the prospects of sale, exchange or use in manufacture of further quantities of that trading stock;

(c) the quantity of trading stock of the same kind sold, exchanged or used in manufacture by the taxpayer during the year of income and preceding years of income; and

(d) such other matters as the Commissioner considers relevant;

the value of the trading stock to be so taken into account shall, notwithstanding any exercise of the option of the taxpayer under that subsection, be the value so determined by the Commissioner.

(3) Subsection (2) does not apply in relation to a taxpayer unless, by written notice signed by or on behalf of the taxpayer and lodged with the Commissioner on or before the last day for the furnishing of the return of income of the taxpayer for the year of income, or within such further time as the Commissioner allows, the taxpayer notifies the Commissioner that he wishes that subsection to apply.

(4) Subject to the following provisions of this section, the value to be taken into account at the end of the 1991-92 year of income, and at the end of each later year of income, of an article of trading stock that consists of an interest in a FIF is to be its cost price.

(5) Subject to subsection (6), if the taxpayer elects that this subsection is to apply to the taxpayer in relation to all the taxpayer's interests in FIFs, the value to be taken into account at the end of the year of income of every article of trading stock that is an interest in a FIF is to be its market value.

(6) Subsection (5) does not apply to the taxpayer unless the election is made before the taxpayer furnishes a return in respect of income of the first year of income in which any notional accounting period of a FIF in which the taxpayer has an interest ends but, if the election is so made, that subsection applies to the taxpayer in respect of that first year of income and in respect of all later years of income.

(a) subsection (4) would, apart from this subsection, apply to the taxpayer in respect of the 1991-92 year of income; and

(b) an article of trading stock was on hand at the beginning of that year of income; and

(c) the value of that article of trading stock that was taken into account at the beginning of that year of income was greater or less than its cost price;

(d) subsection (4) does not apply in relation to that article of trading stock; and

(e) the value of that article of trading stock that is to be taken into account at the end of that year of income, or at the end of any later year of income to which subsection (5) does not apply, is the value referred to in paragraph (c) of this subsection.

FIF has the same meaning as in Part XI.

notional accounting period, in relation to a FIF, has the same meaning as in Part XI."

(a) The Applicants base their arguments firstly on a statement by the Respondent appearing at page 11 of document T2 of the T documents reading as follows:

"In this case the auditor has adjusted the partnership's closing value for trading stock up to its cost price. The partnership is not entitled to write down its trading stock under any of the other valuation methods available to it. Details of other valuation methods, and reasons why the partnership is not permitted to use them to writedown its trading stock, are discussed below."

(b) In the second place the Applicants base their contentions on an exchange between Dr Sorensen and Mr Kosutic (at TC 410) which is set out in clause 63 of annexure D as follows:

"63. The second piece of evidence particularized by the Applicants occurs in the cross examination of Mr. Kosutic on 6 February 2002 at transcript page 410 lines 25 to 35. In context, the passage from the Commissioner's section 37 statement, as set out above, was read to Mr. Kosutic and the following exchange occurred:

Dr Sorensen: 'First of all, is this a document that you prepared?

Dr Sorenson: 'When it refers to auditor, in this case "the auditor has adjusted", do you take that as a reference to yourself?'

Dr Sorenson: 'Do you agree with which ever tax officer wrote this, as a summary of what you did, do you agree with what he or she has said there?' (Emphasis added)

(c) If one examines document T2 as a whole without having regard to one phrase while disregarding the others, one can readily see that the decision-maker did not remove the right of the Applicants to value stock at market selling value where that right was exercised in a proper and bona fide manner. See generally T2 pages 10 to 14 and (as just one example) the second last clause on page 14 of T2 which reads as follows:

"The general thrust of the advice prepared by Steven Wearne of Borough Mazars dated 3 February 1994 is not in dispute. It is accepted that market selling value of an item of stock can be ascertained as a result of a genuine independent valuation of that item. It is stressed that at paragraph 2 of that advice Mr Wearne notes that the request for advice concerns the proposal that the wholesale entity (the partnership) obtain independent market valuations (emphasis added) of certain of the goods. Mr Wearne indicated in his advice that the Commissioner would be likely to accept such valuations for income tax purposes. However, in this case, as already discussed at length, the writedown values obtained by the partnership are not genuine independent market valuations, they are merely stock assessments based on a non-existent market. In other words the facts of this case are very different to the circumstances considered by Mr Wearne in the preparation of his opinion."

Put in other words the statement referred to in sub-clause (a) has been taken out of context.

(d) Similarly to seek to rely on one exchange between Dr Sorensen and Mr Kosutic is again to take one piece of evidence out of context. It is clear from his evidence as a whole that the Respondent did not at any time seek to deny the Applicants their right to elect to value stock at market selling value. It is clear on the contrary that the Respondent came to the conclusion that the manner in which the Applicants sought to value their stock (at alleged market selling value) was in no way made in a manner which was bona fide or proper or correct.

(e) As to Mr Kosutic's evidence, the Tribunal agrees that with clause 88 of annexure D which reads as follows:

"88. The cross examination of Mr Kosutic goes no further than asking him "as a summary of what you did, do you agree" that you adjusted partnership closing value for trading stock up to its cost price. As a shorthand, or summary statement of the practical effect of the adjustment, then that is correct."

(f) It follows then that the Tribunal concludes that the decision-maker was altogether correct. The Tribunal finds then that there is no basis for the contention by the Applicants that the Respondent denied them a right vested in them pursuant to section 31(1) of the 1936 Act.

15. (a) The Respondent correctly contends that the onus is on the Applicants to establish that the amended assessments were excessive (Federal Commissioner of Taxation v Dalco [1990] HCA 3; (1990) 168 CLR 614 at 621). It should be noted that the whole of the Applicants' case as to the write-downs depended on the correctness of the Mitchell system. In January 2002 Mr Mitchell conceded that it was framed on the basis of assumptions which were incorrect. In the light of those admissions, the Applicants were clearly in serious difficulties. The evidence of each of Messrs Gerrard and Sechos depended on the integrity of the Mitchell system which they had supported. I refer to clause to 278 of annexure D reading as follows:

"278. The evidence of each of Mr Gerard and Mr Sechos depends for its intellectual underpinnings on the integrity of the process undertaken by Mr Mitchell. If Mr Mitchell's process is irretrievably flawed then the evidence of Mr Gerard and Mr Sechos is similarly affected and not worth the proverbial hill of beans."

(b) It is in these circumstances that Dr Sorensen found himself obliged to argue a "course of conduct" line of argument described by Mr McGovern as the "Alice in Wonderland" argument, I deal with it later in these reasons.

(c) I am not clear as to the relevance of Mr Gerrard's evidence. He is involved in the jewellery business; however his is an exclusive business at the top-end of the market in the central business district of Sydney and where he sees customers only by appointment. This was not always so, but it has been so, for some considerable time. His support of the Mitchell system was misguided, and based perhaps on an incomplete understanding as to what had been done by Mr Mitchell.

(d) Mr Sechos is a valuator who, on instructions from Mr Gibson performed one write-down valuation (TC 173). He was asked in cross-examination to present his working papers; he produced his file after the luncheon adjournment. It emerged that he had been to Brisbane to prepare a valuation. He said that he done so in consequence of a random sampling only of some stocks. However, his valuation as furnished to Nelson Parkhill indicated that a careful examination of all the stock had been made. It was put to him that that indication was a gross misrepresentation. His answer was that "you can say so but I am sure they knew what was going on". It was put to him that he had committed a despicable act and his answer (surprisingly) was "thank you".

(e) I do not think it is necessary for me to deal with the evidence of those witnesses for the Respondent to the effect that inspection is generally a pre-requisite to a stock valuation of jewellery.

(f) Strictly speaking then it is unnecessary for me to deal with the altogether monumental evidence of Mr Kosutic, an employee of the Respondent, who undertook a survey of the documentation available to him in order to calculate what happened to aged stock in the hands of Allay. The Applicants objected to Mr Kosutic's evidence both on the grounds of competence and on the grounds of relevance. Each of those objections was quite simply ludicrous.

(g) Mr Kosutic in effect performed a statistical spread-sheet analysis in exhaustive (and perhaps exhausting) detail. The Respondent plainly considered that in the light of what had occurred in the Pontifex proceedings, he should be prepared to demonstrate that aged jewellery stock should not be written-down in the manner contended for by the Applicants. When Mr Mitchell's evidence proved to be so defective, the evidence of Mr Kosutic became in some respects in the nature of "overkill". It is significant in the view of the Tribunal that Mr Kosutic's huge statement had been in the hands of the Applicants since January 2001. It cried out for a rebuttal; that none was available is in the highest degree significant.

(h) Once the Mitchell system was discredited and since the "Alice in Wonderland" argument (referred to later in these reasons) is demonstrably silly, the Applicants had as regards their stock write-down claims, no hope of discharging the onus. It is important to note that the whole write-down system depended for its integrity on the Mitchell system, which as has been shown, was flawed and disavowed by its creator.

(i) It is in these circumstances that I could have found that it was unnecessary for me to consider Mr. Kosutic's evidence and that the Applicants had failed pursuant to their own case to discharge the onus, in relation to their contentions as regards the market selling value of closing stock. I have however in any event considered his evidence, although I do not think it necessary to deal with it in these reasons, in any detail.

(j) Mr Kosutic's evidence was in the view of the Tribunal eminently fair and reasonable and given moreover in a convincing manner. Dr Sorensen's cross-examination did not reveal any faults or defects or mistakes. The Tribunal accepts the Respondent was eminently correct in T2 when he came to the conclusion that the trading stock was not worth less than cost. Not only were the milestone events identified by Mr Mitchell irrelevant but on the contrary Mr Kosutic's evidence indicated that aged stock sold at a profit to the business entity as a whole years after purchase; the average period involved was 7.43 years. Moreover, the number of aged stock items sold below actual cost was minute. And this accords with Mrs Ciprian's evidence (as referred to at clause 374 of annexure D) as to sales below cost and in which she said "Not unless we absolutely had to otherwise the door would be shut" (TB 218 and 219).

(k) In relation to Mr Kosutic's evidence and to the extent that it is necessary or relevant for me to do so, I note that I accept this evidence both as to relevance and competence. The Tribunal accepts moreover that his evidence is accurately referred to in annexure D and in particular in clauses 315 (and following).

(l) The Respondent has (correctly) identified six logically separate arguments or propositions by the Applicants. Clause 51 of annexure D is repeated in the body of these reasons as follows:

51. The Applicants' written submissions advance six logically separate propositions or arguments as follows:

(i) The Commissioner has no statutory power to "proceed to assess relying on an option other than that elected by the taxpayer". Thus it is asserted that the Commissioner made an adjustment to "cost" where the taxpayer has elected "market selling value" and it is not open to the Commissioner to deny the Applicants their choice of "market selling value" and prescribe "cost" instead: submissions paragraphs 4, and 12 to 21. The Commissioner's response to this submission appears at paragraph 53 and following, below.

(ii) The 1996 and 1997 returns for Jade were correct and the value of Aged Stock on hand as returned was, as a matter of fact, its market selling value: submissions paragraphs 23 to 37. The Commissioner's response to this submission appears at paragraph 222 and following, below.

(iii) Neither Expert accounting evidence nor the accounting standards are relevant to the determination of "market selling value": submissions paragraphs 24, 25 and 58. The Commissioner's response to this submission appears at paragraph 98 and following, below.

(iv) The Commissioner should be required to notionally adjust the value of opening Aged Stock on hand on 1 July 1995 to cost: submissions paragraphs 38 to 42. The Commissioner's response to this submission appears at paragraph 109 and following, below.

(v) No basis exits for the imposition of penalties, or alternatively such penalties are excessive and should be further remitted: submissions paragraphs 43 to 57. The Commissioner's response to this submission appears at paragraph 426 and following, below.

(vi) The evidence of Mr. Kosutic is neither relevant nor has a proper foundation been made out as to his qualifications or experience to attempt to give that evidence: submissions paragraph 59. The Commissioner's response to this submission appears at paragraph 281 and following, below."

16. (a) Dealing with the first of the Applicants' contentions I have already found that the Applicants were not denied a right or option to value stock at market selling value. On the contrary, the Applicants sought to rely on the Mitchell system found to be fundamentally wrong and unsound.

(b) It is in this context (and in relation to the Applicants' second contention) that Dr Sorensen in his closing argument contended that over a period of years (from 1993 onwards) Jade sold stock to Allay at its the written down value prescribed by the Mitchell system (although in fact and set out in subclause (c) below, the Applicants wrote down stock beyond the percentages recommended by Mr Mitchell) and that this then by established practice was in fact the market selling value.

(c) In fact, the evidence revealed that Mrs Ciprian in keying in the necessary entries in 1995 made two "mistakes". It will be remembered that the 1995 Mitchell system called for different percentages at the 18 month and 36 month milestones; in fact Mrs Ciprian even in respect of stock aged 18 months keyed in the 36 months (or higher) write-down percentage. That was the first error and Dr Sorensen accepted that on the basis of that error the figures of the Applicants would in any event require adjustment accordingly. There was a second and equally egregious error; in respect of watches where in effect there were three milestones, watches aged 12 months were written down by the 36 months (or the highest) percentage.

(d) The inherent unsoundness of Dr Sorensen's argument in this context as to a "course of conduct" market selling value was illustrated by the fact that on this basis (and if taken to its logical conclusion) a sale of each and every item of stock at $1.00 would suffice. In effect, the Applicants were contending that the market selling value was what they said it was. It struck me that this line of reasoning (if "reasoning" is apt in this context) was akin to the manner in which the authorities re-wrote history in Orwell's "1984". Mr McGovern however put paid to that line of argument by a reference to Liversidge v Sir John Anderson [1941] UKHL 1; [1942] AC 206 where Lord Atkin said at 245:

"I know of only one authority which might justify the suggested method of construction: "'When I use a word,' "Humpty Dumpty said in rather a scornful tone, 'it "'means just what I choose it to mean, neither more nor "'less.' 'The question is,' said Alice, 'whether you can "'make words mean so many different things.' 'The question "'is,' said Humpty Dumpty, 'which is to be master - that's "'all.'" ("Through the Looking Glass," c. vi.) After all this long discussion the question is whether the words "If a "man has" can mean "If a man thinks he has." I am of opinion that they cannot, and that the case should be decided accordingly."

(e) It follows then that there is no basis whatever for this "course of conduct" line of argument. (It was referred to throughout by reference to "Alice in Wonderland" although the correct book reference is "Through the Looking Glass").

17. (a) It is unnecessary for me to deal with the Applicants' third contention, but for completeness I confine myself to a few remarks.

(b) The Respondent cited Federal Commissioner of Taxation v St Hubert's Island Pty Ltd (in liq) (1978) 138 CLR 210 at page 228 and J Rowe & Son Pty Ltd v Federal Commissioner of Taxation [1970] HCA 57; (1971) 124 CLR 421.

(c) The Respondent also referred me to the decision of the Federal Court in Commissioner of Taxation v Citibank Ltd and Others (1993) 44 FCR 434 at pages 443 to 448 and to the passage cited at page 444.8 reading as follows:

"Accounting evidence may also assist to elucidate the meaning of a commercial expression used in the Act and thereby to aid in determining an issue of characterisation. Thus accounting evidence was relevant in determining whether cars on floor plan constituted "trading stock" (citation omitted) and likewise a case could be conceived where accounting evidence could be relevant in determining whether a particular item of property was "plant" for the purposes of s 54 of the Act. So too it might be relevant in determining whether a particular receipt was on capital account (citation omitted)."

(d) Lastly in this context the Respondent referred me to a passage from a paper by Justice Hill presented to the Taxation Institute of Australia in 1997. The passage is referred to in clause 106 of annexure D as follows:

The closer the taxation law comes to taxing trading profits the greater it might be expected that it would have regard to accounting concepts.

The very expression "trading stock" if requiring elucidation, is an expression used by businessmen and traders. Perhaps the reference to "trading" in the expression makes the point that the expression could have no meaning outside the area of trade. Evidence of the meaning of expression can thus be adduced and received as is illustrated by the decision in FC of T v Sutton Motors (Chullora) Wholesale Pty Ltd.

Where the issue is whether the work in progress is to be included in the trading account as trading stock, accounting evidence will be relevant. So, too, where the Tax Act permits trading stock to be valued at "cost price" accounting evidence will be accepted as to how that cost price is to be calculated: Phillip Morris Ltd v FC of T. There will be difficulty where the two conflicting views of direct versus absorption costing each has its own adherents. Duple Motor Bodies Limited v Inland Revenue Commissioners. Where the trading stock division specifies market value that too will be a matter for expert evidence.' (Emphasis added)"

(e) Dr Sorensen criticised the passage from the paper by Justice Hill on the basis that it refers to market value whereas market selling value is a different statutory concept. He pointed out that the former concept appears in the 1936 Act far more often than does the latter. My own view is that the views of Justice Hill are potentially apposite to either expression.

(f) Mr McGovern cited case authority to the effect that there may be no difference between market selling value and market value and I think there is much to be said for this proposition. I agree of course with the decision in Citibank (supra) in that accounting evidence may assist in the interpretation of a commercial expression used in the Act. But it is unnecessary for me to deal with this aspect further. In this case, the Applicants did not by any stretch of the imagination make an election in favour of market selling value; on the contrary they purported to follow the Mitchell system (and did not follow it correctly and where the mistakes favoured them) and in circumstances where they must have known having regard to its manifest artificiality, that it was altogether unsound.

1. In respect of the Applicants' fourth contention:

(a) In essence the Applicants seek to contend that if for the 1996 year (but not the 1997 year) the Respondent is entitled to reassess closing stock in such manner that it is equivalent to cost he must do the same in respect of opening stock at the beginning of that year that is on 1 July 1995.

(b) The Respondent contended that this constituted an entirely new ground of objection never raised either in the objections or any documents subsequently filed (and including the Applicants' Statement of Issues and the Applicants' Statement of Facts and Contentions) and was raised for the first time in the Applicants' Submissions furnished after all of the oral evidence had been heard. Certainly this point was not raised by Dr Sorensen in opening, or at any time during the oral evidence. In particular, it was not put by him to any of the witnesses for the Respondent.

(c) The Applicants contended that this ground of objection is encompassed by clause 1(a) of the objection by example Mr Ciprian for the 1996 year and see T11 page 64 which reads as follows:

"1(a) The amount included in the taxable income by the amended assessment as being the taxpayer's share of the net income of the Jade Wholesalers (the "partnership") (TFN 68 298 794) should be reduced to a loss of $2864 or some amount less than $52934."

(d) Dr Sorensen contended that in any event the matter was in effect before me and that I should consider it accordingly. I did not understand him to be making a formal application for an amendment; indeed exhibits R15 and R16 established that the Applicants declined to do so. Dr Sorensen said that he did not consider it necessary to do so.

(e) Dr Sorensen said (tellingly) that the point first occurred to him when he was considering the oral evidence which had been given for the purpose of his clients' closing submissions when the discrepancy between the 1996 and 1997 amended assessments struck him as being significant.

(f) The Respondent contends that I should not consider the matter at all for the reasons set out in clauses 115 to 143 inclusive of annexure D.

(g) It is my view that it is my function to make the correct and preferable decision, standing in the shoes of the Respondent, but only in relation to the material before me. Put in other words and as a matter of jurisdiction it is not proper for me without an amendment to the objections to consider an entirely new ground. As I have said, Dr Sorensen did not apply for an amendment on the basis that clause 1(a) is wide enough to encompass this additional ground. It is my view that clause 1(a) is nothing more than an ambit claim which does not even remotely encompass this additional ground.

(h) I might add that I accept also that if there had been an application (and there was not), it would not have been fair or reasonable for me to allow it since to do so would have caused substantial prejudice to the Respondent for the reasons set out in clauses 139 to 143 inclusive of annexure D which are repeated as follows:

"139. If the issue and contention had been raised in the notice of contention or, for that matter, in opening address then the Commissioner would have presented a different case to the Tribunal.

1. Thus, for example certified copies of the notices of assessment under section 177 of the 1936 Act for the years of income from 1991 to 1995 inclusive may have been tendered to the Tribunal. Evidence may have been led as to whether the Applicants, or any of them, objected to their assessments in any of the years of income from 1991 to 1995 in respect of the particular, namely, the value of opening and closing stock in each year of income.

2. Evidence may also have been led by the Commissioner as to the precise date upon which the Commissioner became aware that the closing stock figure at 30 June 1995 contained write downs in respect of Aged Stock.

3. In particular expert accounting evidence would have been lead from Mr. McClintock as to the appropriateness of having a difference in amount between the value of closing stock for one year and opening stock for the next year. That is matter on which expert accounting evidence could and should have been adduced.

4. Because the Applicants did not raise the issue until the written submissions dated 30 April 2002, and because they did not properly make application for an amendment to their objections, the Commissioner is prejudiced because he would have run his case differently, and because he is denied the opportunity to adduce expert evidence directly on point."

I note in the context that it is clear that the costs incurred in particular by the Respondent have been high. Leaving aside the large number of hearing days, there were numerous days vacated. Moreover, the Respondent incurred large costs in order to prepare the Kosutic evidence; his cost of preparing submissions was also high. To expect the Respondent to be party to a reopened case in order to consider the implications of what was no more than an afterthought would have been grossly unfair.

(i) I was asked at the hearing to consider whether if such an application (for an amendment of the objection) had been made, and if it had been granted, or in the alternative, if it were encompassed by clause 1(a) of the objections I would (making all of these notional assumptions) have found for the Applicants so as to require the Respondent to increase the opening stock for the 1996 year up to cost.

19. (a) The Respondent has (in clauses 145 to 231 of annexure D) dealt at some length and in considerable (and indeed commendable) detail with the Applicant's fourth contention. In particular annexure D can be referred to for a history for all of the relevant legislation and including section 29 of the 1936 Act and both the preceding legislation and the succeeding legislation and being in the latter case the Income Tax Assessment Act 1997 ("the 1997 Act").

(b) In 1924 the precursor to section 29 of the 1936 Act appeared for the first time. I refer in this context to clauses 149 to 155 of annexure D; I include clause 155 only reading as follows:

"155. The following comment is made in the Report-

'The main principle expressed in this Division is that every trader, at the end of every income year, should bring in the value of his trading stock on hand, and that he shall have the option of bringing it in at its cost price, or the market selling price, or at its replacement price. In the following year trading stock should be brought in at the same figure as that given for the previous year.' (Emphasis added)"

(c) In relation to the 1936 Act I again refer to clauses 156 to 159 of annexure D. Dr Sorensen contended that words "Its value as ascertained under the Act" differ from the wording contained in both the predecessor provision and also the successor provision (in the Income Tax Assessment Act 1997) and that accordingly the value of opening stock must also be that "ascertained". Mr McGovern contended (in my view correctly) that the term "ascertained" is in effect a reference to "assessed".

(d) It is perfectly true that the 1997 Act Explanatory Memorandum provides in relation to section 70-40 of the 1997 Act (and see clause 160 of annexure D) that an amendment of the wording (when compared with section 29 of the 1936 Act) was to be made having regard to "some Board of Review decisions"; the relevant passage from the Explanatory Memorandum appears in clause 161 of annexure D as follows:

"161. 'Section 29 of the 1936 Act says that an items opening value is the value ascertained under the Act at the end of the previous year. There are some Board of Review decisions concluding that those words mean that the opening value must be what the previous years closing value should have been. If the previous years assessment cannot be amended because of time limits, its closing value will be different from the next years opening value. This will produce either a windfall gain or an unexpected loss for the taxpayer.

The rewrite avoids the possible problem. If one years closing value is amended, then the next years opening value will change to reflect that amendment. If the closing value cannot be amended, the next years opening value will still be what was recorded as the closing value. Subsection 70-40(2) supports this by ensuring that an items opening value is nil if the items closing value in the previous year was not taken into account at all.' (Emphasis added)"

I agree with Mr McGovern's contention that the problem is referred to as possible only and I also agree with his contention that the rewrite was made as a matter of abundant caution only.

(e) Dr Sorensen relied on the decision of Mr Cotes in 14 CTBR Case 10 which was decided some fifty years ago; he referred also to two further old Board of Review cases namely (1951) 1 TBRD case 106 and (1956) 7 TRBD case G33. I refer in this context to clauses 40 and 41 of annexure B reading as follows:

"40. The Commissioner's 1996 adjustment calculation set out in Ex A1 p.98 (TDoc 7 at 56) (a net adjustment calculation) shows that no adjustment was made for the Opening Stock as returned, that is, no account was taken of the difference between market selling value as returned and cost price - as was done in the 1997 adjustment. The failure to make that adjustment renders the 1996 calculation excessive: see 14 CTBR Case 10; see too (1951) 1 TBRD Case 106 at p.451-452, (1956) 7 TBRD Case G33 at p.191.

1. In Case 10, the Board decided that the value of the stock on hand at the beginning of the year of income must be a value ascertained in accordance with the provisions of s.31 and that the fact that the assessment of the immediately preceding year of income was not amended to give effect to a value adjusted in this manner was immaterial. In this connection, Mr R A Cotes (Member) said, at para 11 p.110-111-

"It was argued at the hearing that unless and until the assessment for 'the 1937 year' was amended, it was not possible for the Commissioner to substitute an altered stock figure as at the beginning of 'the 1938 year' for the purpose of making an amended assessment. In my view, s.29 presupposes that, in determining the stock value at the beginning of a year for the purpose of making an assessment of the taxable income for that year, the value of stock at the end of the previous year would have been correctly ascertained in accordance with the provisions of s.31. It is possible, of course, to make varying calculations of the aggregate value of stock on hand at any date, all of which would comply with the requirements of s.31; and, in my opinion, the true purpose of s.29 is to ensure that the particular aggregate value of stock at the close of any income year, determined in accordance with the provisions of s.31, is to be the value of stock adopted at the beginning of the following year. If, therefore, the value of stock at 31 August 1937 was incorrectly shown in the return for the year ending at that date, and it is possible to determine a substituted value in accordance with the provisions of the Act, that substituted value is the one to be taken to account in ascertaining the amount to be included in or deducted from the assessable income of the year ended 31 August 1938, irrespective of whether or not the assessment of the previous year is amended.""

I agree of course that Case 10 favours Dr Sorensen's contention.

(f) Mr McGovern referred me in particular to the decision (in New Zealand) of Kirkpatrick v Commissioner of Inland Revenue [1962] 13 NZLR 49 see in particular clauses 197 to 207 of annexure D reading as follows:

"197. In the Commissioner's submission, the decision in Kirkpatrick v CIR (1962) 13 NZLR 49 is indistinguishable and directly on point. It is the decision relied upon in Gunn's commentary for the proposition that the opening value "must correspond" with the value on hand at the end of the preceding year.

1. In that case the taxpayer, a sheepfarmer, adopted the simple expedient of representing to the Revenue that he had no unsold wool on hand at the end of each income year. Income was understated because part of his profit was represented in stock on hand. He had adopted the practice for ten years or more.
2. The subterfuge was discovered on his death in 1958 and the Revenue issued assessments back to the 1948 income year commencing on 1 April 1947. It seems the relevant New Zealand Act permitted amendment for ten years.

3. The question raised was, what was the value of his stock on hand (unsold wool) at the beginning of the 1948 year of income. The taxpayer's return for the 1947 year showed the value of closing stock on 31/3/1947 as "Nil". The taxpayer's 1948 return showed the opening value of stock as "Nil". However, the actual wool on hand at 31 March 1947/1 April 1947 was known, as a fact, to be £1842. The value of wool on hand at the end of the 1948 year was £2,505. The Revenue's assessing action for 1948 was to include the value of closing stock at £2,505 as income and subtract "Nil" as the opening stock as per the 1947 and 1948 returns (closing and opening values respectively).

201. Barrowclough CJ summarized the assessing action at page 50.7 as:

"the fact that the return for that year showed no wool in hand must therefore be conclusive evidence that on 31st March, 1947, the taxpayer had no wool in hand: that in other words, for the purposes of the Act, the taxpayer must be deemed to have no wool in hand on 31st March, 1947, even though we know that he had wool in hand worth £1842".

1. So too, in the Applicants' position. If Mr. Mitchell's write downs are inappropriate, the Applicants will have on hand as closing stock on 30 June 1995 and opening stock on hand at 1 July 1995 a higher value of Aged Stock.

2. Barrowclough CJ then set out sec 26 of the Act which corresponds to sec 177(1) of the 1936 Act. He relied upon the decision of Sir John Salmond in Anson v IRC (1922) NZLR 330 at 338 for the proposition "the assessments of the appellant in previous years, therefore, not having been objected to in the statutory time and manner, are conclusive against him."

3. At page 51.5 Barrowclough CJ reached the conclusion that the value of closing stock on 31 March 1947 was a particular of the taxpayer's return and was also a particular of the assessment which issued in conformity with that return. It followed by the equivalent of sec 177(1) that the taxpayer was "estopped from disputing" the assessment, for the 1947 year ending 31 March 1947, and all the particulars thereof (including the value of stock on hand valued at "Nil").

4. The learned Chief Justice then referred to sec 98(3) of the New Zealand Act (at page 52.5) which provision is relevantly indistinguishable from the terms of sec 29. It refers to "the value of trading stock ... to be taken into account at the beginning of any income year shall be its value as at the end of the last preceding income year."

206. Barrowclough CJ then concluded (at page 52.5) as follows:

"the Commissioner was bound by the statute to act on the basis that the value of the wool in hand at the beginning of that year was its value at the end of the preceding year i.e. as at 31st March, 1947. Its value then is conclusively deemed to be nil and I cannot see how the Commissioner could lawfully avoid taking it into account as being of no value at all on 1st April, 1947. This is precisely what he did and I am of the opinion that he was right. ...

[The Commissioner] was required by the statute to take the wool into account at the beginning of the year at the same value as it had at the end of the preceding year and both he and the taxpayer are estopped from saying that its value at the end of the preceding year was other than nil" (Emphasis added)

1. The decision in Kirkpatrick, and decision of the Sir John Salmond for the Court of Appeal in Anson, is correct and indistinguishable. The approach in those decisions is consistent, and in fact on all fours with, the decision of Lindgren J in Commercial Union Australia Mortgage (supra). It is true that Lindgren J does not use the expression "estopped". But his Honour specifically refers to sec 177(1) and says the later year assessment must be "not inconsistent" with the proposition the earlier assessments have been duly made."

(g) Dr Sorensen contends that Kirkpatrick (supra) should be distinguished because the wording in the New Zealand legislation differs from the Australian legislation and again focused on the words "as ascertained" in section 29.

(h) In my view the decision in Kirkpatrick (supra) is in point and the slight wording difference is not such as to cause me to agree with Dr Sorensen's contention that Kirkpatrick is not a valid authority.

(i) It will be noted that the New Zealand Court in Kirkpatrick (supra) specifically found that there was an estoppel in these circumstances. I agree with Mr McGovern's contention that the judgment of Lindgren J in Commercial Union Australia Mortgage Insurance Company Limited v Commissioner of Taxation (1996) 69 FCR 331; (1996) 96 ATC 4854 is in point and I agree in particular with what Lindgren J said ((1996) 96 ATC 4854 at page 4865) of that decision as follows:

"In any event, in accordance with the scheme of the relevant provisions of the 1936 Act which I attempted to explain earlier, CUAMIC's assessable and therefore taxable income for the year ended 30 June 1993 must be ascertained in a manner not inconsistent with the proposition that the assessments have been duly made in the earlier years."

(j) Dr Sorensen argued that the mere fact that there would be a windfall gain or a loss should not affect the matter and referred in this context to Henderson v Federal Commissioner of Taxation (Cth) [1969] HCA 14; (1970) 119 CLR 612. Lindgren J in Commercial Union (supra) dealt in terms with the judgment in Henderson's case (1996) 69 FCR 331 at pages 341 and 342 which reads:

"The present appeal must, however, be resolved in a manner which accords full effect to the High Court's holding in Henderson v Commission of Taxation (Cth) [1969] HCA 14; (1970) 119 CLR 612 in which Barwick CJ, with whom McTiernan and Menzies JJ agreed, said this (at 649):

''... there cannot be any warrant in a scheme of annual taxation upon the income derived in each year of taxation for combining the results of more than one year in order to obtain the assessable income for a particular year of tax ... Once it is decided that the partnership income derived in the year in question will be the net amount of its earnings of that year, it is, in my opinion, only the earnings of that year which can be included in the computation."

Henderson's case was a "change of basis" case: if the cash basis is properly applied in respect of the earlier period and the accruals basis in respect of the later period, any escape of tax is explained by the change and does not falsify the earlier assessment."

(k) The Respondent contended that the judgment of Fullagar J in Australasian Jam Company Proprietary Limited v Federal Commissioner of Taxation [1953] HCA 52; (1953) 88 CLR 23 should be regarded by me as being strongly persuasive even if, in this particular context, obiter. Fullagar J said at pages 26 and 27:

'It is on s. 31 that the present cases primarily turn. The section in terms allows to the taxpayer considerable freedom of choice. He may adopt one method of valuation for one part of his stock, and another method for another part. And he is not bound to adhere from year to year to any method of valuation for any part of his stock: he may change the basis as to the whole or any part of his stock from year to year at will. On the other hand, the section is imperative in that it requires him to adopt for each article of his stock one or other of the three prescribed bases of valuation. He is not at liberty to adopt some other basis of his own. And s. 29 requires that the value at which his stock is brought into account at the beginning of a year shall be the value at which it was brought into account at the close of the preceding year: In other words, the opening figure of any year must be identical with the closing figure of the preceding year.' (Emphasis added)"

(l) Annexure D then goes on to discuss the views of a number of textbook authorities. As appears from annexure D an overwhelming majority holds the view for which the Respondent contends, namely that there must be a strict correlation between closing stock in one year and opening stock in the next succeeding year. The only exception is the CCH Federal Tax Reporter paragraph [17-555] which oddly enough, does not refer to Australasian Jam (supra) or Kirkpatrick (supra) or other relevant cases.

(m) It seems odd to be told that a Board of Review case of fifty years ago should be preferred to superior court authorities which are in any event more recent. Of course I cannot do so, and do not do so.

(n) I refer also to clauses 220 and 221 of annexure D which are repeated in this decision as follows:

"220. It is instructive to note that the Applicants' written submissions, in a section other than dealing with the observations of Mr. Cotes, accepts expressly the Commissioner's contentions concerning sec 29. The Applicants have submitted in paragraph 12 as follows:

"Section 31(1) in terms allows the taxpayer considerable freedom of choice. In regard to the 3 available options, the taxpayer is not limited to adopting one basis only for all articles but may choose a different basis of value for different articles of trading stock. And subject to the overriding requirement of s.29 that the value at the beginning of the year must be the same as that adopted at the end of the previous year, the taxpayer is not bound to maintain the adopted basis or mix of bases in subsequent years." (Emphasis added)

1. Paradoxically, the authority cited in support of paragraph 12 by the Applicants is Australasian Jam Co Pty Ltd v FC of T [1953] HCA 52; (1953) 88 CLR 23 at 26-27 per Fullagar J. which is the very passage set out above and relied upon by the Commissioner."

20. I have said previously in these reasons that Mr Mitchell got into great difficulty over the integral nexus issue. I should say that in line with the judgment of Finkelstein J in Bob Jane T-Marts Pty Ltd v Commissioner of Taxation (1999) 99 ATC 4437 a retail price may have a bearing in certain circumstances on the wholesale price. If a retailer is obliged to discount an item he may seek to pay a lower price to his wholesaler. This will of course generally apply in an arm's length situation. I do not think it necessary for me to deal further with this aspect, which is referred to in these brief terms, only for the sake of completeness.

(a) This brings me to a consideration of the penalties imposed under sections 226J and 226X of the 1936 Act; those sections are set out in full as follows:

Penalty tax where shortfall caused by intentional disregard of law

(a) a taxpayer has a tax shortfall for a year; and

(b) the shortfall or part of it was caused by the intentional disregard by the taxpayer or by a registered tax agent of this Act or the regulations;

the taxpayer is liable to pay, by way of penalty, additional tax equal to 75% of the amount of the shortfall or part.

(a) under a shortfall section, a taxpayer is liable to pay additional tax because of a tax shortfall or part of a tax shortfall; and

(i) the taxpayer took steps to prevent or hinder the Commissioner from becoming aware of the shortfall or part;

(ii) if the shortfall or part was caused otherwise than by the taxpayer in a taxation statement treating an income tax law as applying to the taxpayer in relation to a matter or scheme in a particular way - the taxpayer became aware of the shortfall or part after a taxation statement by the taxpayer that was taken into account in working out the taxpayer's statement tax for the year and failed to tell the Commissioner about it, in writing, within a reasonable time of becoming so aware;

(iii) if the additional tax is payable under section 226G, 226H or 226J - the taxpayer was liable to pay additional tax under any of those sections in respect of an earlier year of income;

(iv) if the additional tax is payable because the taxpayer, in a taxation statement, treated a law as applying in relation to a matter or scheme in a particular way so that section 226K or 226L applied - the taxpayer was liable to pay additional tax under that section in respect of an earlier year of income in respect of which the taxpayer treated that law as applying in relation to that matter or a similar matter or that scheme or a similar scheme in that way;

the taxpayer is liable to pay, by way of penalty, further additional tax equal to 20% of the amount of the additional tax."

(b) Mr McGovern described Mrs Ciprian as a willing participant in the Mitchell system and that description was apposite. It must be remembered that Mrs Ciprian is a trained and educated person who actively pursued tax benefits. Mrs Ciprian said in evidence before me that the Mitchell system was conservative; she cannot have made that statement with any belief in its truth. She was asked if the Applicants discounted at retail level to the same extent that they discounted at the wholesale level. Her answer was "Not unless we absolutely had to otherwise the door would be shut". (TB 219). She had no answer to Mr Kosutic's findings and analysis.

(c) It must be remembered that the 1993 write-down commenced with a request by Mrs Ciprian to Mr Gibson as to whether it was possible to write-down stock for tax purposes.

(d) In November 1993 Mr Gibson wrote to his clients, and including the Applicants advising them that the Respondent was not prepared to "accept the sale of aged stock on or after 1 November 1993 at the revalued amount". Mr Gibson then went on to recommend that it would be possible to continue with the system through an independent valuation to establish true arm's length value of above aged stock.

(e) As the Respondent contends the letter of Mr Gibson in November 1993 calls for a careful and cautious approach. The reference to an independent valuation and true arm's length values were and should have been regarded as warning signs.

(f) I have said that Mrs Ciprian is an educated person with expertise in both valuations of jewellery and mathematics. She knew perfectly well that the stock as revalued was well below value and the Mitchell system was in no way a true and independent valuation of arm's length value. The fact that Jade must of necessity lose money and did in fact incur substantial losses through the Mitchell system should have told, and perhaps did tell its own story.

(g) In November 1993 Mr Gibson obtained a legal opinion from Mr A H Slater QC. Although Mr Gibson (oddly enough) was prepared to show that opinion, he was not prepared to supply it. Why not? Perhaps the caveat which contained in Mr Slater's opinion gave him cause for concern. A part of Mr Slater's opinion appears in clause 446 of annexure D; clauses 446 and 447 of annexure D read as follows:

"446. The opinion by Mr. Slater is in evidence as Exhibit PG07 to the Affidavit of Mr. Gibson. It is worth noting, in full, the caveat to the opinion as follows:

"I add the cautionary note that the foregoing advice is predicated upon the value adopted being an arm's length value. The circumstance that an independent valuer, having no business connection with the wholesaler and retailer other than his engagement to provide a valuation, and having appropriate levels of expertise and experience, provides a valuation of the jewellery for the purpose of fixing the transfer price, is potent evidence that the price adopted is an arm's length price and it may, of course, be the fact that the valuer is simply wrong; in a dispute, a Court or Tribunal might adopt in preference a higher value attributed to the goods by a valuer called by the Commissioner. As the many cases in which competing valuations have been assessed by Courts and Tribunals indicate, independent valuers acting in good faith may reach different figures. However, if the valuer selected is accepted by the Taxation Office as being indeed and independent valuer, I should not expect there to be any contest over the figures adopted by him.

In this regard, I would point out that the consistent use by taxpayers (especially a group of taxpayers having a common advisor) of but one valuer may both lead the Taxation Office to question his independence, and indeed imperil that independence: the prospect of continued work (and revenue) may afford an incentive to make valuations which are more rather than less palatable to the client. A panel of independent valuers, amongst whom the work is spread, is likely to be both more reliable and more acceptable."

1. Mr Slater's caveat could not be more direct, pointed and telling. There is, of course, no evidence that either any of the Applicants or their advisor, Mr. Harrison, actually read the Slater opinion. But nonetheless, it was, to the Applicants knowledge available on request."

Of course Mr Gibson knew perfectly well that the Mitchell system was so arranged that it flew directly in the face of the caveat. Mr Mitchell could not, as Mr Gibson knew, be described as independent in the manner recommended by Mr Slater.

(h) In February 1994, Mr Gibson obtained advice from Borough & Partners, solicitors; I refer in this particular context to clauses 448 to 453 (inclusive) of annexure D, which relate inter alia to that advice and which read as follows:

"448. On 3 February 1994 Mr. Gibson obtained advice from Borough & Partners (Exhibit DC20 page 75). This written advice was received by the Applicants. However, that advice in turn is subject to three specific caveats which set out in paragraphs five and six of the letter as follows:

"It should also be mentioned that the income tax concept of 'market selling value' has been considered upon a number of occasions by the Courts and has developed a relatively clear meaning. For example, it refers to the market selling value of the stock in the taxpayer's own selling market and not some other market. The Commissioner of Taxation also takes the view that selling expenses - i.e. costs which may be incurred in the future in effecting a sale of the goods do not come into the valuation of market selling value. You will appreciate from these comments that the Commissioner of Taxation might take issue with the amount ascribed to stock by an independent valuer upon the basis it does not reflect 'market selling value' in an income tax context.

It follows, therefore, that the adoption of the independent valuations proposed would not, subject only the above stated matters, be disputed by the Commissioner of Taxation. (We note again for completeness that the goods in question represent only certain stock lines and thus their sale at a loss should not result in an overall loss for taxation purposes being incurred by the wholesale entities. In the event such a loss were to be incurred, we understand you are aware of the various means by which this loss might be utilized)." (Emphasis in the original)

The Borough's advice is expressly qualified by reference to the sale in the taxpayers own selling market and not some other market, for example, a fire sale or an export market. It is also predicated on some specific items only being discounted and that no loss is disclosed at the wholesale level.

The Mitchell valuation is, of course, based upon a sale in markets that the Applicants do not trade in, namely, a sale back to wholesalers and a sale for scrap. The Applicants knew, or must be taken to have known, that they did not sell in those markets and that they could not satisfy the caveat. This is particularly so, given the "not" was emphasized in the Borough's letter i.e. "and not some other market".

Mr. Harrison understood the expression taxpayers own selling market to mean the wholesale selling market in which the Applicants operated (TB page 152.7).

Mr. Harrison also agreed that if 37 out of 40 stock items were reduced then perhaps "that doesn't tie in with that spirit" of the Borough's advise that the goods represented "only certain stock lines" (TB 154.2).

Mr. Harrison also understood that Borough's assumed that the wholesale percentage write-down would not result in an overall loss for taxation purposes being incurred at the wholesale level (TB 154.2). Mr Harrison was aware that the occurrence of such a loss at the wholesale level was precisely what happened in the Applicants' case (TB 154.3).

Accordingly, Mr. Harrison was actually aware of, and understood the implications of the three caveats in the Borough's advice, namely, the taxpayer's own market, certain items only written down, and there be no tax loss at the wholesale level."

Dr. Sorensen contended that the Borough's advice was not aptly characterised as a caveat at least so far as losses in Jade were concerned and more particularly having regard to the suggestion that those losses could be "utilised". I agree with Dr Sorensen's contention as to this aspect of the Borough's advice; it may be that Borough (although this is speculation only) had in mind that the Applicants could set off losses in Jade against their other income.

21. (a) The Borough's advice of course was obtained, many years ago, and in February 1994. In the course of Mr Harrison's evidence it was suggested to him that it would have been prudent to obtain an update. He agreed that that might have been desirable but it was not done.

(a) One can then only wonder at the fact that notwithstanding all of these cautionary developments which would have put any reasonable person upon his or her guard and despite the fact any ordinary and reasonable taxpayer would be concerned by all of the various warning signs, Mr Gibson in November 1994 wrote the "It's Time! Stock Revaluation" letter (referred to previously in these reasons).

(b) It will be remembered that Mr Gibson received fees directly commensurate with the level of write-down. The fact that in these circumstances he was prepared to recommend not only continued write-downs but in fact increased write-downs is truly astonishing.

(c) It was suggested to me in argument that Mrs Ciprian was doing no more than following advice from professionals and so that she and her partners should not be held responsible for following bad advice. There might be something in this contention if Mrs Ciprian was an untrained or uneducated person. She was not; she took the advice and followed it; in fact she did more than follow it; she not only originally solicited it, but even went beyond the high levels of write-down recommended by Mr Mitchell. And she did so not once, but twice. Moreover, the level of losses sustained by Jade should have been a cause of concern. Why having made these mistakes (twice) did she not seek to rectify the situation by advising the Respondent that she had erred in the level of write-downs and that amended assessments were for this reason required?

(d) In my view the Respondent has made out a strong case of intentional evasion within Taxation Ruling TR 94/4 and so that the penalty under section 226J was correctly and properly imposed.

1. (a) Section 226X(b)(i) of the Act applies if the Applicants took active steps to hinder the Respondent. The Respondent's contentions in this regard are set out in clauses 465 and following of annexure D.

(b) In particular the Respondent wrote to the Applicants in January 1998 advising that the practice of valuing aged stock was unacceptable. That letter advised:

"This office does not consider that the written down value of the stock on hand in the wholesale jewellers' books of account satisfied the above provisions. Therefore, if you have used the written down value for the calculation of your income, you are required to review your valuation for stock on hand as at 30 June 1996. Should you find that there has been an error or omission made in your calculation, you are requested to advise this office in writing by 27 February 1998. The disclosure of any errors or omissions should include the name and file number under which your business lodges a taxation return, and the amount of any adjustment(s) required. Also, please include a brief explanation of why the error was made." "

(c) The letter concluded with a note to the effect that voluntary disclosures would result in penalty reductions.

(d) The Applicants replied by letter dated 20th February 1998 as follows:

"Re: your letter of 29th Jan 1998. I am satisfied that no error nor omission was made in our calculation of income with regard to our stock on hand as at 30th June 1996." "

(e) The Applicants' letter dated 20th February 1998 was both unwise and disingenuous. The Respondent had put the Applicants on notice that the method was unacceptable and required the Applicants to review their valuation. The Applicants could have replied in a manner which specified that they had used the devaluation method and intended to adhere to it because they thought it correct. A suitable response could have taken the form suggested in clause 477 of annexure D. Mr Harrison thought that the reply was unwise (TB149).

(f) I note in this context that Mr Harrison's evidence did not materially affect the matter one way or another. It was suggested as I have said that it might have been wise to review the Borough's advice; he did not disagree. I gained the impression that he thought of himself as a small town accountant who should not contradict the views of his colleagues in the city.

(g) Mr Kosutic formed the view, that the reply by the Applicants in February 1998 constituted a statement to the effect that the Applicants were not using the write-down system and that he realised that this was not so only when he received a number of similarly worded replies; on the other hand it must be remembered that the Applicants were under no legal obligation to furnish the required information.

(h) The Respondent contends that the word "hinder" includes the concept of "to obfuscate". I can see no reason why this is so. The word "hinder" is not defined and so that resort must be had to its ordinary meaning.

In this context Butterworths _Australian Legal Dictionary (_Butterworths, Sydney, 1997) specifies that "hinder" means "to interfere with for the purpose of delaying a person or thing."

Stroud's Judicial Dictionary of Words and Phrases (6th edition, Sweet & Maxwell, London, 2000) specifies (not altogether helpfully for our purposes) that "hinder" means:

"A contest between rival claimants to tithes was not a "difference" whereby the making an award under the Title Act 1836 (c. 71) was "hindered" within s.45 (Shepherd v. Londonderry, 18 Q.B. 145).

Delay in loading a ship caused by the Canadian Wheat Board's decision to give priority to other ships was "hindrance beyond the charterer's control" within the terms of the charterparty (Reardon Smith Line v. Ministry of Agriculture [1962] 1 Q.B. 42).

A circular issued by the Minister of Health forbidding the circulation of a lawful newspaper in hospitals "hindered...freedom of expression" contrary to Part II, s.14(1) of the Malta (Constitution) Order in Council 1961 (Olivier v. Buttigieg [1967] A.C. 115)."

(i) The Explanatory Memorandum to the Taxation Laws Amendment (Self Assessment) Bill 1992 (to which resort may be had in terms of the Acts Interpretation Act 1901) states that:

"The first situation is where a taxpayer takes steps to prevent or hinder the Commissioner from discovering part or all of the tax shortfall [subparagraphs 226 X (b)(i) and (irrelevant)] This would include, for example, unreasonable delay by the taxpayer in responding to enquiries by taxation officers, or the taxpayer failing to attend an interview at a time previously agreed without a reasonable excuse. It would also include instances where the taxpayer destroyed relevant records, or colluded with other persons (after the relevant statement had been made) to conceal part or all of the shortfall."

(j) It must be noted that the Respondent relies on section 226X(b)(i) and no other subsection of section 226X of the 1936 Act. The "second situation" which applies for the purposes of section 226X(b)(ii) where the taxpayer becomes aware of an error and fails to notify the Respondent of that error (and see page 94 of the Explanatory Memorandum) would thus not appear to be relevant. (As to when the Applicants became aware of their errors in using the Mitchell system is not clear; if the errors were deliberate they were "aware" when the errors were made; if not and this is possible, they might perhaps have become aware when they were preparing their case).

(k) The conduct of the Applicants although hardly to be recommended (and in some respects reprehensible) does not appear to me to fit within any of the concepts of "prevent or hinder" pursuant to section 226X(i) contained in the relevant Explanatory Memorandum; although the various examples given differ quite markedly in degree of culpability, they all connote something active as opposed to something passive. It seems to me that what the Applicants did might properly and at least on one view be categorised as passive rather than active, precisely because they were not legally obliged to furnish the information in question. The letter in February 1998 could in my view be categorised as "stonewalling" and thus passive; it is not clear to me that it was couched in terms which entitled Mr Kosutic to form the view that the Applicants were representing that they were not using the Mitchell system. This being so, I do not think that it can be said that their conduct amounts to hindrance within section 226X(b)(i) of the 1936 Act and accordingly the penalty under this section (but not the penalty under section 226J) should be remitted.

23. I have deliberately not dealt with the evidence of Professor Walker and Mr McClintock because it is not necessary for me to do so. I note that neither party in closing oral submissions thought it necessary to deal with their evidence. I should say though that Mr McClintock's evidence was at all times clear, concise and intelligent and would have been accepted by me had it been necessary for me to do so.

(a) On the main issue, which is of course the question of whether the Applicants validly or properly valued stock in accordance with the market selling value, the Applicants must fail because the Mitchell system was so conclusively discredited.

(b) The 1996 year opening stock contention is not encompassed by the objections, and to allow an amendment at this time after all the evidence would be prejudicial and should not (if it had been applied for, and this is not the case) be allowed.

(c) Even if the Applicants had applied for an amendment and even if it had been granted, the result would not have been different.

(d) The "course of conduct" market selling value argument is untenable (and indeed ridiculous).

(e) The Respondent did not remove a right of election vested in the Applicants under section 31(1) of the 1936 Act.

(f) As to penalties, the penalties under section 226J of the 1936 Act were correctly imposed; however the penalties under section 226X(b)(i) of the 1936 Act are remitted.

25. Accordingly and excepting only that the penalties imposed under section 226X(b)(i) of the 1936 Act are remitted, the objection decisions under review are affirmed in full.

I certify that the 25 preceding paragraphs are a true copy of the reasons for the decision herein of Mr J Block, Deputy President

Signed: H Sim .....................................................................................

Date/s of Hearing 3, 4, 5, 6, 12,13, 16, 17 & 18 July 2001

Solicitor for the Respondent Australian Government Solicitor

ANNEXURE A TO DECISIONS JOHN CIPRIAN: NT1999/685-686

[Para's 26-30 not read; rest read without XXN: TC578.16] A4

Russell Harrison - affidavit sw. 27/4/00 [para 6 not read: TB130.4; 131.5] A7

Anthony Browne - affidavit sw. 3/4/00 [not read: TC578.12] A8

[read without XXN (TC578.23) on the basis agreed between

the parties; ie. that "insofar as she entered information into the

applicants' computer stock management system, [she was]

acting as the instrument of the applicants and upon the applicants'

instructions": letter from Dibbs Barker Gosling to AGS,

Letter dated 24/2/93 from Valuation Centre of Australia to Mr Gibson A17

Notes produced by Professor Walker dated 4/2/01 A18

Notes prepared by B Kosutic re interview with T Mitchell MFI 1

[minor corrections to para's 45, 47 and 75: TC515.4-24] R2

Profit & Loss Statement for period ended 30 April 1997

Fax from D Ciprian to P Stevens + 2 attachments R10

Supplement to "The Valuer", the journal of the National

Letter dated 18 June 2002 from Australian Govt Solicitor to

Letter dated 19 June 2002 from Dibbs Barker Gosling to

1. In the case of each applicant the amended assessments the subject of the present review relate to the income tax years ended 30 June 1996 and 1997. During the whole of the relevant income years the applicants were partners in a partnership, Jade Wholesalers ("Jade"), which during that same period, carried on business as a wholesaler of jewellery and other items.

2. The amended assessments include as taxable income an amount claimed by the Commissioner to be the applicant's share of the net income of the partnership. The amended assessments followed on from an adjustment made by the Commissioner to the value of the trading stock as returned by Jade for the 1996 and 1997 years.

3. In the 1996 and 1997 income tax returns for Jade, the value of trading stock on hand was in the case of most articles returned at cost price; in the case of the remaining articles the value was returned at market selling value. These remaining articles comprised articles that as at 30 June had been on hand for not less than 18 months (12 months in the case of watches) and had been written down in value ("Aged Stock").

4. The Commissioner adjusted the value of Aged Stock, returned at market selling value, to the cost price of that stock. The applicants contend that the Commissioner's adjustment and in consequence the amended assessments are invalid and therefore "excessive" within the meaning of s.14ZZK(b)(i) of the Taxation Administration Act 1953 ("TAA").

5. Penalties were also imposed. The applicants contend the penalties are invalid or excessive.

1. The relevant provisions of the Income Tax Assessment Act 1936 (the "Act") are sections 28, 29 and 31 (which fall within Subdivision B of Part III of the Act). However, more particularly the issue between the parties arises under s.31(1).

2. As at 30 June 1996 and 1997, s.31 was, so far as may be relevant, in the following terms:

"(1) Subject to this section, the value of each article of trading stock (not being live stock ) to be taken into account at the end of the year of income shall be, at the option of the taxpayer, its cost price or market selling value or the price at which it can be replaced.

(2) Where the Commissioner is satisfied, in relation to any trading stock of a taxpayer, that, by reason of obsolescence of, or any other special circumstances relating to, the trading stock, the value of the trading stock to be taken into account at the end of the year of income should be an amount, being less than the amount that is the lowest value that could be applicable under subsection (1), determined by the Commissioner to be the fair and reasonable value of the

the value of the trading stock to be so taken into account shall, notwithstanding any exercise of the option of the taxpayer under that subsection, be the value so determined by the Commissioner." (Emphasis added.)

"(1) Where a taxpayer carries on any business, the value, ascertained under this subdivision, of all trading stock on hand at the beginning of the year of income, and of all trading stock on hand at the end of that year shall be taken into account in ascertaining whether or not the taxpayer has a taxable income.

(2) Where the value of all trading stock on hand at the end of the year of income exceeds the value of all trading stock on hand at the beginning of that year, the assessable income of the taxpayer shall include the amount of the excess.

(3) Where the value of all trading stock on hand at the beginning of the year of income exceeds the value of all trading stock on hand at the end of that year, the amount of the excess shall be an allowable deduction. (Emphasis added.)

"The value of live stock and of each article of other trading stock to be taken into account at the beginning of the year of income shall be its value as ascertained under this or the previous Act at the end of the year immediately preceding the year of income." (Emphasis added.)

1. In Parsons Income Taxation in Australia (LBC 1985) p.792, the learned author writes in regard to the operation of the trading stock provisions:

"[14.1] Tax accounting for trading stock has been explained, in [5.23] - [5.26] and [12.1] - [12.3] above, as a hybrid of accounting for receipts and outgoings, and accounting for profit or loss. The effect of s.51(2) is that an outlay that is the cost of trading stock is an allowable deduction. The corollary that the gross proceeds of realisation of trading stock is assessable income is, however, merely implied. Allowing a deduction of an outlay that is the cost of trading stock would bring about an unacceptable distortion in the operation of the Assessment Act, were it not for the provisions of s.28. That section in its most common operation will negative the allowance of the deduction by bringing in a like amount as income, if the item of stock has not been disposed of by the end of the year of income. In effect, the deduction of cost is deferred till the year of income in which the stock is realised and there is a matching receipt of assessable income. In the result the taxable income comes to include a profit or loss arising from the dealing in the item of training stock.

[14.2] While this is the common operation of s.28 where stock remains undisposed of at year end, the provisions of ss.31 and 32 allow the taxpayer, in the exercise of options open to him, in effect to anticipate a specific profit or loss. Those sections bring in as assessable income at year end, not the cost of the item but its market selling value or, in the case of trading stock other than livestock, its replacement value. In most circumstances a taxpayer will only exercise an option so as to anticipate a profit that will be his income where there is a loss carry forward that he will wish to use before the period of carry forward expires. The exercise of an option to value stock undisposed of at year end at market selling value or replacement value will anticipate a specific profit if market selling value or a replacement value is greater than cost. A taxpayer will generally wish to exercise an option to anticipate a specific loss. The anticipation of the loss will minimise his tax liability in the year of income. The exercise of an option to value stock at market selling value or replacement value will anticipate a loss whenever market selling value or replacement cost is less than cost.

[14.3] The scope given by ss.28, 31 and 32 to anticipate a loss is an advantage that trading stock accounting gives to a taxpayer."

1. Section 28 in effect, vis-a-vis a single article of trading stock, defers deduction of the amount of the cost of the article to the year in which the article is realised and the proceeds are an item of income; s.51(1) and (2) allow a deduction for the cost of the article in the year of acquisition, and s.28 in that same year (if the article remains on hand at the end of the year) brings in the amount of that cost as an item of income - thus the deduction and the income offset each other. See Parsons [14.24].

2. Plainly under the cost price option (and whilst the item remains on hand) the tax outcome remains neutral until the disposal year when the proceeds are brought in as income. Thus the total net assessable income returnable in respect of an article of trading stock over the period from the year of acquisition to the year of disposal cannot exceed the proceeds of disposal - as appears from TABLE 1 at para 11 infra. Whether the value as ascertained under s.31 of an article of trading stock exceeds or is less than the amount for which it is sold, a settlement adjustment is automatically effected in favour of the taxpayer or Commissioner, as the case may be, in the year of disposal. Therefore accounting for trading stock income is ultimately wholly a timing issue.

Table 1 tracks the purchase of a single article of trading stock which is purchased in Year 1 and sold in Year 3 for $150. If the cost price is taken to be either $50 or $150 the Table shows the outcome where the value of the stock is returned at cost price or an amount which is less than or greater than cost price.

1. Section 31 in terms allows to the taxpayer considerable freedom of choice. In regard to the 3 available options, the taxpayer is not limited to adopting one basis only for all articles but may choose a different basis of value for different articles of trading stock. And subject to the overriding requirement of s.29 that the value at the beginning of the year must be the same as that adopted at the end of the previous year, the taxpayer is not bound to maintain the adopted basis or mix of bases in subsequent years:

Australasian Jam Co Pty Ltd v FC of T [1953] HCA 52; (1953) 88 CLR 23 at 26-27 per Fullagar J.

1. Section 31 is a machinery provision which confers an option upon taxpayers in determining the value of trading stock (Barina Corporation Ltd v FC of T (1985) 4 NSWLR 96 at 101F per Rogers J); the section is imperative in that it requires the taxpayer to adopt for each article of his stock one or other of the three options (Australasian Jam 88 CLR at 27.2). There is no provision of the Act which permits or authorises the Commissioner to elect which of the 3 options set out in s.31(1) shall apply in a given case, or to proceed to assess relying on an option other than that elected by the taxpayer. The paramountcy of the taxpayer's s.31(1) election is recognised by s.31(2) which makes "the value so determined by the Commissioner [pursuant to s.31(2)]" the "value ... to be taken into account at the end of the year of income", "notwithstanding any exercise of the option of the taxpayer under [s.31(1)]". As Latham CJ noted in Commissioner of Taxes (SA) v Executor Trustee and Agency Co of SA Ltd (Carden's case) [1938] HCA 69; (1938) 63 CLR 108 at 118, "If there is an imperative provision in the statute, the Commissioner is bound to obey it, and he cannot ... in effect repeal it in the case of any taxpayer."

2. Whether the Commissioner is permitted to proceed to assess on the basis of a s.31(1) option other than that elected by the taxpayer is not an issue raised in Australasian Jam, the leading authority on s.31(1). In that case the taxpayer returned stock on what the taxpayer argued was the cost price; the Commissioner's calculation of cost price was used in making the amended assessments.

3. In Australasian Jam the taxpayer company, in its income tax returns, stated the valuation of its stocks as having been made "at cost or under". The value adopted for each article of a particular category of trading stock (namely, jams, canned fruit, and tinplate) was in fact a "standard value" first established for that category approximately 30 years earlier. An argument that because the standard value when first established (30 years earlier) was based on cost the stock on hand in the years in question "could be said with truth to have been valued at cost" was rejected - Fullagar J commenting "[the asserted conclusion] does not seem to me to bear any relation to the real situation or to the actual requirements of s.31." (88 CLR at 31). In making amended assessments the Commissioner determined, in the case of jams and canned

fruit, a value representing "as nearly as possible actual cost" by an averaging methodology; and in the case of tinplate, the Commissioner, from figures supplied by the taxpayer, arrived at an estimated cost into store per base box (88 CLR at 28-29). On the evidence Fullagar J rejected the taxpayer's claim that the closing stock values stated in the returns conformed to what was required by s.31 (88 CLR at 30). His Honour, in the end, concluded that the taxpayer had failed to establish that any of the amended assessments was excessive (88 CLR at 30).

The Commissioner's calculation of the value of stock in Australasian Jam was not disputed by the taxpayer; whether the Commissioner was permitted to make the assessments as he did was not in issue. Although some of the Commissioner's calculations likely were not accurate, the Court noted that any error would likely be in favour of the taxpayer company and that "in any case, the Commissioner's figures were not disputed" (88 CLR at 29.2).

The value of the Aged Stock (Jade's stock) was returned on a market selling value basis as provided for by s.31(1), a fact known to and acknowledged by the Commissioner. In determining the taxable income of the partnership the value of the Aged Stock taken into account by the assessor was its value on a "cost price" basis.

Pursuant to s.28(1) the "value" of the stock that must be "taken into account" in ascertaining whether or not the taxpayer has a taxable income, is the "value" "ascertained under" Subdivision B.

In the present case the "value" falls to be ascertained under s.31(1). (The "value" of stock at the end of a year of income ascertained under s.31 is also the value of the stock at the beginning of the next year of income (s.29).) Thus, having regard to s.28 and s.31(1), unless the "value" of the trading stock is ascertained as prescribed by s.31(1) the "amount of the excess" otherwise determined in accordance with s.28 cannot by force of that provision be "assessable income".

There is nothing in s.31(1) that requires cost price or market selling value to be determined by some formal valuation performed by a qualified valuer of items of the kind comprising the stock. An honest estimate satisfies the requirements of s.31, even in the case of cost price (Australasian Jam 88 CLR at 30.8).

An amended assessment is "excessive" within the meaning of s.14ZZK(b)(i) of the TAA where as in the present case, the Commissioner has no statutory power to make the adjustments purportedly made: McAndrew v FC of T [1956] HCA 62; (1956) 98 CLR 263 at 271.10, 282.8-283; FC of T v Dalco [1990] HCA 3; (1990) 168 CLR 614, 621-622, 631.6, 632.6.

Alternatively, the value of the Aged Stock as returned was its market selling value at 30 June 1996 and 30 June 1997, as the case may be, and the amended assessments are invalid and therefore excessive within the meaning of s.14ZZK(b)(i) of the TAA to the extent of the adjustment made by the Commissioner to the amount of the s.28(2) assessable income as returned. Further, even if the Commissioner were permitted to adopt cost price as the value of Aged Stock in making the adjustment, the 1996 amended assessment is excessive in that the adjustment does not properly comply with s.29 of the Act and overstates the net adjustment by an amount of $137757: see paras 38 to 42 infra.

1. At all material times the term "market selling value" (which is not defined in the Act) was used in the Act in 3 subsections only, namely, s.31(1), s.32(1) and s.32A(2). In the Act as consolidated as at 1 January 1996 there were in excess of 240 subsections which used the term "market value"; in Subdivision B itself the term "market value" is used in s.31(5) and s.36(8). Even without examining the issue further, the proper inference must be that the terms "market selling value" and "market value" are not synonymous.

2. The value of trading stock for accounting purposes or as established in accordance with accounting standards, is not necessarily the same as market selling value for the purposes of s.31: Australian Tax Practice (Looseleaf) ("ATP") para [31/140] and see too para [31/125].

3. There are instances in which accounting principles may be relevant in determining income under the Act; but that is not so in every instance: FC of T v Citibank Ltd (1993) 44 FCR 434 at 443-448; 93 ATC 4691 at 4698-4702. It is clear that accounting standards do not govern Subdivision B. In FC of T v St Hubert's Island Pty Ltd (in liq) (1978) 138 CLR 210 at 228; 78 ATC 4104 at 4113 Mason J said-

"[O]ur statutory provisions specifically instruct us as to what constitutes assessable income and as to the items that shall be allowed as deductions from that income. The trading stock provisions contained in sec 28 to 36 are a case in point. Accounting principle and practice cannot prevail over them."

1. In Australasian Jam the taxpayer company argued in the alternative that the amended assessments were excessive because a valuation might have been made on the basis of market selling value, and a valuation so made would have shown far lower values of closing stock than those at which the Commissioner arrived. (The Commissioner had (apparently in the course of the investigation) given the company the opportunity, in respect of any lines which it considered were below cost, to submit a market selling value. It did not do so. (88 CLR at 39.5).) The argument, which Fullagar J viewed as based on an untenable foundation, proposed market selling value being ascertained "by supposing the whole [of the stock] to be offered for sale en bloc on the last day of the accounting period" (88 CLR at 31). Dealing with this argument, his Honour said-

"But it is not to be supposed that the expression "market selling value" contemplates a sale on the most disadvantageous terms conceivable. It contemplates, in my opinion, a sale or sales in the ordinary course of the company's business - such sales as are in fact effected. Such expressions in such provisions must be interpreted in a commonsense way with due regard to business realities, and it may well be - it is not necessary to decide the point - that, in arriving at market selling value, it is legitimate to make allowance for the fact that normal selling will take place over a period. But the supposition of a forced sale on one particular day seems to me to have no relation to business reality.... To attempt to arrive at market selling value on the supposition that the whole of the stock in hand must be offered for sale and sold on the last day of the accounting period is, in my opinion, to proceed on a wrong basis." (Emphasis added.) (88 CLR at 31-32)

1. Gobbo J in Parfew Nominees Pty Ltd v FC of T 86 ATC 4673 at 4677 stated "[market selling value] reflects the price at which the particular taxpayer may sell". It is submitted that the sense of "may sell", which is prospective, is "will likely sell". Market selling value refers to "a sale or sales in the ordinary course of [the taxpayer's] business - such sales as are in fact effected" (Australasian Jam), "the actual or hypothetical sale price to an actual or hypothetical purchaser" ((1953) 4 TBRD Case D65 at p.340 per Chairman Fletcher). The term market selling value contemplates, in respect of articles on hand at the balance date, the amount (which must be determined on the facts as known at the balance date: ATP para 31/11 citing Case A42 69 ATC 235) for which the taxpayer will in a notional sale on the balance date, likely sell the article in the ordinary course of the taxpayer's business: cf Taxation Ruling TR 93/3 para 19. This is wholly consistent with the scheme of SubDivision B which ultimately brings in as assessable income the amount of the proceeds of sale: see paras 8 to 11 supra.

2. In 1996 and 1997 Jade purchased stock from jewellery manufacturers and other suppliers which it then delivered to Allay Pty Ltd ("Allay") on consignment for retail sale to the public - occasionally wholesale stock was sold to other wholesale or retail entities. The relationship between Jade and Allay was structured on a basis approved by the Commissioner: see Streamlined Sales Tax Bulletin No 10: THE JEWELLERY INDUSTRY dated 12 October 1992, replaced by Streamlined Sales Tax Bulletin No 10: JEWELLERY from 1 September 1997; Pontifex Jewellers (Wholesale) Pty Ltd v FC of T (1999) 2000 ATC 4642 at 4644 para 4, 4647 para 13. Allay was, essentially, Jade's sole customer.

3. Aged Stock, whether sold to Allay or a third party, was always sold at the written down value. That had been Jade's regular method of trade during the period over which the revaluation system was operating, namely, from 1993 to the end of 1998 when they stopped the practice. The sales of Aged Stock by Jade to Allay, "such sales as are in fact effected" (Australasian Jam) are made at the written down value. The disposal by Jade to Allay was a disposal in ordinary course of Jade's business. Walsh J in Pastoral & Development Pty Ltd v FC of T [1971] HCA 41; (1971) 124 CLR 453 at 464 said-

"I do not assert as a general proposition that a sale by one company to an associated company upon terms that allow the latter to make a substantial profit and give the former less profit than otherwise it might be possible for it to make is never a sale in the ordinary course of the carrying on of the business of the former company. It is common enough that business is conducted in that fashion between associated companies, not by way of an exceptional and isolated transaction, but as a regular method of trading: cf Cecil Bros. Pty Ltd v FC of T [1964] HCA 82; (1964) 111 CLR 430."

See too Cecil Bros. Pty. Ltd. v. Federal Commissioner of Taxation [1964] HCA 82; (1964) 111 CLR 430 at 434.5.

The terms of s.31 make plain that the relevant stock is Jade's Aged Stock, and the "such sales as are in fact effected" (Australasian Jam) refer only to sales by Jade - as the Aged Stock is, vis-a-vis Jade, indisputably trading stock these articles in the hands of Jade have a market selling value (Barina Corporation 4 NSWLR at 105G). Sales by Allay are wholly irrelevant in determining the market selling value of Aged Stock in the hands of Jade as a wholesaler to Allay: see para 28 supra. The view expressed by Burchett J in Pontifex 2000 ATC at 4648 para 16, is perhaps apposite: "Much time was ... taken up in a minute examination of selling techniques of the retailers in the conduct of discount sales.... But I do think the retail selling methods employed have much to do with the wholesale transactions".

Historically, Aged Stock was always sold, and continued to be sold up to the end of 1998, by Jade at the written down value. That amount is in the circumstances of this case properly the market selling value - to use a higher value basis such as cost price is to deliberately overstate the income and produce a circumstance that will not be rectified until the relevant items of Aged Stock are in fact disposed of: see paras 8 to 11 supra. (Due to misunderstanding on the part of Mrs Ciprian, Aged Stock was not in fact written down to the full extent recommended by Mr Mitchell.)

The percentage write downs determined by Mr Mitchell, were not determined in the course of a "valuation" of closing value of Aged Stock at balance date. The writing down occurred over the course of the income year and so produced a market selling value for the time being and that was adopted as the price for which Jade sold Aged Stock. The closing value returned as at 30 June 1996 and 1997 for Aged Stock was the written down value current as at that date - that would also be the highest amount for which that article would be sold.

The jewellery articles which Jade dealt in were ordinary jewellery with an average selling price when sold at retail by Allay of $125-$130. At 30 June 1996 Jade had 17,636 items of stock on hand with a total cost price of $793973 - i.e., an average cost price of $45; at 30 June 1997 Jade had 17,398 items of stock on hand with a total cost price of $751514 - i.e., an average cost price of $43.

If it be relevant (given Jade's long standing trading practice of selling Aged Stock only at the written down value), it is submitted that the procedure developed by Mr Mitchell for establishing a write down percentage for Aged Stock is not shown to be inappropriate or unreasonable by any evidence lead for the Commissioner. Neither Mr Alford nor Ms Foley have the experience or expertise that Mr Mitchell has in the wholesale/retail marketing of mass produced jewellery and related items. Ms Foley also agreed that with a reliable description, an experienced valuer could put a price on an item without inspecting the item. Mr Mitchell's evidence is that the descriptions in the stock sheets provided enough information for him to make the determinations he did (TC73 line 5).

That there is a phenomenon of "aged stock" in the mass-produced items jewellery business was confirmed by both Mr Gerard (TB80 line 35; 82; 131-132) and Mr Sechos. Empirically, Mr Mitchell's methodology was to start with the cost price of the item and then from research surveys conducted by registered valuers of wholesale and retail prices for mass produced items, determined a write down figure. A figure which Mrs Ciprian, a registered valuer, considered conservative.

As to Mr Mitchell's procedure when used to determine the taxable value of aged stock for sales tax purposes, the following statements by Burchett J in Pontifex seem apposite:

"But Mr Mitchell was not guided by the accepted techniques of valuation in attempting to solve the applicants' problem [the value of aged stock]. That would plainly have been impracticable, having regard to the number of items involved and the expense that would have been incurred." 2000 ATC at 4644 para 7.

"it would not have been sensible for the applicants to have incurred the cost of separate appraisal of all these items": 2000 ATC at 4646 para 10.

1. Mr Mitchell's write down percentage procedure was developed to address the problem of aged stock; there is no other currently accepted or alternative and practical procedure suggested by any valuer experienced in determining closing stock value of trading stock in the mass-produced jewellery wholesale/retail market.

1. Even accepting that the Commissioner is correct in using cost price to calculate the adjustment for trading stock, the net adjustment for 1996 of $148,794 is excessive in that the adjustment does not properly comply with s.29 of the Act and overstates the net adjustment by an amount of $137757.

2. (i) Using cost price as the value of stock, for the year ended 30 June 1996 the closing stock is $793973 and the opening stock is $607197. The s.28(2) assessable income is therefore $186776.

(ii) Using the written down value as the value of stock, for the year ended 30 June 1996 the closing stock is $645179 (ie., $793973 - $148794) and the opening stock is $469440 (ie. $607197 - $137757). The s.28(2) assessable income is therefore $175739.

(iii) The difference between the s.28(2) assessable income in (i) and (ii) is: $186776 - $175739 = $11037. The difference between the amount of the write-down applied to the closing stock value ($148794) and to the opening stock value ($137757) for the year ended 30 June 1996 is $11037.

1. The Commissioner's 1996 adjustment calculation set out in Ex A1 p.98 (TDoc 7 at 56) (a net adjustment calculation) shows that no adjustment was made for the Opening Stock as returned, that is, no account was taken of the difference between market selling value as returned and cost price - as was done in the 1997 adjustment. The failure to make that adjustment renders the 1996 calculation excessive: see 14 CTBR Case 10; see too (1951) 1 TBRD Case 106 at p.451-452, (1956) 7 TBRD Case G33 at p.191.

2. In Case 10, the Board decided that the value of the stock on hand at the beginning of the year of income must be a value ascertained in accordance with the provisions of s.31 and that the fact that the assessment of the immediately preceding year of income was not amended to give effect to a value adjusted in this manner was immaterial. In this connection, Mr R A Cotes (Member) said, at para 11 p.110-111-

"It was argued at the hearing that unless and until the assessment for 'the 1937 year' was amended, it was not possible for the Commissioner to substitute an altered stock figure as at the beginning of 'the 1938 year' for the purpose of making an amended assessment. In my view, s.29 presupposes that, in determining the stock value at the beginning of a year for the purpose of making an assessment of the taxable income for that year, the value of stock at the end of the previous year would have been correctly ascertained in accordance with the provisions of s.31. It is possible, of course, to make varying calculations of the aggregate value of stock on hand at any date, all of which would comply with the requirements of s.31; and, in my opinion, the true purpose of s.29 is to ensure that the particular aggregate value of stock at the close of any income year, determined in accordance with the provisions of s.31, is to be the value of stock adopted at the beginning of the following year. If, therefore, the value of stock at 31 August 1937 was incorrectly shown in the return for the year ending at that date, and it is possible to determine a substituted value in accordance with the provisions of the Act, that substituted value is the one to be taken to account in ascertaining the amount to be included in or deducted from the assessable income of the year ended 31 August 1938, irrespective of whether or not the assessment of the previous year is amended."

1. Details of the 1996 opening and closing stock figures and details of the net adjustment (namely, $137757) were available to the Commissioner at the time of making the amended assessment from at least TDoc 6 at 44 and 46 - which also provides the net adjusted closing stock for 1996 and the opening and closing stock for 1997, used by the Commissioner in TDoc 7 at 56.

1. In the case of each applicant a "tax shortfall penalty" was imposed at the rate of 90% pursuant to s.266J and s.226X(b)(i) of the Act. The applicants had at all times acted and relied upon professional advice (TB62.7; 92.5; 223.7; 227.2; 359 line 25; 361 line 20; 366 line 23; 367 line 18; 370 line 25; 371 line 5; 376 line 3). To the extent that any penalty is otherwise applicable, it should be remitted pursuant to s.227 of the Act.

1. Section 226J applies where the tax shortfall or part of it was "caused by the intentional disregard by the taxpayer or by a registered tax agent of this Act or the regulations." In the present application no provision of "this Act or the regulations" has been disregarded, intentionally or otherwise, by the applicants. Any disregard of the Commissioner's interpretation of the Act is not disregard of the Act.

2. Section 31(1) permits the taxpayer (relevantly here, the applicants as members of Jade: Division 5 of Part 3 of the Act) to choose market selling value.

3. The Commissioner's letter of 31 March 1998 (a re-addressed copy of the ATO letter of 29 January 1998) (the "Letter") asserts inter alia , that "incorrect values have been used to calculate the value of stock-on-hand at the end of the financial year for income tax purposes", and further-

"These issues resulted principally from a practice occurring within the jewellery industry that s not in accordance with either the Income Tax legislation or the Sales Tax Legislation. We refer to the practice of devaluing aged stock generally held with an interposed wholesale company prior to sale to the associated retail company."

"This practice is not in accordance with the stock-on-hand valuations prescribed in [s.31(1)]",

"This Office does not consider that the written down value of the stock-on-hand in the wholesale jewellers' books of account satisfy [s.31]".

1. The Commissioner does not point to any provision of the Act (as opposed to the Commissioner's interpretation of a provision of the Act) which was disregarded within the meaning of s.226J.

2. There is no provision of "this Act or the regulations" which stipulates the procedure by which the market selling value must be determined, or which requires that the market selling value of an article-

Χ shall not be greater than, or less than, or the same as, the cost price of that article (cf Parsons para 8 supra); or

Χ shall be determined only by a registered valuer, or a valuer with some formal qualification in that field; or

Χ shall be determined only after physical examination by the person making the determination

1. It is trite that the Commissioner's stated opinion or view as to the correct interpretation of a provision of the Act is no more than the Commissioner's opinion and is not necessarily the correct view of the law.

2. An interpretation announced by the Commissioner merely puts the taxpayer on notice that if the taxpayer wishes to continue to conduct his affairs according to a contrary interpretation , that could be disallowed in an assessment. The announced interpretation does not of itself render the taxpayer's interpretation wrong.

1. Section 226X(b)(i) applies where the taxpayer took steps "to prevent or hinder the Commissioner from becoming aware of the shortfall or part".

2. In this case it is asserted that the Commissioner was "prevented or hindered" by the applicants having failed to respond to the Letter.

3. After stating the issue, how it arises, and the Commissioner's view that "devaluing" aged stock is not permitted by s.31 (see para 46 supra), the Letter then states-

"Therefore, if you have used the written down value for the calculation of your income, you are required to review your calculation for stock-on-hand as at 30 June 1996. Should you find that there has been an error or omission made in your calculation, you are requested to advise this Office in writing by 18 April 1998.

The disclosure of any errors or omissions should include [taxpayer details], and the amount of any adjustment(s) required. Also, please include a brief explanation of why the error was made."

Under the heading WHAT YOU SHOULD DO, the Letter advises-

"Please forward your revised income tax stock-on-hand figures and/or your supplementary sales tax return to this Office by 18 April 1998.

Your reply should be addressed to [postal address details for M. O'Brien]

If you were not using any aged stock revaluation methods during the relevant period ... please contact Mrs Marilyn O'Brien on [telephone details] or Mr Boris Kosutic on [telephone details] as soon as possible."

1. In response to the Letter, Mrs Ciprian forwarded a supplementary sales tax return to the Commissioner under cover of a letter dated 7 April 1998 marked "Attention: Marilyn O'Brien", and a letter dated 20 February 1998 ("February letter") addressed to "Dear Ms O'Brien" and which reads:

I am satisfied that no error nor omission was made in our calculation with regard to our stock-on-hand as at 30th June 1996."

1. The express terms of the Letter requires a taxpayer who has used the "written down value" for the calculation of income to first review the valuation and then, if there had been an error or omission, to advise the Office "in writing". If the taxpayer was not using aged stock revaluation, then the express terms of the Letter required the taxpayer to contact one or other of the nominated officers by telephone.

2. The February letter is plainly a response to the request (see para 53 supra) made by the Letter. Given the terms of the Letter, in particular those parts recited in paras 46 and 53 supra, it is a reasonable and proper inference that the February letter is a response to the Letter by a correspondent who had used the "written down value" for the calculation of income. The evidence is that Mrs Ciprian is the author of the February letter. Further the communications between Mrs Ciprian and Marilyn O'Brien (Ex A14, para 6-7) confirm that "written down value" was being used by Jade and so constitute notice to the Commissioner of that fact, regardless of whether Mr Kosutic was aware of those communications: cf Foster v FC of T (1951) 82 CLR 606, 615, 619; see too National Trustees Executors & Agency of Australasia Ltd v FC of T (Cain's case) [1954] HCA 71; (1954) 91 CLR 540, 589.

3. Neither of Mr Ciprian or Mr de Jonge had any personal knowledge of the Jade administration - that was left entirely to Mrs Ciprian. Mrs Ciprian is patently an honest and credible witness; she wrote the February letter in answer to the Letter to disclose the situation. Mrs Ciprian accepted statements in the Letter regarding s.31 and believed she was entitled to write down using market selling value.

1. The applicants object to the whole of the evidence of Mr McClintock, on the ground of relevance. Mr McClintock does not hold himself out as a legal expert. Issues to do with the meaning of market selling value and the operation of s.31 are wholly matters of law. Evidence as to accounting standards and principles are not relevant: see para 25 supra.

2. Mr Kosutic's evidence is objected to on the ground of relevance and foundation. He is not accepted as an expert on the matters to which Ex R3 and R5 are directed. Retail sales by Allay are not relevant to market selling value of Aged Stock in the hands of Jade as a wholesaler. Events that occur subsequent to the balance date are not relevant: see para 27 supra. Plainly the write down percentages take into account information of sales experience which occurred prior to the relevant balance dates. Mr Kosutic directed himself to retail sales subsequent to the balance dates. Mr Kosutic has not established qualifications and experience to design, assemble and interpret a statistical model of the sort he has attempted.

Χ TC = Transcript for the period 30 January to 13 February 2002

IN THE ADMINISTRATIVE APPEALS TRIBUNAL ANNEXURE C

1. These submissions on the evidence are in addition to the Applicants' Submissions dated 30 April 2002 and filed in these applications (the "Submissions").

2. Apart from the matter of penalties, it is submitted that the context in which the relevance of evidence falls to be determined is as follows:

(i) The relevant provision of the Income Tax Assessment Act 1936 is s.31(1).

(ii) The Commissioner is not authorised by s.31 to substitute cost price for the Applicants' elected option of market selling value.

(iii) The relevant stock is Jade's Aged Stock on hand at 30 June 1996 and 1997.

(iv) The only relevant sales are wholesale sales made by Jade - its selling market in the relevant years is wholesale sales made exclusively (effectively) to Allay.

(v) Aged Stock has always been sold by Jade to Allay at their written-down value.

(vi) This is an income tax, not a sales tax, matter.

1. The relevant stock was generally of the ordinary and inexpensive kind, low value, generally mass produced - in 1996 and 1997 the average wholesale cost of all stock was about $44; their average retail price in retail sales by Allay was $125-$130. The biggest selling items in jewellery, were silver earrings, silver chains, gold earrings and gold chains - a pair of silver earrings sold from $20 to $60, and gold earrings from $39 up to $200.

2. The majority of the jewellery industry sells mass produced items. The fact that aged stock (in the mass-produced jewellery industry) is difficult to sell is confirmed by the evidence - only about 11 % of Allay's total retail sales comprised Aged Stock. The view that "ageing" affects the value of such stock is confirmed by Mr Gerrard, and Mr Sechos as well as Mr Mitchell and Mrs Ciprian.

1. Mr Mitchell has substantial and significant experience in determining wholesale and retail values of articles in the jewellery industry in particular the medium value mass-produced items and also the whole range of giftware, EPNS silverware, pewter, leather goods, porcelain, trophies and the standard jewellery items.

2. To determine an appropriate write-down percentage, Mr Mitchell utilised marketplace surveys (conducted by registered valuers) for both the wholesale and retail sector in

respect of medium value mass-produced items to obtain prices being charged for the commodities and discounts given at both wholesale and retail level. He knew the suppliers, the types of material used, the markups and so could work out the cost price of the various jewellery items. In the case of giftware, the value was taken from surveys of wholesalers and distributors that had been conducted into the general practice of handling this kind of material over a period of time Mr Mitchell also determined in regard to markup factors that at the wholesale level there was no difference in markup in the various the States. "If the market stays pretty much the same the percentage figures would remain pretty much the same".

1. The survey was also to establish the quality of merchandise actually being traded generally and to help substantiate or not the figures that are issued by the Valuing Council - and that was the starting point for his assessments. The survey information was then applied to the wholesale cost of the goods to be examined. Being familiar with the kinds of goods in question, the suppliers, the quality and materials used, the minimum information Mr Mitchell required to make his assessment of write-down percentage was the description of the department and the wholesale cost price of the item.

2. Mr Mitchell made a write-down percentage assessment in each of 1993 and 1995. Mr Mitchell's evidence is that he could properly come to a conclusion (as to write-down percentage) on the basis of the information on the stock printouts. And further, his belief is that there was no reason to change the write down percentages arrived at in 1995 for the closing stock value on 30 June 1996 and 1997.
3. The specific valuation procedures set out in the so-called Silver Book, have no direct application to the present matter - none of those procedures deals with closing value for income tax purposes of a wholesaler's stock. The procedure developed by Mr Mitchell to arrive at a market selling value for Aged Stock is empirically consistent with the Silver Book procedures, in that a determined percentage write-down is applied to a base figure, namely, cost price.

4. In producing write-down percentages for Aged Stock Mr Mitchell regarded himself as having made a commercial assessment not a replacement valuation of the item - a valuation is a more formal procedure. According to Mr Alford, arriving at a value by "scientific approach" is not always possible; in certain cases "market knowledge is going to be as if not more important" than the Silver Book procedure - "market knowledge" is "knowing what things are sold for" and is obtained "by being involved in the business of valuation, talking to people, observing, seeing what things are sold for".

5. There are very few registered valuers who have the experience and expertise of Mr Mitchell in wholesale and retail stock values. Neither of the registered valuers (namely, Mr Alford and Ms Foley) called for the respondent claim any, or any significant, experience in determining wholesale trading stock values.

1. If the whole of the Ex R5 and R3 are not disregarded, then the following paragraphs should be excluded on the grounds indicated. (In Streamlined Sales Tax Bulletin No 10, relating to jewellery, the Commissioner refers to "interposed wholesalers" but does not use the expression, interposed captive wholesalers: cf Ex R5 at e.g., para 2.)

1. Mr Kosutic seeks to draw conclusions from the various so-called Results Analyses ("RAs") prepared by himself and Mr Petaro. Mr Kosutic is not presented (and is not accepted by the Applicants) as an expert on matters purportedly going to or going to the production of or reliant on the RAs. The only qualifications or experience cited as enabling him to produce and interpret the RA models are studies at University for an undergraduate degree completed in 1982 in subjects which he could not name and at a basic course level only; no previous experience of producing models such as the RA models or at all is cited or offered.

2. Nowhere in his evidence does Mr Kosutic validate his methodology in matters such as best practice, or reliability to demonstrate that his reasoning and assumptions proceeded on a sound or proper premise. Apart from Mr Kosutic's lack of qualifications or experience in this area, the indicators of poor and unreliable methodology and practice include-

(i) There was no consultation with a registered valuer experienced in closing stock values for income tax purposes or at all prior to or at the time of preparing the RAs.

(ii) Photocopy material was relied on when the original (which was of poor quality) was available - which lead to the making of at least one series of errors that was identified.

(iii) Mr Kosutic had no experience in stock or any other aspect of the jewellery industry yet did not seek from the Applicants any explanation of what each of the various figures and amounts in Jade's records represented. Mr Kosutic was not aware that Aged Stock was sold by Jade to Allay at the written down value only.

(iv) Mr Kosutic had no knowledge of how the Jade or Allay business operated - he visited the business premises once and then for only "a day and a little bit" to obtain stock and sales "prints" records.

(v) No explanations were sought of the Applicants in regard to the records of, e.g., an entry which on its face suggested an article had a retail cost of 1 cent, or an entry which showed some stock sold after 30 June 1996 that did not appear in closing stock at 30 June 1996;

The Applicants contend (for income tax closing stock purposes) that retail sales by Allay have no relevance in determining the market selling value of Aged Stock sold by Jade in its selling market, namely, wholesale sales to Allay. Thus RAs which deal to any extent with Allay's retail sales are not relevant to this case. Apart from not being relevant, these RAs also bear indicators of poor and unreliable methodology and practice, for example:

(vi) Discounts allowed by Jade in sales to Allay are compared with discounts (calculated from sales records) allowed by Allay in retail sales. But there is a distortion in the comparison because Mr Kosutic was unaware that the selling price recorded by Allay was not always the "true" selling price - in those instances the selling price was much lower. These were cases where some further service was required such as fitting a watch band or sizing a ring (which could include adding further metal etc); the practice was that the discount that would otherwise apply was reduced or removed and the service provided notionally at no charge - rather than leaving the discount in place and charging separately for the service. (This fact necessarily renders invalid any RA which, when comparing Jade's and Allay's discounts and sales, treats Allay's recorded selling price as the "true" selling price: see para 14(ix) infra.)

(vii) 0% and 100% writedowns of Aged Stock were ignored in statistical analyses; it is axiomatic that to exclude those writedowns is to ignore items which are part of the total sample (Aged Stock) and so must necessarily invalidate the process.

(viii) The ignoring of part of the sample group (Aged Stock) occurs also in the models described by paras 17 and 18 of Ex R3. Para 17 of Ex R3 purports to set out the relative percentage between "new stock" and "aged stock" on the basis of a total stock holding of 15,637 items for the year ended 30 June 1996 and 14,990 items for the year ended 30 June 1997. However, the number of items of stock for each of those years was in fact 17,636 and 17,398 respectively. The sample and analysis is further distorted by (in para 18) the calculation of a relative percentage for 1996 after excluding stock held in Katanning.

(ix) Mr Kosutic's calculation to show that about 50% of Aged Stock is sold at full ticket price at retail by Allay (an assessment that does not take into account that the sale price may include service fees: para 14(vi) supra) does not support any meaningful conclusion. For income tax purposes dollar amounts not numbers are the meaningful measure - a matter which Mr Kosutic does not dispute. In terms of dollar value, 19% of Aged Stock is sold at full ticket price at retail by Allay ie., 81% is sold at a discount - a result which is consistent with Mr Gibson's evidence of the experience of other interposed wholesalers in 1996 and 1997.

(x) In any event, that 50% (by number) of Aged Stock on hand at 30 June 1996 was sold by Jade subsequent to that date has no relevance to an assessment of the writedown percentage as at 30 June 1996 because: first, what s.31(1) of the Act is concerned with is market selling value of stock on hand at that date; and second, a significant factor in assessing writedown percentage is that the Aged Stock being assessed is still on hand, i.e., has not sold - its being on hand is what indicates a writedown. And for the same reason, that Aged Stock has been sold by Jade during or after the year ended 30 June 1997 has no relevance to an assessment of the writedown percentage as at 30 June 1997 in respect of Aged Stock still on hand as at that date.

1. Neither Mr Alford nor Ms Foley has any relevant experience in determining closing value of trading stock for income tax purposes. Accordingly the Applicants' object to the whole of Ex R4 and Ex R1 on the ground of relevance.

2. Mr McClintock's evidence (Ex R2 and R12) is objected to on the ground of relevance. Responses to Questions 1 to 4 (paras 9 to 35: Ex R2) interpret terms or expressions, none of which is used in s.31 of the Act; further, the meaning of English language terms and expressions is not a matter of accounting expertise. All other responses address matters that have nothing to do with the interpretation or application of s.31 of the Act - in any event such issues are wholly issues of law and not matters of accounting expertise. Ex R12 responds to Professor Walker's affidavit Ex A13 filed as a response to Ex R2 - see too Professor Walker's further comment in Ex A18 and 19.

1. (i) Ex A8 (Anthony Noel Browne affidavit sworn 3 April 2000): The affidavit is not read or relied upon by the Applicants.

(ii) Ex A7 (Russell Harrison affidavit sworn 27 April 2000): Para 6 is deleted.

(iii) Ex A5 (Terry Mitchell affidavit sworn 26 April 2000): Para 30 is amended by Ex A15 (Terry Mitchell affidavit sworn 6 June 2001) para 3.

(iv) Ex A2 (John Ciprian affidavit sworn 28 April 2000): Para 2 is amplified at TB330-331.

(v) Ex A3 (Harry de Jonge affidavit sworn 28 April 2000): Para 2 is amended and amplified at TB99-101.

(vi) Ex A4(Malcolm Alderton affidavit sworn 19 April 2000): Paras 26 to 30 are not read or relied upon by the Applicants.

1. The following amendments should be made to the Submissions.

(viii) Para 31 - delete "plus the 6% uplift are" and insert "is".

(ix) Para 34 - after "determinations he did" insert "(TC73 line 5)".

(x) Para 35 - after "Mr Gerrard" insert "(TB80 line 35; 82; 131-132)".

(xi) Para 42 - after "opening and" insert "closing".

(xii) Para 43 - after "advice" insert "(TB62.7; 92.5; 223.7; 227.2; 359 line 25; 361 line 20; 366 line 23; 367 line 18; 370 line 25; 371 line 5; 376 line 3)".

(xv) Para 56 - delete "[affidavit, trans]" insert "(Ex A14, para 6-7)"; insert "by" before "Jade".

(xvi) Para 58 - delete "objected" insert "object"; substitute "McClintock" for "McLintock".

(xvii) Para 59 - after "27 supra" delete "are not relevant".

1. The three Applicants (the "Applicants") in these six (6) separate proceedings have applied to this Tribunal for a review of the decisions by the Respondent (the "Commissioner") to disallow their objections to amended assessments for income tax for the years of income ending 30 June 1996 and 30 June 1997.
2. By the amended assessments the Commissioner increased the value of the Applicants' trading stock on hand at the end of the years ended 30 June 1996 and 30 June 1997. The Commissioner's decisions disallowing the whole of each of the Applicants' objections are reviewable objection decisions, within the meaning of section 14ZQ of the Taxation Administration Act 1953 (the "TAA"). The Applicants' rights to bring the present proceedings arise under section 14ZZ(a)(i) of the TAA.
3. Each of the Applicants is a partner in the partnership styled Jade Wholesalers ("Jade"), which operates as a "captive wholesaler" to Allay Pty Ltd ("Allay"), a retail jeweller.
4. Each of the Applicants is a director of Allay (see historical company extract from records of ASIC, exhibit BK2 to witness statement of Boris Kosutic, 10 January 2001).
5. Jade purchases quantities of goods for ultimate sale by the three retail stores owned and operated by Allay. The goods fall within 40 separate categories including, inter alia, diamond rings greater than $500 (category 1), diamond rings less than $500 (category 2), eternity rings greater than $500 (category 5), eternity rings less than $500 (category 6), wedders (category 7), watches Seiko, Pulsar, Citizen, Classique (categories 12-15), gold jewellery (category 17), silver jewellery (category 18), fashion jewellery (category 19), opal jewellery (category 20), pearl jewellery (category 21), earrings (category 22), gold chains (category 23), charms and ingots (category 25), bracelets and bangles (category 27), clocks and barometers (category 29), leather (wallets) (category 30), crystal (category 32), silverplate (category 33), pewter (category 34), China and figurines (category 35), miscellaneous gifts (category 37), trophies (category 38), loose stones and metal (category 39), repairs (category 40) (see generally BK 90, 91 and 92 at folder 13 to the witness statement of Boris Kosutic).
6. Jade purchased quantities of goods from third parties at arm's length. The goods purchased by Jade were immediately placed on consignment with Allay and a sale by Jade of goods on consignment to Allay took place immediately prior to the retail sale of the goods by Allay to members of the public. Allay owned and operated three retail stores, two in Albany, Western Australia and the other in Katanning.
7. Jade sold its goods to Allay almost exclusively. The one exception was de minimus. Notwithstanding the assertion in Mrs. Ciprian's affidavit that Jade "sells predominately to Allay [however], it can, and it has previously made sales to other retail and wholesale entities" in fact, there were no such sales at all in 1996 (TB page 57.5) and one sale only to the House of Fraser occurred in the 1997 year (TB page 58.2; 58.4 and 58.9-60.1).
8. That one sale produced $7,185 revenue in 1997. The total sales by Jade in 1996 and 1997 were $865,980 and $662,948 respectively. Thus sales by Jade, other than to Allay, accounted for 0.46% of total sales over the two years (TB page 59.5). For practical purposes the one-off sale to House of Fraser was truly exceptional and can be disregarded. The sale of stock to the House of Fraser by Jade was, in fact, a situation where the two businesses purchased a consignment of stock together to get a better price from the supplier (TB 55.5).
9. Jade's business was referred to in the evidence as an interposed captive wholesaler of jewellery. The use of interposed and captive wholesalers in the jewellery industry was made popular by the so-called sales tax "safe harbour" (see Streamlined Sales Tax and the Jewellery Industry, in force from 12 October 1992 to 1 September 1997; and see Streamlined Sales Tax Bulletin No. 10: Jewellery, in force from 1 September 1997). The safe harbour applied where non-arm's length sales of jewellery were made to an associated retail entity; that is:

(a) a so-called "wholesale" entity was interposed between a genuine wholesaler and a retail entity;

(b) the interposed entity was associated with or "captive" to the retail entity in that the retail entity dictated the circumstances or occasions when sales of jewellery would be effected by holding the goods on consignment and arranging for the wholesale sale to take place immediately prior to the retail sale;

(c) the purported tax advantages of the above structure were that the last wholesale sale occurred between the interposed captive wholesaler and the retailer and accordingly the point in time at which liability for sales tax arose was purportedly delayed;

(d) under the safe harbour the Commissioner accepted that the last wholesale sale would be the sale from the interposed captive wholesaler to the associated retailer provided such sales were made on the basis of cost plus 6%. (The ATO publication Streamlined Sales Tax and the Jewellery Industry, in force from 12 October 1992 to 1 September 1997, provided for an uplift of cost plus 10%. The Streamlined Sales Tax Bulletin No. 10: Jewellery, which came into force from 1 September 1997, provided for an uplift of cost plus 6%. While there is no evidence on the point, it is not in dispute that in the relevant years (1996 and 1997) the Commissioner accepted an uplift of cost plus 6%); and

(e) the interposition of an entity such as Jade in the distribution chain was, prior to the introduction of a goods and services tax (GST), a reasonably common arrangement which facilitated the deferral of the payment of sales tax until a retail sale occurred, given that the liability for the payment of sales tax was imposed on the last wholesale sale.

1. In the year of income ended 30 June 1996 the Applicants' stock revaluation report disclosed closing stock at cost $793,972.69 and closing stock written-down value $645,178.53 (BK46 folio 328). The 1996 tax return for Jade, which included its financial statements, showed on its balance sheet, closing stock on hand $793,973 with a "Provision for reduction in valuation of stock (148,794)" (BK18 folio 187). The trading, profit and loss statement for Jade showed closing stock as $645,179 (BK18 folio 189) and that figure was carried into Jade's 1996 tax return (BK18 folio 185).
2. In the year of income ended 30 June 1997 the income tax return for Jade with attached financial statements, recorded opening stock as $645,179 and closing stock as $577,914 (BK19 folio 202, and compare BK18 folio 189). The balance sheet for Jade for the year ended 30 June 1997 showed closing stock on hand as $751,514 with a "Provision for reduction in valuation of stock (173,600)" (BK19 folio 201). The partnership tax return showed closing stock as $577,914 (BK19 folio 198).
3. The Applicants elected to value their trading stock on hand at the end of the years ended 30 June 1996 and 30 June 1997 under two (2) of the valuation methods provided for in section 31(1) of the 1936 Act, namely, cost and market selling value. They did so by identifying, broadly speaking, two (2) classes or categories of trading stock as follows:

(b) aged stock, which was valued at market selling value (Aged Stock).

1. There were, however, some items of trading stock which were valued at cost regardless of age, namely:

1. In the years of income ended 30 June 1996 and 1997 Jade sought to value its closing Aged Stock at "market selling value" which it did by applying write-down percentages to different categories and/or departments of stock according to the age of that stock. The write-down percentages were based on alleged valuation advice provided by Mr. Mitchell of the Valuation Centre of Australia.
2. Technically, the trading stock election disclosed in Jade's tax return was to value stock at cost (BK 18 page 185 & BK 19 page 198). The tax return annotation is "/C". As a matter of semantics all the stock was actually valued at market selling value (if it is accepted that the written down value was "market selling value" and that cost plus 6% was market selling value). It is more correct to say Aged Stock was valued at its written down value whilst new stock was valued at cost plus 6% in the return of Jade.
3. The Commissioner did not accept that Mr. Mitchell's write-down percentages for different categories and/or departments of stock according to the age of that stock, gave a true reflection of the market selling value of trading stock on hand at 30 June 1996 and 1997.
4. The audit activity which culminated in the issue of the amended assessments to the Applicants is referred to chronologically in the witness statement of Boris Kosutic (paragraphs 4, 5, 6, 7, 8, 9, 10, 12, 13, 14, 15, 16, 17, 18, 19, 20, 21, 22).
5. The adjustments made to the Applicants' assessments are referred to in the witness statement of Boris Kosutic at paragraphs 25 - 33 inclusive.
6. Each of the adjustments involved taking the written-down value of Aged Stock on hand as at 30 June 1996, 1 July 1996 and 30 June 1997 and adjusting the value of that Aged Stock by increasing its value to cost. This was because the Commissioner did not accept that Mr. Mitchell's write-down percentages gave a true reflection of the market selling value of trading stock on hand, and the Commissioner formed the view that the market selling value of the Aged Stock on hand was not less than its cost.
7. It is not in dispute that the market selling value, ascertained as a result of Mr. Mitchell's "valuation" exercise, and as returned by the Applicants, of stock classed as Aged Stock at the end of the years ended 30 June 1996 and 30 June 1997, was less than the cost of that stock.
8. The Applicants contend that the adjustments made by the amended assessments are invalid and therefore 'excessive' within the meaning of s.14ZZK(b)(i) of the TAA.

1. For the years of income ended 30 June 1996 and 1997 section 31(1) of the Income Tax Assessment Act 1936 ("the 1936 Act") relevantly provided:-

"Subject to this section, the value of each article of trading stock (not being livestock) to be taken into account at the end of the year of income shall be, at the option of the taxpayer, its cost price or market selling value, or the price at which it can be replaced".

1. Section 31(2) of the 1936 Act relevantly provided:

"Where the Commissioner is satisfied, in relation to any trading stock of a taxpayer, that, by reason of obsolescence of, or any other special circumstances relating to, the trading stock, the value of the trading stock to be taken into account at the end of the year of income should be an amount, being less than the amount that is the lowest value that could be applicable under sub-section (1), determined by the Commissioner to be the fair and reasonable value of the trading stock

The value of the trading stock to be taken into account shall, notwithstanding any exercise of the option of the taxpayer under that sub-section, be the value so determined by the Commissioner"

1. Section 31(3) of the 1936 Act relevantly provided:

"Sub-section (2) does not apply in relation to a taxpayer unless, by written notice ... the taxpayer notifies the Commissioner that he wishes that sub-section to apply."

1. In each instance there is a sale of goods by Jade to Allay which are not specific ascertained goods. The contract may set out the price (defined as a "money consideration") or provide for the manner in which it is to be ascertained. Alternatively the price may be determined by the course of dealing between the parties. There may, however, be a contract for the sale of goods although the contract does not fix the price or provide for its determination, or it is not determinable from the party's dealings. This is where the parties intend, actually or presumptively, that the buyer pay a reasonable price for the goods. What is a reasonable price is a question of fact. Generally, the market price is regarded as a reasonable price. In Wenning v Robinson (1964) 64 SR (NSW) 157 it was said by Asprey J (at page 169) that:-

"It seems to me not difficult in the context of this contract to draw the conclusion that when the parties to it agreed that the disposal of this type of stock in a going concern should be effected "at valuation" they meant no more than at a fair valuation, that a fair value should be paid for. In the absence of agreement between the parties as to what constituted a reasonable price in the particular circumstances, this would be a matter for the jury to determine on the evidence adduced before it ..." [citations omitted]

1. A contract for the sale of goods is a contract whereby the seller transfers or agrees to transfer the property and goods to the buyer for a money consideration called the price. The property in the goods is transferred or agreed to be transferred to the buyer by force of the contract of sale and without the necessity of any further instrument of transfer. In the case of specified goods the fundamental rule is that the property in the goods passes from seller to buyer when the parties intend it to pass. If the parties have not evinced any intention on the matter it is necessary to resort to the five prima facie rules provided by section 23 of the Sale of Goods Act.
2. The classic statement on market value by an Australian court was made by Griffith CJ in Spencer v The Commonwealth [1907] HCA 82; (1907) 5 CLR 418 at 431. This is the concept of the willing but not over anxious seller and the willing but not over anxious buyer. It is argued that the above judgment suggests an open market in which the buyer and seller are operating at arm's length.
3. In ascertaining "market selling value" no deduction can be made for selling costs: (1953) 4 TBRD 336, Case D 65 (also reported at (1953) 4 CTBR(NS), Case 5).
4. In Charrington & Co Limited v Wooder (1914) AC 71 it was held that the term "market" was to be construed with reference to the surrounding circumstances and that upon the true construction of the proviso the lessee was to be charged the fair market price as applying to tenants of tied houses and was not entitled to discount beyond the recognised rates. Lord Haldane at p. 79 said:

"What is the fair market price must depend on what is meant by the market, and this must be ascertained by reference to the facts proved."

He also considered the term "market" as a word covering a variety of possible forms.

1. In Edge v Commissioner of Inland Revenue [1958] NZLR 42; (1957) 11 ATD 270, the Court said that all of the surrounding facts must be looked at and from those it must be determined first what is the market to which the sale or disposition is referable, and secondly what is the price in such market. This is largely, if not entirely a question of fact (see also Earl of Ellesemere v CIR (1918) 2 KB at 735, 740).
2. Thus according to Edge (at 95) the proper inquiry is to ascertain the market on the day of sale. The 1936 Act does not stipulate any particular market and must be held to have in contemplation all markets upon which the taxpayer in its manifold activities might trade or dispose of goods as well as the various markets upon which trading stock is bought and sold.
3. There are three bases provided for in section 31(1) of the 1936 Act - cost price, market selling value or the price at which stock can be replaced - which are exhaustive and no other valuation method is acceptable.
4. It is not permissible for tax purposes to write off a percentage in anticipation of subsequent falling prices even though such a procedure might be prudent from an accounting point of view.
5. In Australasian Jam Co Pty Ltd v FCT [1953] HCA 52; [1953] 88 CLR 23 the Court emphasised that under section 31 it is imperative to require the closing value to be based on one of the three specified bases, not some standard or arbitrary value (at pages 30, 31.4). The emphasis is upon the need to deal with the reality of the situation based upon the actual stock on hand at the time. Fullagar J said that "market selling value" contemplates a sale in the ordinary course of a company's business - such sales as are in fact effected. Such expressions must be interpreted in a commonsense way with due regard to business realities. While it may be legitimate to make allowance for the fact that normal selling will take place over a period, the supposition of a forced sale on a particular day has no relationship to business reality (at pages 31-32).
6. In BSC Footwear v Ridgeway (Inspector of Taxes) [1972] AC 544 it was held that "market value" meant the price at which the stock could be expected to be sold in the market in which the trader sold. Lord Reid said (at page 553) a market is a place where there is sufficient trade to enable a market price at a particular time to be recognisable and where a trader can buy or sell almost immediately at that price.
7. If the Allay shops are the market then the Applicants have to wait until customers appear who want to buy those goods at the retail prices marked. It is only at that particular time that the sale by the Applicants to Allay occurs. If there is no market there is no market price.
8. Market selling value in section 31(1) contemplates the sale of trading stock effected in the ordinary course of business.
9. In (1951) 1 TBRD 485, Case No. 115 (also reported at (1951) 1 CTBR(NS), Case No. 120) the evidence showed that the potential value to the company of the goods as a whole was not less and was probably more than the actual cost price and therefore it was natural to think that the true market selling value would be at least equal to that potential value. The Tribunal considered that conceding that section 31 cannot mean cost or replacement value there is ample authority for the proposition that where for some reason there is no true market a hypothetical market is assumed. Market value assumes that the thing which is said to have the market value is something which somebody will buy and that there is a market in which it can be sold (at page 505).
10. In Bob Jane T-Marts Pty Ltd v FCT 1999 ATC 4437, Finkelstein J was called upon to consider the case of a taxpayer selling tyres by retail which it purchased from a related company. It sold the tyres through franchise agents and its own retail outlets. The taxpayer also sold goods by wholesale. Such sales were mostly made to a dealer at cost plus a set percentage plus sales tax. This price could be increased at the option of the taxpayer. In the course of the judgment Finkelstein J said (at 4448 paragraph 59):-

"it seems obvious, in my view, that the recommended retail price, and any special price that is set from time to time, is arrived at by taking into account the price at which Bob Jane Corporation is able to purchase its goods which in turn is dependent upon the volume of purchasers by Bob Jane Corporation. It is equally obvious that when it comes to determining the fair wholesale market value of the tyres, that determination must take account of the actual retail price. After all, what must be ascertained is the price for which the tyres could be sold to a notional retailer who sells those tyres for their actual retail price. In a typical wholesale market it is to be expected that the retailer will only pay a particular price for his stock if the sum of that price, the costs and expenses incurred in selling the stock and a reasonable margin is recoverable in a retail sale. It is for this reason that the determination of the notion of fair wholesale market price must take account of the actual retail price as well as the costs and expenses that would be incurred by the notional retailer selling the goods. In other words, a wholesale price will not be a fair wholesale market price if it is determined without regard to the state of the notional market into which the notional wholesale sale takes place and an aspect of that notional market is the actual retail price that is achieved on the sale of the goods.

1. Elsewhere in the same case (paragraph 87, page 4452) it was said that the assumption must be made for the purpose of determining the fair wholesale market price of the tyres that Bob Jane as a notional wholesaler is distributing its goods through its owner operated outlets and through its franchise agents.
2. At paragraph 89 it is said that in a competitive market the rate of return will vary from time to time and in a highly competitive market it will often be sales at a price where the vendor will not be able to recover his cost base let alone derive a profit.
3. In Commissioner of Taxes (SA) v Executor Trustee & Agency Co of South Australia (Carden's case) [1938] HCA 69; (1938) 63 CLR 108 at page 156 Dixon J said:

"The basis of a trading account is stock on hand at the beginning and end of the period and sales and purchasers"

1. As His Honour explains (63 CLR page 155) it is impracticable to estimate income from trade otherwise than by means of a profit and loss account and the computation of profits from trading "has also proceeded upon the principle that the profit may be contained in stock in trade". Only by taking account of stock in trade in the conventional way can a correct reflex of the trader's income for the accounting period be obtained.
2. Within the framework of the Australian tax system, with its assessment of tax upon the excess of assessable income over allowable deductions, it is the provisions of sections 28-31 which ensure such a correct reflex in the case of stock in trade.
3. If the amount of stock in trade has increased materially during the year then in effect sums which would have gone to swell the years profits are represented at the end of the year by tangible assets. To omit the stock in trade would give a false result.
4. The Act does not deal fully with the matter in which a profit and loss account is to be kept by a trader and in particular does not expressly provide as to the manner in which trading stock acquired during the year of income is to be brought to account.
5. In Curran v FCT [1974] HCA 46; [1974] 131 CLR 409 Gibbs J at page 419 said:

"Where the Act is silent recourse must be had to "common understanding and commercial principles" and that method must be adopted which will be "calculated to give a substantially correct reflex of the taxpayer's true income" - cf Commissioner of Taxes (SA) v Executor Trustee & Agency C/- South Australia Limited Ltd"

In the same case (Curran, at page 428) Stephen J said:-

"The Income Tax Assessment Act contains no prescription concerning the figure at which acquired stock is to be first entered in a trader's account, just as it is silent concerning the correct figure to ascribe to sales. In Ballarat Brewing Co v FCT [1951] HCA 35; (1951) 82 CLR 364 at 368 Fullagher J referred to this silence by saying that the consequence was that:

"The question does not depend upon any express provision to be found in the Act. It depends upon "the conceptions of business and the principles and practices of commercial accountancy". (Per Dixon J in Commissioner of Taxes (SA) v Executor Trustee in Agency Co of South Australia Ltd.).

"But the matter cannot I think be in doubt; what must be done is to adopt that method of accounting which is calculated to give a substantially correct reflex of the taxpayer's true income, due regard being had to the principles recognised or followed in business and commerce in the absence of any statutory provision to the contrary".

1. In Goldsborough Mort & Co Ltd v Maurice [1937] HCA 71; (1936-1937) 58 CLR 773 at 787.8 Latham CJ said:

"The value of a commodity is determined by what a purchaser is prepared to give for it. Expenses incurred in finding a purchaser, that is, expenses incidental to selling, should not be deducted when an estimate of value is being made, though such expenses are plainly a proper deduction when it is sought to ascertain, not the market value of the commodity, but the profit made by the vendor upon a sale."

1. Where there exists an established market for a particular form of property the price on that market will usually reflect accurately enough its value and there will be no occasion for postulating a hypothetical purchaser, instead the market price provides evidence of accepted offers made by actual purchasers. Listed shares provide a prime example of property having an established market and almost invariably the value of listed shares will be the current market value; that is, the market value is the price at which shares are being bought and sold on the exchange: Commissioner of Succession Duties (SA) v. Executor Trustee & Agency Company of SA Ltd & Ors [1947] HCA 10; (1947) 74 CLR 358 (Clifford's case) at page 361. The exchanges on which shares are listed quote both market selling prices and market buying prices.
2. It is necessary to look at the notional market into which the notional wholesale sale takes place and an aspect of that "notional" market is the actual retail price that is achieved on the sale of the goods. Allay buys the goods at the moment before it effects the retail sale. Accordingly, looking at business reality and the ordinary course of the partnership's business and such sales as are effected, dictates that in arriving at market value regard has to be had to the sales made in Allay's retail market.

1. The Applicants' written submissions advance six logically separate propositions or arguments as follows:

(i) The Commissioner has no statutory power to "proceed to assess relying on an option other than that elected by the taxpayer". Thus it is asserted that the Commissioner made an adjustment to "cost" where the taxpayer has elected "market selling value" and it is not open to the Commissioner to deny the Applicants their choice of "market selling value" and prescribe "cost" instead: submissions paragraphs 4, and 12 to 21. The Commissioner's response to this submission appears at paragraph 53 and following, below.

(ii) The 1996 and 1997 returns for Jade were correct and the value of Aged Stock on hand as returned was, as a matter of fact, its market selling value: submissions paragraphs 23 to 37. The Commissioner's response to this submission appears at paragraph 222 and following, below.

(iii) Neither Expert accounting evidence nor the accounting standards are relevant to the determination of "market selling value": submissions paragraphs 24, 25 and 58. The Commissioner's response to this submission appears at paragraph 98 and following, below.

(iv) The Commissioner should be required to notionally adjust the value of opening Aged Stock on hand on 1 July 1995 to cost: submissions paragraphs 38 to 42. The Commissioner's response to this submission appears at paragraph 109 and following, below.

(v) No basis exits for the imposition of penalties, or alternatively such penalties are excessive and should be further remitted: submissions paragraphs 43 to 57. The Commissioner's response to this submission appears at paragraph 426 and following, below.

(vi) The evidence of Mr. Kosutic is neither relevant nor has a proper foundation been made out as to his qualifications or experience to attempt to give that evidence: submissions paragraph 59. The Commissioner's response to this submission appears at paragraph 281 and following, below.

1. The argument advanced by the Applicants, outlined at paragraph 51(i) above (and which was to the effect that the Commissioner improperly denied the Applicants their election of "market selling value" and prescribed "cost" instead), is in the nature of a threshold or preliminary point. Accordingly it is appropriate to deal with that contention first.

Taxpayer's first argument - Commissioner improperly denied the Applicants' section 31 election and prescribed cost instead.

1. At paragraph 4 and again at paragraph 12 to 21 inclusive the Applicants assert that, to the knowledge of the Commissioner, the value of each article of trading stock on hand and taken into account at the end of the year of income was, at the option of the Applicants, in some cases the cost price of the trading stock and in other cases the 'market selling value' of that article of trading stock.
2. The Applicants contend that the election under section 31(1) of the 1936 Act to value selected trading stock at its 'market selling' value is the exclusive preserve of the taxpayer. The Applicants contend that it is beyond power for the Commissioner to dictate or prescribe to a taxpayer which method of valuation the taxpayer shall elect for particular articles of trading stock.
3. As summarised in paragraph 13 of the Applicants' submissions the Applicants state that 'There is no provision of the Act which permits or authorises the Commissioner to elect which of the three options set out in section 31(1) shall apply in a given case, or to proceed to asses relying on an option other than that elected by the taxpayer'. The taxpayer's election under section 31(1) is said to be paramount: submissions paragraph 13.
4. The Applicants contend that in making the adjustment to the value of aged stock and, as a consequence, issuing amended assessments to the Applicants, "the Commissioner adjusted the value of aged stock, returned at market selling value, to the cost price of stock": submissions paragraph 4 and "in determining the taxable income of the partnership the value of the Aged Stock taken into account by the assessor was its value on a "cost price" basis: submissions paragraph 17.
5. It is conceded that the Applicants elected to value Aged Stock at its purported 'market selling value' in the 1996 and 1997 tax returns for Jade.
6. The Commissioner did not prescribe to the Applicants that the value of their Aged Stock on hand shall be at 'its cost price' and did not violate the paramountcy of, or seek to set aside, in any manner whatsoever the taxpayer's election to adopt market selling value for its Aged Stock.
7. The onus is placed upon the Applicants to establish that the assessments are excessive. That burden is only discharged by the Applicant producing evidence establishing that the amount of its taxable income as assessed exceeds its substantive liability to tax: see Dalco v FC of T [1990] HCA 3; (1990) 168 CLR 614 at 621.
8. It is important therefore to identify with precision the evidence upon which the Applicants rely to establish that the Commissioner has set aside the Applicants' election and prescribed to the Applicants that the value of their Aged Stock is its cost price in lieu of the 'market selling value' of the Aged Stock.
9. Two pieces of evidence are relied upon by the Applicants.
10. Firstly, the Applicants rely upon the passage appearing in the Commissioner's statement of findings on material questions of fact, evidence and the reasons for the decision pursuant to paragraph 37(1)(a) of the Administrative Appeals Tribunal Act 1975 at T2 - 11 as follows:

'In this case the auditor has adjusted the partnerships' closing value for trading stock up to its cost price. The partnership is not entitled to write down its trading stock under any of the other valuation methods available to it.'

1. The second piece of evidence particularized by the Applicants occurs in the cross examination of Mr. Kosutic on 6 February 2002 at transcript page 410 lines 25 to 35. In context, the passage from the Commissioner's section 37 statement, as set out above, was read to Mr. Kosutic and the following exchange occurred:

Dr Sorensen: 'First of all, is this a document that you prepared?

Dr Sorenson: 'When it refers to auditor, in this case "the auditor has adjusted", do you take that as a reference to yourself?'

Dr Sorenson: 'Do you agree with which ever tax officer wrote this, as a summary of what you did, do you agree with what he or she has said there?' (Emphasis added)

1. That is the entirety of the evidence relied upon by the Applicants to establish that the Commissioner has set at naught the paramountcy of the taxpayers' election under section 31(1): see Applicants submissions paragraph 4 footnote 6 and paragraph 17 footnote 11.
2. In relation to the Commissioner's section 37 statement the Applicants have seized upon two sentences spread over a total of two and a half lines out of a document (excluding the penalty section) comprising 13 pages of single spaced typing.
3. The Applicants' reliance upon the two sentences identified above so as to establish the proposition that the Commissioner has set aside their election and substituted his election in lieu thereof is, with respect, misconceived and plain wrong.
4. The section 37 statement commences at T2 - 3 by posing the correct question, namely, 'has closing trading stock correctly being valued in accordance with section 31 of the Income Tax Assessment Act, 1936 ("the Act")'.
5. At T2 -10 the section 37 statement under the heading 'Valuation of Trading Stock for Income Tax purposes' observes as follows:

'However prudent it may be for accounting purposes it is not permissible for income tax purposes to write down the value of trading stock except to a bona fide replacement or market selling value. For income tax purposes trading stock can be valued at cost, market selling value or replacement price: sub section 31(1) of the Act. In special circumstances it can be valued at less than this due to obsolescence: sub section 31(2) of the Act.'

1. At the foot of T2 - 10 there is a discussion under the heading 'Cost Price' of what items are included within that cost price.
2. Thereafter that statement follows on at page T2 page 11 in the two sentences on the first two and a half lines which are the two sentences relied upon by the Applicants, in isolation, and set out above.
3. Most significantly, though apparently not relied upon by the Applicants, nor put in cross examination to Mr. Kosutic, is the closing sentence to the first paragraph on page 11 which immediately follows the two sentences relied upon by the Applicants. In its full context the first paragraph at T2 - 11 reads as follows:

'In this case the Auditor has adjusted the partnership's closing value for trading stock up to its cost price. The partnership is not entitled to write down its trading stock under any of the other valuation methods available to it. Details of other valuation methods, and reasons why the partnership is not permitted to use them to write down its trading stock, are discussed below.' (Emphasis added)

1. The last sentence, emphasised above, has not been referred to by the Applicants, much less put to Mr. Kosutic.
2. Immediately following on from the paragraph at the top of page T2 - 11 is a heading 'Market Selling Value'. Thereafter follows a discussion of the legal meaning of the expression market selling value. In the last paragraph of T2 -11 and the first paragraph on T2 - 12 the Commissioner, through his decision maker on objection has stated as follows:

'So, then, using the definition espoused by Fullager (sic) J. in the Australasian Jam case, what is market selling value for this partnership? The evidence reveals that there are no markets in existence where a jeweller with an interposed wholesale entity sells aged stock back to a supplier, or where it sends aged stock to a refiner for melting, or where it breaks up jewellery containing stone where it sells the stones to a precious stone merchant and sells the precious metal back to a refiner. To the extent of the auditors investigations it was revealed that there is no market in existence that deals in aged jewellery. These are not real situations for this partnership. At page 31 of the Australasian Jam judgment Fullager J was unable to accept a valuation that "does not seem to me to bear any relation to the real situation or to the actual requirements of section 31".

What is real to this partnership is that slow moving stock is usually discounted in its retail store (non arm's length retail entity Allay Pty Ltd) until it is sold and that the selling price, even after allowing for discounts, is nearly always greater than the original cost, let alone the written down amount. What is also real to this partnership is that if an item, such as an expensive diamond ring, cannot be sold in its retail store then the partnership, as a last resort, will break the ring down and remodel it or make a new one out of the diamond. The evidence suggests that the stone is never removed and sold to a stone merchant and the ring melted because this would result in too high a loss, again, when ultimately sold, the selling price of this newly manufactured item is likely to be greater than the total original cost of the piece combined with the cost of the alteration. This is the matter in which the ordinary course of this partnership's business is operated. The "market selling value" based on sale of trading stock affected in the ordinary course of this partnership's business would therefore be expected to be greater than the actual cost of the stock used in the business". (Emphasis added)

1. At T2 - 13 the decision maker on objection discussed two decisions of the Board of Review namely, (1953) 4 CTBR(NS) Case 5 (also reported at (1953) 4 TBRD 336, Case D65) and 14 CTBR Case 10. After discussing (1953) 4 CTBR(NS) Case 5 the section 37 statement at pT2 - 13 paragraph 2, stated as follows:

'By comparison, in this case the evidence shows that the actual or hypothetical sale price will almost always be greater than the actual cost price'.

1. At T12 - 13 at the fourth paragraph on the page the decision maker has stated as follows:

'In case number 10 it was not in dispute that the taxpayer used the cost price method to value its stock. Where the case with the taxpayer in case number 10 and the jewellers in general differs is that they have purported to use market selling value to value their trading stock. However as has already been discussed, it is clear that it is impossible for the jewellery taxpayers to use market selling value in a market that does not exist, where they trade in a market that otherwise does exist. The market selling value in relation to the partnership's retail market will generally be higher than cost given that almost all items of stock are ultimately sold for greater than cost. Therefore the next best valuation alternative available to the partnership is cost, and cost according to the outcome of case number 10 is the actual original cost, not an "adjusted cost" as was used by the taxpayer in that case.' (Emphasis added)

1. At T2 - 14 the decision maker on objection expressed his conclusion to the discussion of market selling value as follows:

'However, in this case as already discussed at length, the write down values obtained by the partnership are not genuine independent market valuations, they are merely stock assessments based on a non-existent market.'

1. Thereafter the section 37 statement discussed "Replacement Price". In the first paragraph at the top of the page on T2 - 15, in the discussion of replacement price, it is stated as follows:

'In this case the "hypothetical" values used to determine the partnership's value for closing stock bear no relevance to what it would have to pay in its buying market on the last day of the income year. It is considered that to purchase an item which is substantially similar, and available, the partnership would be required to pay an amount at least equal to, if not greater, than the original cost price of the stock it is now wishing to write down.' (Emphasis added)

1. Subsequently, the decision maker in his section sec 37 statement has discussed 'Obsolescence'. At T2 - 15 the decision maker has concluded in the last paragraph of the page as follows:

'In this case the partnership's write down of stock, based purely on age, is not acceptable for income tax purposes. The write down is akin to a "depreciation" or "chronological diminution" of the stock based on a pre-determined formula according to age. These are not valid reasons for the consideration of obsolescence. Put simply trading stock cannot be depreciated under section 54 as it does form part of a taxpayers' plant or articles. Moreover, as noted earlier, however prudent it may be for accounting purposes, it is not permissible for income tax purposes to write down the value of trading stock except to a bona fide replacement or market selling value. Clearly there are no bona fides in this case. Hypothetical values have no bona fides in terms of section 31 of the Act in cases where an actual market selling value can be readily ascertained'. (Emphasis added)

1. Contrary to the Applicants' contentions the Commissioner did not seek to deny to Jade or set aside Jade's election to value Aged Stock at market selling value.
2. Rather, as a matter of fact, the Commissioner has posed the question 'What is market selling value for this partnership?' (T2- 11 paragraph 6). The Commissioner has concluded that market selling value must be 'a bona fide replacement or market selling value' and not a hypothetical value in a non-existent market (T2-15).
3. What the Commissioner has then done is to pose the question, as a matter of fact, what is the real market selling value of Aged Stock and he has concluded that "slow moving stock is usually discounted in its retail store (non-arm's retail entity Allay Pty Ltd) until it is sold and that the selling price, even after allowing for discounts, is nearly always greater than the original cost, let alone the written down amount." (T2_-_12)
4. At T2 - 13 paragraph 4 the Commissioner has expressed the same conclusion as follows:

'The market selling value in relation to the partnership's retail market will generally be higher than cost given that almost all items of stock are ultimately sold for greater than cost.'

1. What the Commissioner has done, as a matter of fact, is to not accept the written down values supplied by Mr. Mitchell for Aged Stock and has arrived at a conclusion, as a matter of fact, that market selling value is at least equal to the cost price of the Aged Stock, if not more.
2. Of course, if the Commissioner had adopted a higher value for each article of Aged Stock than its cost price as its 'market selling value' then the taxable income for Jade Wholesalers would have been correspondingly further increased. Ordinarily, in the absence of, for example, carried forward losses or an increased rate of tax in the next income year, taxpayers would not elect to use market selling value if it is above cost price.
3. But that is not what has occurred here. All that the Commissioner has done is to arrive at the conclusion, as a matter of fact that the market selling value for the Aged Stock is not less than its cost price and that the write down values obtained by Jade Wholesalers from Mr. Mitchell were not a genuine or "real" market selling value.
4. It is not a case of the Commissioner denying to the Applicants the availability of an option or election open to them under section 31(1). The Commissioner has not said to the Applicants 'you shall select cost price as your election'.
5. The sec 37 statement when it is read in its entirety makes clear that the Commissioner, as a fact, concluded the market selling value was not less than cost. Two sentences taken out of context, do not establish so radical a proposition as the Applicants allege.
6. The cross examination of Mr. Kosutic goes no further than asking him "as a summary of what you did, do you agree" that you adjusted partnership closing value for trading stock up to its cost price. As a shorthand, or summary statement of the practical effect of the adjustment, then that is correct.
7. The allegation that the Commissioner has either denied to a taxpayer an election given to him as a statutory right or has prescribed to a taxpayer the manner in which the taxpayer shall exercise that statutory right is a very serious allegation indeed. It is an allegation that the Commissioner has acted improperly and in bad faith. Cogent and compelling evidence would be required.
8. Procedural fairness dictates that matters of impropriety and bad faith be squarely and unambiguously put to Mr. Kosutic. The rule in Browne v Dunn (1893) 6R 67; cf Allied Pastoral Holdings Pty Ltd v FCT [1983] 1 NSWLR 1 requires that such matters be put to the opponent's witnesses in cross examination. The basis of the rule rests in common fairness and the proper administration of justice. It is a basic obligation of procedural justice and not a mere rule of court procedure or evidence: Ghazal v Government Insurance Office of NSW (1992) 29 NSWLR 336 at 345A per Kirby P, with whom Mahoney JA and Clake JA agreed. These principles apply equally in the AAT under the rubric of procedural fairness: Kioa v West [1985] HCA 81; (1985) 159 CLR 550 at pages 582-584 per Mason J., Sullivan v Department of Transport (1978) 20 ALR 323 at page 342.3 per Deane J. and Australian Postal Commission v Hayes [1989] FCA 176; (1989) 23 FCR 320 at page 326.3 per Wilcox J..
9. The rule has particular application where serious allegations of fraud and impropriety are raised. As Kirby P observed in Ghazal (supra):

"In a trial the duty arises most clearly when what is being suggested is fraud and false testimony on the part of a witness. It is a well-established rule of our legal procedure that such contentions must be clearly identified and not raised accidentally, peripherally and nonchalantly in the course of litigation." (Emphasis added)

1. All that Mr. Kosutic was asked was, as a summary of what he did, did he agree that he had adjusted the closing value up to its cost price. The question was general, peripheral, imprecise and nonchalant.
2. Mr. Kosutic was not asked the specific questions 'did you set aside and treat as null and void the taxpayer's election for market selling value?'" He was not asked 'did you deny to the taxpayer its statutory right to select market selling value for Aged Stock?" He was not asked the proper concluding question 'did you prescribe to the taxpayer that it could elect cost price only for its Aged Stock'.
3. There is no proper basis at all, for the Applicants' contention that the Commissioner has denied the Applicants their statutory election or dictated that cost only was available to them. The sec 37 statement when read properly in context shows that the Commissioner asked the correct question: what is, as a matter of fact, the market selling value. The Commissioner's answer is clear. Market selling value is not less than cost.
4. In the alternative, even if the Commissioner has improperly over ridden Jade Wholesalers' election to value Aged Stock at "market selling value" (which is denied) then, it is well established by force of section 43 of the Administrative Appeals Tribunal Act the Tribunal has all the powers and discretions that are conferred upon the Commissioner in determining a taxpayer's objection: see Fletcher and others v FC of T 88 ATC 4834 at page 4846.
5. In exercising those powers and discretions the Tribunal is bound to consider the facts as they were proved in evidence before the Tribunal, making the decision which, upon that evidence and at the time was the correct or preferable decision to be made in considering the Applicants' objection.
6. In those circumstances it is open to the Tribunal on the basis of the evidence before it to determine, as a matter of fact, whether the Applicants' written down value for Aged Stock was a correct reflex or not of the market selling value of that stock. For the reasons set out elsewhere, Mr. Mitchell's write-down percentage procedure is not a proper measure of the market selling value of Aged Stock on hand.

Availability of Expert Evidence and relevance of accounting standards

1. The Applicants' submissions at paragraph 25 rely upon a passage by Mason J in FC of T v St. Hubert's Island Pty Ltd (in liq) (1978) 138 CLR 210 at page 228 to the effect that statutory provisions of the 1936 Act contain specific instructions as to what constitutes assessable income and what items are allowable deductions. More particularly in case of the trading stock provisions 'accounting principle and practice cannot prevail over them'.
2. So much can be conceded where the accounting system, standard, principle or practice relied upon, is inconsistent with the provisions of the 1936 Act itself.
3. For example, the accounting system advocated by the taxpayer in J Rowe & Son Pty Ltd v FC of T [1970] HCA 57; (1971) 124 CLR 421 concerning an instalment sale of white goods which were previously trading stock on hand to the taxpayer, would have removed the item of trading stock, being subject to the instalment sale, from the accounts as soon as the sale took place on the grounds that it was no longer trading stock 'on hand'.
4. However, the accounting system took no account of any revenue item until the instalments progressively came in over the succeeding years of income. The instalments comprised a part payment of the purchase price for the goods and an element in the nature of a financing charge or interest.
5. The effect of the accounting system was to claim an immediate deduction of the full cost of the stock when it ceased to be on hand, but to only recognise as income those instalments actually received. The practical effect was that if the business increased turnover at the rate of 20% per annum 'its method of accounting would ensure a continually falling annual income' per Menzies J at page 448.5. At page 450.8 Menzies J., with whom Barwick CJ agreed, said 'the taxpayer's main contention is opposed to ordinary principles of accounting, to the scheme of the Act and to authority. It must, therefore, be rejected.'
6. In this case the expert accounting evidence of Mr. McClintock and the accounting standards are not relied upon to prevail over the statutory provisions in sections 28, 29 and 31 in the manner contemplated by Mason J in St Hubert's Island or Menzies J in J Rowe & Son Pty Ltd.
7. Rather, the expert accounting evidence of Mr. McClintock and the accounting standards are available to assist the Tribunal, or for that matter a Court, to ascertain what is, as a matter of fact, the market selling value of an item of trading stock. The observations by the Full Court (Jenkinson, Einfeld and Hill JJ) in FC of T v Citibank Limited (1993) 44 FCR 434 at pages 443 to 448 are particularly relevant and appropriate. More particularly at page 444.8 their Honours stated as follows:

'Accounting evidence may also assist to elucidate the meaning of a commercial expression used in the Act and thereby to aid in determining an issue of characterisation. Thus accounting evidence was relevant in determining whether cars on floor plan constituted "trading stock" (citation omitted) and likewise a case could be conceived where accounting evidence could be relevant in determining whether a particular item of property was "plant" for the purposes of section 54 of the Act. So too it might be relevant in determining whether a particular receipt was on capital account (citations omitted).'.

1. In this case the expression 'market selling value' is a commercial expression used in the Act and accounting evidence is available to ascertain its meaning as well as assisting in establishing what is, as a matter of fact, the actual market selling value of an item of trading stock. 'Market selling value' was in fact a concept formerly used by accountants, as was noted by the Taxation Review Committee (the Asprey Committee) in its Final Report (AGPS, 1975), (at paragraph 8.137):

'Market selling value ceased to be an acceptable method of stock valuation for financial accounting purposes many years ago when it was replaced by the concept of valuation at 'net realizable value', provided it is less than cost.'

1. Moreover, the contention advanced by the Applicants in paragraph 25 and 58 that the whole of the evidence of Mr. McClintock is not relevant is directly contrary to the extra judicial opinion expressed by Justice Hill in his paper entitled 'Role and Limitations of Expert Evidence in Tax Cases' being a paper presented to the Taxation Institute of Australia in 1997. At page 20 to 21 his Honour has observed as follows:

The closer the taxation law comes to taxing trading profits the greater it might be expected that it would have regard to accounting concepts.

The very expression "trading stock" if requiring elucidation, is an expression used by businessmen and traders. Perhaps the reference to "trading" in the expression makes the point that the expression could have no meaning outside the area of trade. Evidence of the meaning of expression can thus be adduced and received as is illustrated by the decision in FC of T v Sutton Motors (Chullora) Wholesale Pty Ltd.

Where the issue is whether the work in progress is to be included in the trading account as trading stock, accounting evidence will be relevant. So, too, where the Tax Act permits trading stock to be valued at "cost price" accounting evidence will be accepted as to how that cost price is to be calculated: Phillip Morris Ltd v FC of T. There will be difficulty where the two conflicting views of direct versus absorption costing each has its own adherents. Duple Motor Bodies Limited v Inland Revenue Commissioners. Where the trading stock division specifies market value that too will be a matter for expert evidence.' (Emphasis added)

1. Accordingly it follows that the expert accounting evidence and accounting standards are admissible and relevant as to, firstly, the meaning to be attributed to the expression "market selling value", and secondly, in the ascertainment as a matter of fact what is the market selling value in the circumstances of the particular case. In the present matter expert accounting evidence is also admissible and relevant to test the appropriateness of the methodology used by Mr Mitchell to arrive at the purported market selling values of the Applicants' trading stock.
2. The substantive question as to the content of the standards and Mr. McClintock's evidence will be orally addressed.

1. At paragraphs 38 to 42 of the Applicants' submissions an argument is advanced that the 1996 amended assessment is excessive to the extent that it overstates the net adjustment by an amount of $137,757.
2. The basis for this submission is as follows. The Commissioner adjusted the market selling value for Aged Stock on hand at year end on 30 June 1996 up to an amount equivalent to its cost price. However, the Commissioner accepted Jade's return for the preceding year of income ending on 30 June 1995, with the closing value of Aged Stock on hand valued at what is purported to be market selling value, calculated in accordance with Mr. Mitchell's written down values. That closing value, being a purported market selling value, was carried over and accepted by the Commissioner, as the opening stock figure on 1 July 1995, being the first day of the 1996 year of income.
3. The Applicants contend that the Commissioner is obliged to adjust the value of Aged Stock on hand at 1 July 1995, being the beginning of the 1996 year of income, up to its cost, in conformity with the adjustment to cost, made to the value of closing stock on hand on 30 June 1996, being the last day of the 1996 year of income. This is notwithstanding that the return and assessment for the previous year of income ended 30 June 1995 is not amended in any manner.
4. The Applicant's argument is not available in respect of the 1997 year of income because the Commissioner has adjusted the closing stock figure as at 30 June 1996 and has carried forward that adjusted amount for Aged Stock on hand as the opening stock figure on 1 July 1996 being the first day of the 1997 tax year.
5. The basis of the of the Applicants' contention are the observations by Mr. Cotes in 14 CTBR Case 10 (at page 111) as follows:

'It was argued at the hearing that unless and until the assessment for 'the 1937 year' was amended, it was not possible for the Commissioner to substitute an altered stock figure as at the beginning of 'the 1938 year' for the purpose of making an amended assessment. In my view, Section 29 pre-supposes that, in determining the stock value at the beginning of a year for the purpose of making an assessment of the taxable income for that year, the value of stock at the end of the previous year would have been correctly ascertained in accordance with the provisions of Section 31. It is possible, of course, to make varying calculations of the aggregate value of stock on hand at any date, all of which would comply with the requirements of Section 31; and in my opinion the true purpose of Section 29 is to ensure that the particular aggregate value of stock at the close of any income year, determined in accord with the provisions Section 31, is to be the value of stock adopted at the beginning of the following year. If, therefore, the value of stock at 31 August 1937, was incorrectly shown in the return for the year ending at that date, and it is possible to determine a substituted value in accordance with the provisions of the Act, that substituted value is the one to be taken to account in ascertaining the amount to be included in or deducted from the assessable income of the year ended 31 August 1938, irrespective of whether or not the assessment of the previous year is amended. In my opinion, the Commissioner, in determining the assessable income, has just as much power to correct a valuation of stock at the beginning of an income year, by adding back a deduction wrongly made by the taxpayer from a value previously ascertained in conformity with Section 31, as he has to correct any other item necessary to be taken into account for the purpose of making an assessment and which has been shown to be incorrect' (emphasis in original).

1. The Commissioner contends that the Applicants' argument is wrong and should not be accepted on the following grounds:

(i) It is not open to the Applicants to advance the argument, without the leave of the Tribunal, as it was not raised in the Applicants' objections;

(ii) The Applicants' contention is contrary to the legislative history and intent of the provisions of sec 29;

(iii) The Applicants' contention is contrary to academic commentary on sec 29;

(iv) The Applicants' contention is contrary to general law concepts on opening and closing stock;

(v) The Applicants' contention is contrary to the general scheme of the 1936 Act and if accepted would cause anomalies to both taxpayers and the Commissioner;

(vi) The Applicants' are estopped from disputing the correctness of opening value of Aged Stock on hand; and

(vii) The Applicants' contention is contrary to the observations of Fullagar J in Australasian Jam Company Pty Ltd v F.C. of T. [1953] HCA 52; (1953) 88 CLR 23 at page 27.

The terms of the Applicants' objections, notice of contention, and opening address to the Tribunal

1. The argument contained in paragraphs 38 to 42 that the 1996 amended assessment is excessive because the 1996 opening stock should be amended in reliance upon 14 CTBR, Case 10:

(i) was not raised by the Applicants in their objections;

(ii) was not raised by the Applicants in their statement of issues and contentions;

(iii) was not raised by the Applicants' counsel in the course of his opening address to the Tribunal; and

(iv) the Applicants declined to amend their objections notwithstanding that the Commissioner put them on notice that an amendment was required.

1. The Commissioner contends that the Applicants are, in the absence of the leave of the Tribunal, limited to the grounds stated in their objections, which objections do not raise the relevant ground and leave to amend is, in any event, opposed by the Commissioner.
2. The Commissioner opposes any such amendment or proposed amendment to the grounds of the Applicants' objections. The Commissioner has at all material times conducted his case on the basis that the particular of the assessment comprised in the value of the Aged Stock on hand on 1 July 1995 at the beginning of the 1996 tax year was $469,440.
3. The Applicants' represented in their 1995 return of income that the value of closing stock on hand at 30 June 1995 was $469,440 (Ex R7).
4. Presumably, although they are not in evidence, assessments issued to each of the Applicants for the 1995 year of income on an unknown date, which assessments incorporated as a particular of the assessment a closing stock figure of $469,440.
5. Presumably, though there is no evidence before the Tribunal, the Applicants' were not dissatisfied with their 1995 assessments and did not represent to the Commissioner, by way of an objection, that their 1995 assessments were wrong in a particular, namely the value of closing stock on hand at 30 June 1995 of $469,440 was understated and should be adjusted.
6. In the Applicants' 1996 year return of income it was represented to the Commissioner that the value of opening stock for the 1996 year of income was $469,440 (1996 return of income Ex R7). The opening stock figure is a material particular of the 1996 return.
7. On 8 October 1996 original assessments issued to each of the Applicants on the basis of the returns as lodged (T3 - 21 in each respective "T" documents). Presumably, though there is no evidence before the Tribunal, the Applicants did not represent to the Commissioner, by way of an objection, that they were dissatisfied with their original assessments.
8. On 5 January 1999 the Commissioner issued to each of the Applicants a notice of amended assessment for the 1996 year of income (T9 - 60 for John Ciprian; T10 - 62 for Dianne Ciprian; and T9 - 60 for Harry De-Jonge).
9. Incorporated within those 1996 amended assessments by way of the sec 28 trading stock adjustment, was a material particular of the amended assessment issued to each of the Applicants, namely, that opening stock was valued at $469,440.
10. On 11 January 1999 each of the Applicants objected against the amended assessment issued to them for the 1996 year of income (T11- 64 for John Ciprian; T11 - 64 Dianne Ciprian; T11 - 63 Harry De-Jonge).
11. By those notices of objection the Applicants notified the Commissioner that they were dissatisfied with their amended assessments in respect of a material particular and accordingly objected against their assessment in that particular.
12. In making the amended assessments for the 1996 year of income the Commissioner amended the Applicants' original assessments in respect of a particular (section 14ZV of the Tax Administration Act "TAA") and that particular, that is, the value of closing stock on hand at 30 June 1996, was increased by an amount of $148,749 (T7 -56).
13. The Applicants' right to object against their amended assessment was by section 14ZV of the TAA in respect of 'alterations or additions in respect of, or matters relating to, that particular.'
14. The Applicants' by their objections were not dissatisfied with their assessments in respect of the particular, namely, the value of opening stock on hand on 1 July 1995 at $469,440.
15. Quite the contrary, the Applicants have, by their objections, positively represented to the Commissioner that the opening stock figure of $469,440 was correct and not the subject of any dispute or dissatisfaction. At paragraph 1(b) of the objection (T11 - 64 for Mr. & Mrs. Ciprian and T11 - 63 for Mr. De Jonge), each of the Applicants have stated as follows:

'John Anthony Ciprian ("the taxpayer") objects against the amended assessment of income tax based on income derived by him during the year of income ended 30 June ("the year of income") and notified to him by notice of amended assessment issued 5 January 1999 and contends that the amended assessment should not have been issued and should not be cancelled, withdrawn or reduced on the grounds that:

(a) The amount included in the taxable income by the amended assessment as being the taxpayer's share of the net income of the Jade Wholesalers (the 'partnership') (TFN 68 298 794) should be reduced to a loss of $2,864 or some amount less than $52934.

(b) the values of trading stock on hand at the beginning and end of the year of income as returned in the partnership return for the year of income ("partnership return") accorded with the requirements of sections 29 and 31(1) of the Act.' (Emphasis added)

1. On 12 October 1999 the Commissioner disallowed the Applicants' objections on the grounds raised in the objection (T13 - 70). Neither the Applicants' Statement of Issues, dated 16 February 2000, nor the Applicants' Statement of Facts and Contentions, dated 10 May 2000, raised as an issue, or a contention, that the 1996 assessment was in error in a material particular, namely, that the value of opening stock disclosed in the return of $469,440 should be increased by the amount of $137,757.
2. In opening address to the Tribunal the Applicants' counsel raised as an issue that the Commissioner had set aside the Applicants' election of market selling value and had prescribed cost as the only election under section 31(1) (see transcript 3 July 2001 page 28, line 40 to page 29, line 14).
3. The second issue raised by the Applicants' counsel in opening was a valuation issue as to the value of the Aged Stock on hand at 30 June 1996 and 1997 (transcript 3 July 2001 page 30, line 17 to 19).
4. The transcript at page 30, line 19 to 24 records the Applicants' counsel informing the Tribunal as follows:

'The second line really is valuation. Is this valuation permissible? Is there something wrong with it? Certainly we are following that line as the alternate basis. I don't know that there is any other dispute beyond that which is why a lot of material has been put in doesn't appear to go in valuation proper.'

1. The transcript on 3 July 2001 at page 31, line 12 records the Tribunal asking Counsel for the Applicants 'Does that conclude your opening address?' The Applicants' Counsel replied:

'I think that it is all I can put at this point other than on to the penalty aspect if I need to mention it'.

1. The Applicants ought not at this late stage be allowed to change fundamentally the nature of their objection to now indicate dissatisfaction with a particular, namely, value of opening stock on 1 July 1995. The Applicants have had ample opportunity, as set out above, and have eschewed the opportunity to amend their objections to raise it as an alternative ground, notwithstanding the Commissioner's invitation so to do on 18 June 2002.
2. Section 14ZZK(a) of the TAA provides that in a review by the Tribunal "the Applicant is, unless the Tribunal orders otherwise, limited to the grounds stated in the taxation objection to which the decision relates". Paragraph 1(b) of the Applicants' objection is specific. The value of trading stock on hand at the beginning of the 1996 year disclosed in the return is correct. Paragraph 1(a) of the objection stating the amount included in income should be some lesser figure than $52,934 does not state fully and in detail the grounds relied upon: sec 14ZU of the TAA.
3. If that ground had been raised at an appropriate time in, for example, the objections lodged on 11 January 1999 then, it is highly likely the Commissioner may have proceeded to amend the 1995 and earlier years of income, subject to limitation periods in section 170 of the 1936 Act.
4. If the issue and contention had been raised in the notice of contention or, for that matter, in opening address then the Commissioner would have presented a different case to the Tribunal.
5. Thus, for example certified copies of the notices of assessment under section 177 of the 1936 Act for the years of income from 1991 to 1995 inclusive may have been tendered to the Tribunal. Evidence may have been led as to whether the Applicants, or any of them, objected to their assessments in any of the years of income from 1991 to 1995 in respect of the particular, namely, the value of opening and closing stock in each year of income.
6. Evidence may also have been led by the Commissioner as to the precise date upon which the Commissioner became aware that the closing stock figure at 30 June 1995 contained write downs in respect of Aged Stock.
7. In particular expert accounting evidence would have been lead from Mr. McClintock as to the appropriateness of having a difference in amount between the value of closing stock for one year and opening stock for the next year. That is matter on which expert accounting evidence could and should have been adduced.
8. Because the Applicants did not raise the issue until the written submissions dated 30 April 2002, and because they did not properly make application for an amendment to their objections, the Commissioner is prejudiced because he would have run his case differently, and because he is denied the opportunity to adduce expert evidence directly on point.
9. If the Applicants are permitted to take the point, the Commissioner submits in the alternative that it is devoid of merit on the grounds set out above in paragraph 145 and following, below.

1. The issue in dispute concerns the treatment of the opening value of trading stock for the purposes of section 29 of the 1936 Act. The section provides:

"The value of live stock and of each article of other trading stock to be taken into account at the beginning of the year of income shall be its value as ascertained under this or the previous Act at the end of the year immediately preceding the year of income."

1. The initial trading stock provision was paragraph 14(a) of the Income Tax Assessment Act 1915-1921. It provided:
   1. The income of any person shall include -

(a) profits derived from any trade or business and converted into stock-in-trade or added to the capital of or in any way invested in the trade or business:

Provided that for the purpose of computing such profits the value of all live-stock, produce, goods and merchandise (not being plant used in the production of income) not disposed of at the beginning and end of the year in which the income was derived shall be taken into account."

1. That form of wording from sec 14 of the 1915 Act was carried over to the Income Tax Assessment Act 1922. Section 16(a) of that Act provided:
   1. The assessable income of any person shall include -

(a) profits derived from any trade or business and converted into stock-in-trade or added to the capital of or in any way invested in the trade or business:

Provided that for the purpose of computing such profits the value of all live-stock (not being live-stock used as beasts of burden or as working beasts), and trading stock (not being live-stock) not disposed of at the beginning and end of the period in which the income was derived shall be taken into account:

For the purposes of this paragraph "Value" means-

(i) in the case of live-stock (not being live-stock used as beasts of burden or as working beasts) - the value as prescribed; and

(ii) in the case of trading stock (not being live-stock) - the actual cost price or market selling value of each article of trading stock, or the price at which each article of trading stock can be replaced, at the option of the taxpayer in respect of each article."

1. At this point there existed a trading stock adjustment provision but there was no equivalent to sec 29 requiring continuity from one income year to the next year. In 1923 amendments were introduced to allow primary producers the option of valuing the natural increase of livestock, at cost price as specified or market selling price. In 1924 amendments were introduced to deal specifically with the question whether the option to value livestock, once exercised, was irrevocable. For the first time the precursor to section 29 appeared in the Act.
2. The amended sec 16(a) of the 1922 Act provided:

16. The assessable income of any person shall include -

(a) profits derived from any trade or business and converted into stock-in-trade or added to the capital of or in any way invested in the trade or business:

Provided that for the purpose of computing such profits the value of all live-stock (not being live-stock used as beasts of burden or as working beasts), and trading stock (not being live-stock) not disposed of at the beginning and end of the period in which the income was derived shall be taken into account except where the taxpayer otherwise elects, as provided in paragraph (aa) of this section:

For the purposes of this paragraph "Value" means-

(i) in the case of trading stock (not being live-stock) - the actual cost price or market selling value of each article of trading stock, or the price at which each article of trading stock can be replaced, at the option of the taxpayer in respect of each article;

Provided that the value adopted in relation to any article of trading stock as the value of that article as at the end of the period in which the income was derived, shall, for the purposes of the assessment of the person's income derived in the next succeeding period, be deemed to be the value of that article as at the commencement of the next succeeding period, and

(ii) in the case of live-stock (not being live stock used beasts of burden or as working beasts) - the cost price or market selling price at the option of the person which shall be exercised by notice in writing signed by him and delivered by him at the office of the Commissioner on or before the prescribed date. The cost price in relation to natural increase of live stock shall be the value per head of the live stock selected by the person within the limits prescribed and the value so selected shall be used for the purposes of the assessment of the financial year beginning on the first day of July One thousand nine hundred and twenty three and of all subsequent years:

Provided that the value adopted in relation to any live stock, as the value of that live stock, as at the end of the period in which the income was derived, shall, for the purposes of the assessment of the person's income derived in the next succeeding period, be deemed to be the value of that live stock as at the commencement of the next succeeding period:

Provided also that any option exercised in pursuance of this sub-paragraph for the purposes of an assessment for the financial year beginning on the first day of July One thousand nine hundred and twenty four or any subsequent year, shall be irrevocable and shall, if the person, in the notice of his option, so requires, apply to the assessment of his income tax for the financial year beginning on the first day of July One thousand nine hundred and twenty three and shall apply to the assessment of the person's income derived in the period in respect of which the option is exercised and to assessments in respect of which the option is exercised and to assessments in respect of all subsequent periods. (Emphasis added)

1. Section 29 of the 1936 Act was introduced as part of the harmonisation of the Commonwealth and State income tax legislation. Although it was clearly based upon paragraph 16(a) of the Act 1922-1936, it also reflects the recommendations of the 1934 Royal Commission on Taxation and the subsequent Conference of Commonwealth and State Commissioners of Taxation.
2. The 1934 Royal Commission on Taxation discussed the valuation of live stock in its Third Report. Although the matter of the value of trading stock being brought to account at the beginning of a year of income being the same value at the end of the previous year was not discussed independently of the question of irrevocable elections, it did feature in a recommendation.
3. Whilst the Royal Commission recognised the necessity for reasonable permanence in regard to any option that may be exercised by a grazier, it did not believe the election regarding the method of valuation for live stock should be irrevocable. Consequently the Royal Commission recommended a mechanism for varying the method of valuation.
4. The recommendation featured at paragraph 796 in the Report. The relevant paragraph is subparagraph (2) -

"We recommend that a grazier who has made, or who may make, any election relating to the valuation of live stock (other than the election to omit natural increase) for the purpose of the Commonwealth or any State Income Tax Act be allowed to make a fresh election, subject to the following conditions:

(1) That the new election shall be subject to the approval of the Commissioner, and that all subsequent returns shall be prepared on that basis unless and until it is altered with the consent of the Commissioner;

(2) That in the year of change the value of live stock on hand at the beginning of the year must be brought into account at the value at which it was assessed by the Department as on the last day of the preceding year;

(3) That, in the absence of any material objection, the Commissioner shall favourably consider any application to make a new election if the object of the alteration is to bring the valuation of live stock into agreement for the purposes of the Commonwealth and State returns'. (Emphasis added)

1. The Conference of Commonwealth and State Commissioners of Taxation, which discussed the recommendations of the 1934 Royal Commission, also adopted the premise that trading stock should be brought to account at the beginning of the year of income at the same figure as that given for the end of the preceding year.
2. The following comment is made in the Report-

'The main principle expressed in this Division is that every trader, at the end of every income year, should bring in the value of his trading stock on hand, and that he shall have the option of bringing it in at its cost price, or the market selling price, or at its replacement price. In the following year trading stock should be brought in at the same figure as that given for the previous year.' (Emphasis added)

1. The most explicit policy statement in relation to the meaning of section 29 appears in the transcript of the Second Reading Speech to the Income Tax Assessment Bill 1935, where the Treasurer made the following statement (at 2724 Hansard) -

'Under the Bill greater elasticity has been provided by giving the taxpayer the right to alter his elections, subject, however, to the Commissioner's consent....With the concession of this elasticity, however, one definite requirement of the Bill is that the closing value in the one return must always be the opening value in that subsequent return. This is essential to prevent the evasion of taxation.' (Emphasis added)

1. The Treasurer's statement in the Second Reading Speech is entirely consistent with the intention that may be read into the recommendations of the 1934 Royal Commission and the subsequent discussion at the Commissioners' Conference. It is possible to conclude that section 29 was intended to prevent any tax evasion that may have been possible where the method of valuation of trading stock had changed.
2. The section was clearly intended by the framers of the 1936 Act to operate so that the figure that was given as the closing value of trading stock in one year was the same figure as that given as the opening value of the trading stock in the subsequent year.
3. The Applicants' contention that the words "its value as ascertained under this Act" mean its value as hypothetically or notionally adjusted imply an ambiguity in the construction of sec 29. Accordingly resort to the legislative history, explanatory memorandum or notes and extrinsic materials is authorized by reference to sec 15AA of the Acts Interpretation Act 1901.
4. For completeness it should be noted the 1997 Act has effected a slight change in wording in the equivalent provision. Section 70-40 replaces section 29. The section provides -

"70-40 Value of trading stock at start of income year

(1) The Value of an item of trading stock on hand at the start of an income year is the same amount at which it was taken into account under this Division at the end of the last income year.

(2) The value of the item is a nil amount if the item was not taken into account under this Division at the end of the last income year.

1. The wording ensures that the opening value of each item of stock is always the same as the closing value it had in the previous year. If the amount is not taken into account at the end of a year, its opening value at the start of the next year will be nil. The Explanatory Memorandum provides as follows -

'Section 29 of the 1936 Act says that an items opening value is the value ascertained under the Act at the end of the previous year. There are some Board of Review decisions concluding that those words mean that the opening value must be what the previous years closing value should have been. If the previous years assessment cannot be amended because of time limits, its closing value will be different from the next years opening value. This will produce either a windfall gain or an unexpected loss for the taxpayer.

The rewrite avoids the possible problem. If one years closing value is amended, then the next years opening value will change to reflect that amendment. If the closing value cannot be amended, the next years opening value will still be what was recorded as the closing value. Subsection 70-40(2) supports this by ensuring that an items opening value is nil if the items closing value in the previous year was not taken into account at all.' (Emphasis added)

1. There is, in the 1997 rewrite no legislative recognition that the Board decisions are necessarily correct. All that the 1997 Act evinces is a legislative intention, as an abundance of caution in the rewrite process, to ensure there was no 'windfall gain or an unexpected loss for the taxpayer". The anomalies created by acceptance of the taxpayers contentions are discussed at paragraph 189 and following, below.

1. Academic commentary on section 29 with the exception of the commentary in the CCH Federal Tax Reporter paragraph [17-555] is diametrically opposed to the Applicants' contentions. The CCH commentary is addressed at paragraph 219 and following, below.
2. Thus in Ryan's 'Manual of the Law of Income Tax in Australia' 7th Ed (1989) the effect of s. 29 is simply stated as follows:

'Section 29 merely requires that the value given to stock at the beginning of a year of income agrees with the value given to it at the close of the preceding year of income'.

1. The same approach is taken by Lehmann and Coleman 'Taxation Law in Australia' 4th Ed 1996 at paragraph 5.1490 as follows:

'The three methods prescribed by s. 31(1) are: cost price, market selling value and replacement price. Section 29 provides that the value of trading stock at the commencement of the year of income shall be the same as the value at the end of the previous year.'

1. The same approach is adopted in Gunn's 'Commonwealth Income Law and Practice' 7th Ed 1963 where it is stated as follows:

'Value of Trading Stock at beginning of year of income

The value of all trading stock on hand at the beginning of a year of income must correspond with the value of stock on hand at end of preceding year. Ascertainment of the value of stock on hand at end of an income year is provided for in sections 31 and 32.

See Steel Barrel Co Limited v Osborne (1948) 30 TC 73, where it was said that a sum fixed as value of trading stock at close of an income year would 'of necessity also be the opening figure' for the next year (per Vasey, J at page 81).

The taxpayer, a grazier, had over a number of years omitted to disclose in his income tax returns the value of substantial quantities of wool on hand at the end of each year. After this omission was finally disclosed, the Commissioner amended the assessments for the ten years from 1948 onwards, but was debarred by s.24 of the NZ Act from amending the assessment for 1947 which had been made on the basis that there was no wool on hand at 31 March 1947. In amending the assessment for 1948, the Commissioner brought to account the value, £2505, of wool on hand at 31 March 1948, but ignored the value of wool on hand at the beginning of the year, £1842. Held: the 1947 assessment, which could not be reopened under section 24, was deemed under section 26 (cf section 177 of Commonwealth Act) to be correct in all its particulars; accordingly, both taxpayer and the Commissioner were estopped from attributing any value to the wool on hand at 31 March 1947 other than nil and by virtue of section 98(3) (cf section 29 of Commonwealth Act) this same value was to be adopted for the opening stock in the 1948 assessment (Kirkpatrick v IRC (NZ) (1962), 8 AITR 469).' (Emphasis added)

1. This same approach is taken in Cooper Krever and Vann 'Income Taxation Commentary and Materials' 1989 at page 627 as follows:

Taxpayers are given a great deal of latitude in valuing their stock. The reference in section 31 to valuing 'each article' of stock suggests that each and every asset may be valued separately and by a different method and it appears that methods of valuation can change annually. Virtually the only obligation of consistency is across years: section 29 requires the closing value allocated to stock to be the opening value of the next year.' (Emphasis added)

1. The same principle is contained in Woellner, Vella and Burns 'Australian Taxation Law' 4th Ed 1994 at paragraph 14-080 as follows:

'As section 31(1) refers to "each article of trading stock" it is open to the taxpayer to value some items of stock at cost, some at market selling value and some at replacement price. Further, the taxpayer is not bound to maintain a particular basis of valuation from year to year and can adopt a completely different "mix" of valuations in any subsequent year, subject only to the over-riding requirement of section 29 that the value of trading stock on hand at the beginning of a year of income must be the same value as that adopted at the end of the preceding year of income.' (Emphasis added)

1. Put simply, the academic commentators, including in particular Gunn and Cooper Krever and Vann are emphatic. The trading stock provisions allow great flexibility. Individual items can be valued separately and by different methods. The particular method adopted for a specific individual piece of stock may change from year to year. But the fixed and immutable rule is, there can be no inconsistency across income years between closing stock in year one and opening stock in year two.

General law concepts of opening and closing stock

1. The decision in Steel Barrel Co Ltd v Osborne (1948) 30 TC page 73 involved an agreement between the revenue authorities and the taxpayer for the 1933 to 1937 years inclusive. By that agreement the opening and closing stock figures were accordingly reduced for 1933 to 1937. By an oversight the revenue omitted to reduce the opening stock figure for the 1938 year so as to correspond with the closing figure of stock as at 31 December 1937.
2. The case turns in part on the terms of agreement between the parties. However Vaisey J., in a passage referred to in part by Gunn's commentary, stated a matter of general principle as follows:

"It is perfectly true that the agreement in question purported to relate, and did relate in terms, to the years 1933 to 1937 inclusive, and to no other year. But the difficulty in the way of the present Appellants would appear to be this. A conventional figure having been fixed by agreement as the closing figure at the end of 1937, it would, in my judgment, of necessity also be the opening figure for the year 1938.

[The] substitution of a different figure as the opening figure for 1938 would be in itself surprising." (Emphasis added)

Anomalies: unexpected losses and windfall gains

1. The position advocated by the Applicants, namely, that the value of opening stock on hand at the beginning of year of income may be amended irrespective of whether or not the closing stock figure for the immediately preceding year of income is amended or not, produces distortions and has the effect that either an amount falls through between income years and escapes tax completely, to the detriment of the revenue, or, double taxation occurs to the taxpayer.
2. As set out above at paragraphs 156 it was the existence of such distortions by way of "windfall gains or unexpected losses" or the "essential to prevent the evasion of taxation" that lead the legislature to introduce sec 29 and sec 70-40 in their then existing form.
3. The windfall gains or unexpected losses arise as to whether the closing stock figure is above or below the opening stock figure. If the value of closing stock on hand at the end of year one is lower than the opening stock figure the taxpayer is denied a deduction for its stock that it is entitled to. This is because the inflated value of closing stock on hand at the end of year one (less opening stock for that year) is added back into income as the trading stock adjustment under sec 28. Correspondingly, if the value of closing stock on hand at the end of year one is less than opening stock in year two, the amount of the increase escapes tax altogether.
4. Two scenarios can be envisaged, namely, where the adjusted opening stock figure exceeds the unamended closing stock figure from the previous year or, alternatively, the adjusted opening stock figure is less than the unamended closing stock figure from the previous year.
5. Suppose the cost of an article is $100, its market selling value in the taxpayers' ordinary domestic market is $160 and its market selling value in a special export market is $220. Assume, for the moment, that contrary to the decisions in Australasian Jam and BSC Footwear the taxpayer adopts the market selling value in the export market as the value of the stock on hand at year, that is, $220. The position will be, in the first year of income a deduction is claimed for the cost of the trading stock purchased, that is, $100; and $220 is added to income as being the 'inflated' market selling value of that stock on hand at the end of the first year. Thus, an amount of $120 is included in the taxpayers' taxable income in the first year of income as the trading stock adjustment in year one.
6. Assume now the stock is sold in the second year in the export market for $220, and there is no adjustment in accordance with Australasian Jam to adjust market selling value to the market in which the taxpayer ordinarily operates.
7. In the second year, being the year of sale, the taxpayer brings the sales proceeds of $220 to account as income and is allowed a deduction of $220, because the item is included in stock on hand at the beginning of the year at a value of $220, which amount is subtracted from stock at the end of the year because it is no longer on hand. Thus, the second year the deduction, by way of $220 included in opening stock, matches the income from the sale of $220 and no net amount is included in income in the second year. But the profit on sale of $120 is returned in full in year one. In this situation the taxpayer anticipates the profit for tax purposes in year one.
8. Suppose instead the item is sold in year two in the domestic market for $160 and there is still no adjustment in accordance with Australasian Jam to use the domestic market being the market in which the taxpayer ordinarily sells its goods.
9. Thus, in year two the taxpayer will obtain a deduction for $220 through the item of stock being included at $220 in stock on hand at the beginning of the year. The sale proceeds of $160 will be returned as income and there will be a net loss on sale of $60 in the second year. The correct net profit is returned over two years, namely, income of $120 in year one and a loss of $60 in year two.
10. Suppose now the Commissioner discovers the incorrect market valuation and, in accordance with the Applicants' submissions closing stock for the first year should remain unadjusted but the Commissioner should amend the opening stock figure for the second year.
11. On that scenario the taxpayer will, as in the example above, return $120 in the first year. In the second year when the sale occurs in the export market at $220, the sale proceeds of $220 will be returned as income but the taxpayer will only be allowed a deduction of $160 being the now amended opening stock figure.
12. Thus in year two the taxpayer will pay tax on that article of $60 and will pay tax in year one on $120. Double taxation results because the taxpayer is not allowed in the second year a deduction for the difference between the closing stock figure of the article (that is $220) and the opening stock figure in year two being $160.
13. The same problem occurs if the item is sold in the domestic market at $160 in the second year. Sale proceeds of $160 are returned as income and a deduction is allowed in respect of the adjusted opening stock figure of $160. The article sells at a profit of $60 but, $120 has been included assessable income in year one as being the inflated unadjusted market value figure of stock on hand of $220.
14. Thus, where the proper value of stock on hand is less than the taxpayer's market selling value, then by only adjusting the opening stock figure and leaving the closing stock figure unamended, double taxation results to the taxpayer.
15. In the converse situation where closing stock is under valued then by making an adjustment to increase opening stock to a proper market selling value the amount of the uplift escapes tax completely.
16. This arises in the example above if it is assumed that the domestic market selling value is $220 and the export market selling value is $160. If the taxpayer incorrectly uses the export market value of $160 as the market selling value, then closing stock on hand at the end of year one is included back in income (less the opening stock figure for that year) at $160. But if the error is discovered and the Applicants' contention is accepted, the opening stock figure in year two is $220, and the taxpayer obtains a deduction for that amount by way of the $220 figure being subtracted from closing stock at the end of year two. Effectively a deduction is taken for $220 in year two, but only $160 is included in year one as income.
17. If these matters were raised in objection or at the hearing then expert evidence could have been adduced through Mr. McClintock as to the proper accounting treatment of adjusting opening stock but not closing stock at the end of the previous year.

Construction of the 1936 Act and windfall gains and unexpected losses

1. It is apparent from the above illustrations that the acceptance of the Applicants' contention can lead to either a windfall gain or a loss to the taxpayer. Such an intention is contrary to the legislative intention as expressed in the extrinsic materials.
2. Authority exists that a Court should be disinclined to adopt a construction that has as its consequence unanticipated "windfall gains and unexpected losses": see Commercial Union Australia Mortgage Insurance Company Limited v FC of T 96 ATC 4854.
3. In that case the taxpayer carried on a mortgage insurance business; whereby it would indemnify mortgagees against the risk of loss, in return for premiums. Although the indemnity extended over the term of the mortgage, the taxpayer company received the whole of its premium before or in the first year of the mortgage. For accounting and income tax purposes the taxpayer would apportion the premium progressively over the term of the mortgage.
4. On subsequent advice, the taxpayer sought to change the method of apportionment, resulting in more of the premium being earned in the first 4 years, with less in later years. The change in method would create a windfall to the taxpayer, as some premium income of earlier years would escape taxation, because the Commissioner would be precluded from increasing assessable income in those years (1992 and earlier years), though, on the taxpayer's analysis the Commissioner was obliged to reduce the assessable income of the later years (1993 and following).
5. In response to this, Lindgren J stated at 4861 -

"Notwithstanding CUAMIC's concession that the whole of an amount of premium received is ultimately to be returned as assessable income and its contention that the only difference between it and the Commissioner is one of timing, the position contended for by it can lead to a different result. It can lead to the escape from assessment of premium income which has been received, a result not intended by the legislation."

1. The same outcome follows from acceptance of the Applicants' contention as to the trading stock adjustment. At page 4862 his Honour referred to the statutory scheme of the lodgement of returns, the making of an assessment being the ascertainment of taxable income (sec 166), the service of a notice of assessment (sec 174), and the validity of the assessment is not affected by any procedural irregularity (sec 175). His Honour then set out the terms of sec 177(1) and continued:

There has, of course, been no relevant proceeding on a review or appeal relating to the assessments of years preceding the year ended 30 June 1993 in the present case.

In my view, the scheme of the provisions to which I have referred is that in the absence of a proceeding under Part IVC of the TAA on a review or appeal relating to the assessments for earlier years, the amount assessed as premium income earned in those years is correct, leaving the balance to be earned in the year ended 30 June 1993 and future years. An alternative way of expressing this conclusion is to say that the scheme of those provisions is that CUAMIC can succeed only if its present appeal in relation to the year ended 30 June 1993 is associated with a proceeding on a review or appeal which would have the effect of increasing commensurately its assessable income, and therefore its taxable income, in respect of the earlier years."

"In any event, in accordance with the scheme of the relevant provisions of the 1936 Act which I attempted to explain earlier, CUAMIC's assessable and therefore taxable income for the year ended 30 June 1993 must be ascertained in a manner not inconsistent with the proposition that the assessments have been duly made in the earlier years."

1. In the absence of any appeal or review being made by the Applicants for the year ended 30 June 1995, (i.e. the year immediately prior to the year in which the Applicants are seeking to increase its opening balance for trading stock), the production of a certified copy of the Applicants' assessments for the year ended 30 June 1995 under subsection 177(1) of the 1936 Act is conclusive evidence that the notices of assessment for the year ended 30 June 1995 that the amount and all the particulars of the assessment are correct.
2. In the Commissioner's submission, the decision in Kirkpatrick v CIR (1962) 13 NZLR 49 is indistinguishable and directly on point. It is the decision relied upon in Gunn's commentary for the proposition that the opening value "must correspond" with the value on hand at the end of the preceding year.
3. In that case the taxpayer, a sheepfarmer, adopted the simple expedient of representing to the Revenue that he had no unsold wool on hand at the end of each income year. Income was understated because part of his profit was represented in stock on hand. He had adopted the practice for ten years or more.
4. The subterfuge was discovered on his death in 1958 and the Revenue issued assessments back to the 1948 income year commencing on 1 April 1947. It seems the relevant New Zealand Act permitted amendment for ten years.
5. The question raised was, what was the value of his stock on hand (unsold wool) at the beginning of the 1948 year of income. The taxpayer's return for the 1947 year showed the value of closing stock on 31/3/1947 as "Nil". The taxpayer's 1948 return showed the opening value of stock as "Nil". However, the actual wool on hand at 31 March 1947/1 April 1947 was known, as a fact, to be £1842. The value of wool on hand at the end of the 1948 year was £2,505. The Revenue's assessing action for 1948 was to include the value of closing stock at £2,505 as income and subtract "Nil" as the opening stock as per the 1947 and 1948 returns (closing and opening values respectively).
6. Barrowclough CJ summarized the assessing action at page 50.7 as:

"the fact that the return for that year showed no wool in hand must therefore be conclusive evidence that on 31st March, 1947, the taxpayer had no wool in hand: that in other words, for the purposes of the Act, the taxpayer must be deemed to have no wool in hand on 31st March, 1947, even though we know that he had wool in hand worth £1842".

1. So too, in the Applicants' position. If Mr. Mitchell's write downs are inappropriate, the Applicants will have on hand as closing stock on 30 June 1995 and opening stock on hand at 1 July 1995 a higher value of Aged Stock.
2. Barrowclough CJ then set out sec 26 of the Act which corresponds to sec 177(1) of the 1936 Act. He relied upon the decision of Sir John Salmond in Anson v IRC (1922) NZLR 330 at 338 for the proposition "the assessments of the appellant in previous years, therefore, not having been objected to in the statutory time and manner, are conclusive against him."
3. At page 51.5 Barrowclough CJ reached the conclusion that the value of closing stock on 31 March 1947 was a particular of the taxpayer's return and was also a particular of the assessment which issued in conformity with that return. It followed by the equivalent of sec 177(1) that the taxpayer was "estopped from disputing" the assessment, for the 1947 year ending 31 March 1947, and all the particulars thereof (including the value of stock on hand valued at "Nil").
4. The learned Chief Justice then referred to sec 98(3) of the New Zealand Act (at page 52.5) which provision is relevantly indistinguishable from the terms of sec 29. It refers to "the value of trading stock ... to be taken into account at the beginning of any income year shall be its value as at the end of the last preceding income year."
5. Barrowclough CJ then concluded (at page 52.5) as follows:

"the Commissioner was bound by the statute to act on the basis that the value of the wool in hand at the beginning of that year was its value at the end of the preceding year i.e. as at 31st March, 1947. Its value then is conclusively deemed to be nil and I cannot see how the Commissioner could lawfully avoid taking it into account as being of no value at all on 1st April, 1947. This is precisely what he did and I am of the opinion that he was right. ...

[The Commissioner] was required by the statute to take the wool into account at the beginning of the year at the same value as it had at the end of the preceding year and both he and the taxpayer are estopped from saying that its value at the end of the preceding year was other than nil" (Emphasis added)

1. The decision in Kirkpatrick, and decision of the Sir John Salmond for the Court of Appeal in Anson, are correct and indistinguishable. The approach in those decisions is consistent, and in fact on all fours with, the decision of Lindgren J in Commercial Union Australia Mortgage (supra). It is true that Lindgren J does not use the expression "estopped". But his Honour specifically refers to sec 177(1) and says the later year assessment must be "not inconsistent" with the proposition the earlier assessments have been duly made.
2. There is nothing in the decision of Hill J in Oates v FC of T 91 ATC 4060 that is inconsistent with the above analysis. That decision concerned carry forward losses. There was not the requirement for consistency as between two income years intimately linked and entwined through the statutory imperative of the value of closing stock for one year and the opening stock for the next being the same, as there was in Kirkpatrick, Anson and by analogy in Commercial Union.
3. The question in Oates was whether the carry forward loss was a deduction in the year in which there was income to offset against the loss. Of necessity, that question of deductibility has to be adjudged in the income year when the loss is brought to account. The Commissioner's assessing action in the loss year cannot be decisive of the deductibility in the income year.
4. One further matter requires comment. The Commissioner's assessing action in Kirkpatrick, Anson and in the instant case here, does not involve double taxation. In Kirkpatrick, an adjustment of £2,505 was made and there was no recognition of the factual value of stock on hand (£1,842) at the commencement of the year (it was disclosed as "Nil").
5. But in an ideal world, that amount should have been brought to account as income as the closing stock in the preceding year. Unlike the Applicants' contention, there is, on the Commissioner's approach, no "windfall gains and unexpected losses". The line is drawn properly with opening stock at the beginning of the first year of adjustment fixed, as per the closing stock from the prior assessment. That is, after all, what Barrowclough CJ meant by both the Commissioner and the taxpayer being estopped from disputing the opening amount and what Lindgren J meant by the later assessment being "not inconsistent" with the earlier assessments duly made.
6. There is no double tax or slippage on the Commissioner's analysis. At a point in time, the value of the opening stock at the beginning of the first year of adjustment is fixed, and thereafter the valuation of stock on hand at the end and commencement of each succeeding year proceeds on a proper basis.
7. The practical effect of the Commissioner's adjustment is that the omitted income from improper closing stock valuations made in earlier years is brought to account in the year of the first adjustment. That is precisely the result in Anson: there the increase in value of livestock over time (brought about because the taxpayer adopted in each year a fixed low arbitrary value) was assessed in one amount, in the year of disposal, rather than incrementally in each year whilst the stock was on hand. But, on the Commissioner's approach, as in Kirkpatrick, Anson and the instant case, the proper amount of income is brought to account and most importantly, there are no "windfall gains and unexpected losses".
8. Accordingly, the amount of closing stock on hand in the prior year is the value ascertained under the Act, and is the value to be used for the opening stock in the following year.
9. Finally, if the Applicants' contention is accepted, it is a literal interpretation that has unlikely or arbitrary consequences. In AGC (Advances) Ltd v F C of T 75 ATC page 4057, Mason J observed at 4072 -

"If this conclusion involves a departure from the literal meaning of the words used it is to be justified by reference to the context and to the unlikely and arbitrary consequence which would flow from the adoption of a literal interpretation. That a loss having its origin in the course of carrying on a business for profit should only be deductible whilst the business is still in operation, though the loss may not be ascertained until a later date, seems to be a strange result; so strange indeed that an intention to bring it about should not be imputed to the Legislature when the statute is susceptible to a sensible interpretation."

1. The Applicants' contention is, in addition to being, contrary to the legislative intent, productive of windfall gains and unexpected losses, and inconsistent with a proper construction of the Act, also directly contrary to the observations of Fullagar J in Australasian Jam.
2. In Australasian Jam Co Pty Ltd v FC of T [1953] HCA 52; (1953) 88 CLR 23 at page 26 to 27 Fullagar J said as follows:

'It is on s. 31 that the present cases primarily turn. The section in terms allows to the taxpayer considerable freedom of choice. He may adopt one method of valuation for one part of his stock, and another method for another part. And he is not bound to adhere from year to year to any method of valuation for any part of his stock: he may change the basis as to the whole or any part of his stock from year to year at will. On the other hand, the section is imperative in that it requires him to adopt for each article of his stock one or other of the three prescribed bases of valuation. He is not at liberty to adopt some other basis of his own. And s. 29 requires that the value at which his stock is brought into account at the beginning of a year shall be the value at which it was brought into account at the close of the preceding year: In other words, the opening figure of any year must be identical with the closing figure of the preceding year.' (Emphasis added)

1. The decision of Mr. Cotes in 14 CTBR, Case 10, predates the decisions in Australasian Jam, Kirkpatrick and Commercial Union Australia Mortgage. The decision is directly inconsistent with the decisions in Australasian Jam, and Kirkpatrick, both of which are decisions of superior Courts. Mr. Cotes did not have the benefit of being taken to the legislative history of sec 29 of the 1936 Act, or have access to the extrinsic materials, or the commentary by Gunn or the decision of Vaisey J in Steel Barrel Co Ltd v Osborne. The decision in Case No. 10 is contrary to the weight of authority and should not now be followed. The Applicants submission in respect to the notional adjustment of the opening stock in the 1996 year is without proper foundation.
2. Similarly, the Federal Tax Reporter at paragraph [17-555] follows Case No. 10 and regards the observations of Fullagar J as per incuriam on that point. However as above, the CCH observations, in turn, are made without reference to the decisions in Kirkpatrick, Anson, Steel Barrel v Osborne, the commentary in Gunn as well as, the legislative history of sec 29 and the extrinsic materials.
3. It is instructive to note that the Applicants' written submissions, in a section other than dealing with the observations of Mr. Cotes, accepts expressly the Commissioner's contentions concerning sec 29. The Applicants have submitted in paragraph 12 as follows:

"Section 31(1) in terms allows the taxpayer considerable freedom of choice. In regard to the 3 available options, the taxpayer is not limited to adopting one basis only for all articles but may choose a different basis of value for different articles of trading stock. And subject to the overriding requirement of s.29 that the value at the beginning of the year must be the same as that adopted at the end of the previous year, the taxpayer is not bound to maintain the adopted basis or mix of bases in subsequent years." (Emphasis added)

1. Paradoxically, the authority cited in support of paragraph 12 by the Applicants is Australasian Jam Co Pty Ltd v FC of T [1953] HCA 52; (1953) 88 CLR 23 at 26-27 per Fullagar J. which is the very passage set out above and relied upon by the Commissioner.

1. The Applicants' case on the valuation of aged stock is solely dependent upon valuations undertaken by Mr. Mitchell. The Applicants say (paragraph 34 written submissions) that "the procedure developed by Mr. Mitchell for establishing a write down percentage for Aged Stock is not shown to be inappropriate or unreasonable by any evidence led for the Commissioner".
2. Although this statement inverts the evidential onus the submission implicitly recognizes the justification for the write down percentage procedure rests solely with Mr. Mitchell's alleged expertise. It is stated (written submissions paragraph 37) that "Mr. Mitchell's write down percentage procedure was developed to address the problem of aged stock; there is no other currently accepted or alternative and practical procedures suggested by any valuer experienced in determining closing stock value of trading stock in the mass produced jewellery wholesale/retail market" (Emphasis in original)
3. The Commissioner's primary submission on Mr. Mitchell's evidence is that the Tribunal cannot be satisfied the discount percentages arrived at in Mr. Mitchell's stock assessment in 1993 and 1995 are the product of a bona fide valuation process.
4. Further, the discount percentages intended to be applied to stock on reaching 18 months of age, to be further discounted again at 36 months of age, did not result from a process which was calculated to result in the ascertainment of the market selling value of stock on hand, and could not be utilised by the Applicants as a basis for valuing their trading stock at year end, as at 30 June 1996 or 1997.
5. It would also be open to the Tribunal to conclude that Mr. Mitchell never intended to engage in any bona fide valuation process at all, and that he arrived at discount percentages for so-called Aged Stock on a completely arbitrary basis, which had no relevance or relationship to reality, but was constructed with the deliberate intention of constructing purported market selling value for stock when he knew that the figures arrived at were not the end product of a bona fide valuation process.
6. If the Tribunal agrees with any of the alternative ways of viewing Mr. Mitchell's evidence, as submitted by the Commissioner, it follows necessarily that the Applicants have not adopted one of the three alternatives set forth in section 31 of the 1936 Act for the valuation of trading stock in the years under review and the Commissioner's decisions on the objections must be upheld.
7. Jade was an entity interposed between genuine wholesalers and Allay Pty Ltd as a retail entity. It was associated with or "captive" to Allay. Allay Pty Ltd was to all intents and purposes the only customer of Jade.
8. However Mr. Mitchell had proceeded with his valuations on the assumption of dealing with a wholesaler which was in no way connected with the retailer (TC page 12.25 - 12.37). In fact he agreed that his valuation would not really apply if the retailer was to all intents and purposes the only client of the wholesaler (TC page 13.11-TC page 13.21). Moreover, his valuations were formulated on the basis of an assumed arm's length arrangement between a wholesaler and a retailer and not a sale on consignment (TC page 14.30-15.1).
9. If as the Commissioner submits the arrangements between the Applicants, as the Jade partnership, and Allay Pty Ltd as retailer, cannot be regarded as an arm's length arrangement, then the very foundation for Mitchell's alleged valuations is destroyed.
10. Mr. Mitchell has admitted the basis of his valuation is destroyed and he would not have made his valuations for Jade and Allay in that manner had he known of the non arms length arrangement. He was asked whether he would have issued his valuations in the same way, had he known that the wholesaler and the retailer were really one and the same person in economic terms_._ He admitted in answer to that question "If they were one entity, sir, no." (TC page 21.4).
11. His specific evidence on this point was that he was instructed to undertake the valuation upon the assumption that there was an arm's length transaction between wholesaler and retailer, where the wholesaler was acting entirely independently of the retailer and where the entities were not controlled by the same people (TC page 14.36-15.1). He further made the assumption that the price of the goods sold was negotiated as a result of hard bargaining between willing but not anxious vendor and willing but not anxious purchaser (TC page 7.15-7.30).
12. In fact Mr. Mitchell agreed that if he had to consider a valuation of stock in circumstances where there was an association between the wholesaler and the retailer he would treat the entity as one entity as opposed to two (TC page 9.3-9.10). To him this was a valuation situation which was in effect a "whole different ball game" and "that would be a completely different ball game" (TC page 9.10 and 9.15). This was because the need for the wholesaler to get rid of stock simply disappeared and that affected the situation because the goods would then be in a retail environment where they can be heavily discounted by up 70-80% of the normal retail price without incurring a loss (TC page 11.5-11.20).
13. The Commissioner next submits, Mr. Mitchell's valuations which yielded up the stock percentage write downs were premised upon a hypothetical situation which never occurred in the reality of Jade's trading activities with Allay. Shortly put, his valuations of so-called "Aged Stock" assumed that at the 18 month and 36 month cut of points, aged stock was no longer saleable by Jade as wholesaler to Allay as retailer, but instead that the stock would have to be sold back up the distribution chain to stone merchants or bullion dealers, that in those circumstances the profit margins would be lost in sales back to the trade, thus justifying the discount percentages. Ultimately at the 36 month point the stock would only be suitable for scrap value or melting down (see for example exhibit A17 letter from Mr. Mitchell to Gibson dated 24 February 1993 which represented the English language version of Exhibit TM08 to Mitchell's affidavit TB page 647.25).
14. Mitchell explained his rationale with respect to the gold content as follows:

(i) that after 18 months stock had passed its useful life and was no longer saleable and ultimately it became completely unsaleable (TB page 648.10); and

(ii) selling the gold back to the bullion dealer to be refined and reprocessed, results in the loss of the benefit of the labour content as well as losing 50% of the value of the gold (TB page 648.13-648.19).

1. Mitchell explained his rationale with respect to the precious stones component follows:

(i) in relation to stones, a jeweller selling those back to the stone merchant gives rise to a loss of 20% of the uplift or mark up charged by the stone merchant to the jeweller (TB page 648.20-648.27); and

(ii) as a second consideration, because the stone merchant could buy from his own sources further back down the distribution chain, that warranted a further discount of 30% to induce the stone merchant to repurchase the stone from the jeweller (TB page 648.28-648.33).

1. At the end of 18 months if the stock is still on hand it had to be valued looking at the components of the stock namely the gold and the stones (TB page 649.5).
2. Mr. Mitchell agreed that the integral elements justifying the discount in those circumstances was that the best the wholesaler would ever do was to sell the goods back to the refiner and the stone merchant (TB page 649.20). Again this was the methodology referred to in Mitchell's letter to Mr. Hobbs of the ATO, which was in a similar format to Exhibit A17 (see Mr. Mitchell's affidavit Annexure "TM10" p.64 and TB page 651.25-651.30).
3. Mr. Mitchell agreed that the assumptions adopted in TM04 (see Mr. Mitchell's affidavit page 21) which was again an English version of TM08 and in the same terms as the letter of 18 September 1997, was that at the end of 18 months all that could be done was to break the item into its component parts, sell the stones back to the stone merchant and sell the gold back to a refiner (TB page 653-654; TB page 700-701, TB page 702.20-702.24, TB page 704.32-704.36; TB page 705.27; TB page 707.16-707.25).
4. Yet the evidence clearly discloses that Jade never operated in that market; and never sold goods back to stone merchants or gold refiners. Indeed it was common ground that in the relevant years merely a handful of items at retail level sold for less than retail cost, that is, actual wholesale cost from an independent wholesaler (TA page 58.13-58.18, and TA59.8-59.12). There were no sales by Jade to any entity other than Allay except for an insignificant number of sales in the month of January 1997 (TB page 61, TB page 63.6).
5. It is next submitted that the Tribunal will find in any event that the basis upon which Mr. Mitchell arrived at his discount percentages in valuing trading stock has not been demonstrated to have been based upon any professional and reliable foundations. Accordingly, his so-called expert opinion is worthless, unreliable and an unsafe basis for concluding that the Applicants' trading stock could properly be brought to account on the basis of his valuation. Specifically Mr. Mitchell's expert opinion is bereft of primary factual material and silent on the validity of assumptions made.
6. The methodology which Mr. Mitchell explains in-chief (TB page 552.14-552.27) asserts that surveys were obtained in order to calculate the applicable discounts at both wholesale and retail levels.
7. However, nowhere in his affidavit nor in any of the other evidence is there any result of market research, the nature of the research, the methodology adopted or the precise content of the research (TB page 579.14-580.20). Notwithstanding his agreement that it was a fundamental tenet of his procedure to be transparent in his approach to valuation, he produced no worksheets, no source materials, no information which might corroborate his alleged methodology (TB page 599.11-600.11).
8. Setting aside the veracity of TM08 (to which separate submissions will be addressed) there were 23 categories of goods not covered by the methodology set forth in TM08 (TB page 621.1-622.2). Mr. Mitchell produced no source material in relation to any of these categories, nor was he able to give any exposition at all about the basis upon which he arrived at discount percentage factors for those 23 categories (TB page 621.18, 621.29, 621.35).
9. Notwithstanding that Mitchell was asked to produce documents on subpoena he produced no information which enabled the Tribunal to conclude what the alleged surveys may have shown and he produced no working papers or other documentation in relation to surveys (TC page 15.7-15.19).
10. When he was pressed to explain how the survey information was utilised in order to arrive at particular discount percentages, in particular by reference to TM08, he was ultimately driven to agree that there was no retail market survey information at all in TM08 (TC page 23.24-14.3).
11. He made one of many concessions about errors in his affidavit as to whether the market research surveys were wholesale or retail (TC page 18-20, TC page 24.17-24.21).
12. Finally he agreed that none of the so-called information from the industry was reproduced in his affidavit or produced in answer to a notice to produce (TC page 29-30.2).
13. He then conceded that a search high and low in the affidavit for basis upon which valuations for categories other than gold and jewellery will not enable any information to be found on that topic and that was completely unsatisfactory (TC page 39.18-39.22). In short, the affidavit, as Mitchell agreed, simply failed to incorporate any information enabling the Tribunal to determine the process by which he arrived at any valuation (TC page 39.27).
14. The Commissioner further submits that Mr. Mitchell did not undertake a genuine valuation of so-called Aged Stock nor could he do so simply by reference to stock sheets provided to him by Peter Gibson. Mr. Mitchell agreed that the stock lists provided did not contain sufficient information to enable him to undertake proper valuation of stock according to industry recognised guidelines (TC page 47.24- 47.30).
15. Quite apart from methodology involved in valuing gold or silver or jewellery, Mr. Mitchell agreed that he did not bring any expertise to bear to work out discount percentages in relation to other categories (TB page 621.18-622.2, specifically, TB page 621.15, 621.17,621.32, 621.35 and 622.2).
16. When he suggested in his affidavit and in evidence that it would be possible to value items of jewellery simply by reference to stock numbers and identification he became spectacularly unstuck discussing the topic of cultured pearls. He agreed that in terms of valuation it was necessary to know the size of the pearls, the lustre, and the match of the pearls, all of which would require visual examination (TB page 634.28-635.27).
17. Mr. Mitchell, of course, twice asserted that in the case of pearls there was in fact no write down (TB page 634.31 and 635.25). He was then confronted with his own analysis writing down pearls 50% after 18 months and the same percentage again after 36 months (TB page 635.18-636.7). He allowed himself to be drawn to a point of ridicule when he agreed with the suggestion "do you say there was some rapid decline in the pearl market since 1995" to which he answered, "yes I'm afraid there has, yes, there has" (TB page 637.11-637.12).
18. He was then referred immediately to paragraph 42 of his affidavit which stated that "since 1995 pricing levels in the wholesale jewellery industry have remained generally static" (TB page 637.22-TB page 638). Although he would not accept that this was a "howling" error he conceded "it is an omission, yes, and I do apologise" (TB page 639.12).
19. The Commissioner further submits that Mitchell's evidence about his valuation methodology, his explanations for arriving at his discount percentages, was riddled with error such as to make it unreliable. Specifically there is sufficient in the cross examination to enable the Tribunal to conclude that there was a complete absence of genuine valuation in the process undertaken.
20. TM08 is a prime example of the insuperable difficulties with Mr. Mitchell's evidence.
21. In paragraph 29 of his affidavit it was addressed as if it was the contemporaneous record showing how the discount percentages for all categories of stock were arrived at.
22. In oral evidence in-chief this was moderated to being "an example of the actual calculations that we do on the stock items, on the wholesale stock items" (TB page 557.12), and it was asserted to have been done in January 2000 (TB page 557.17).
23. In cross examination Mitchell agreed that in plain terms paragraph 29 of his affidavit suggested that TM08 was the table used to calculate the write downs dated 22 February 1993 and 20 June 1995 (TB page 602, particularly 602.30).
24. Confronted with the terms of paragraph 29, as suggesting a contemporaneous document used to calculate the markdowns Mr. Mitchell agreed that it was put "badly" in his affidavit and he also agreed that it had been put "atrociously" and it was "absolutely incorrect" (TB page 603.5, TB page 603.12, TB page 603.13, TB page 603.20).
25. Mr. Mitchell was then challenged about TM08 having been completed in January 2000 by reference to Annexure D to his affidavit in the Pontifex proceedings in September 1998 (TB page 604-TB page 605.18). He resolutely asserted that the document had been prepared in January 2000 because he had gone through exactly the same exercise at that time and the figures worked out exactly the same (TB page 605.24).
26. It was then pointed out to him that an error in TM08 was identical to the error appearing in Annexure D to the Pontifex affidavit. When it was suggested that it was in fact the same document, he denied again, saying "no, my updating was done in the early part of 2000" (TB page 630-631.14). It was then demonstrated to Mr. Mitchell that the figures he had picked up in TM08 were exactly the same figures as appeared at page 22 of his affidavit (TB page 663-664). It was suggested to him that he had picked up the same figures as appeared in the JATVC publication of June 1997 in some instances. He would only agree that they were the same figures (TB page 668.31, TB page 669.19-669.23, TB page 670.12-670.20). Finally, he conceded that to his best recollection was that TM08 was put together in 1997 (TC page 27.15); more specifically in June 1997 (TC 28.11-28.15).
27. Mr. Mitchell then agreed that, had he prepared TM08 in January 2000 (as he had earlier asserted), the process would have involved him looking at the most up to date JATC figures and therefore looking at the November 1999 gold price figures (TC page 28.24-28.27). He then agreed that, returning to paragraph 29 of his affidavit, the last sentence should more accurately be expressed as suggesting that TM08 was a copy of a table prepared in June 1997 which he looked at again in 2000 (TC page 28.32).
28. Thus TM08 was not a contemporaneous document, it was not prepared in January in 2000 and it was undeniably the same document as appears in Annexure D to Mr. Mitchell's affidavit in Pontifex. Moreover, it is a document which exemplifies a process of reasoning that after 18 months gold jewellery or jewellery containing the precious stones has to be broken down and sold back up to stone merchants or bullion dealers (TC page 29.17-TC page 29.22). It therefore appears highly likely that there was never any document prepared to support the alleged valuations undertaken in 1992 or 1995. Mr. Mitchell could not recall anything having been done by way of preparation by him of such a document in either of those years (TC page 66.11).
29. The Commissioner submits that when Mr. Mitchell swore his affidavit paragraphs 27, 28 and 29 he did so to give the impression that TMO8 was a contemporaneous record of valuations undertaken in 1992 and 1995 when he knew that it was a document prepared by him in 1997.
30. He maintained the pretence until giving evidence in-chief, when no doubt because he expected that he may be discovered, he then suggested that it was a document prepared in the year 2000. When it was ultimately shown to him and he agreed that it was a 1997 document his credibility was utterly destroyed.
31. The Commissioner also points to the numerous examples of errors, inconsistencies, amendments and "apologies" offered up by Mr. Mitchell for various parts of his affidavit. Matters which are about to be illustrated leave the Tribunal in a position where it could have no confidence whatsoever in the reliability of Mitchell's evidence and it follows therefore that it can have no confidence in the reliability or veracity of Mitchell valuations.
32. Firstly, Mr. Mitchell had great difficulty in working out whether he was undertaking a valuation on the basis of sales by independent wholesaler to independent wholesaler or retailer. Paragraph 59(c) of his affidavit originally contained reference to the discount percentage having been arrived as the price of goods sold by a wholesaler to another arm's length wholesaler. He said he conducted surveys with wholesalers (TC page 15.24), he was then referred to paragraph 28 of his affidavit which said that he conducted market surveys with retail jewellers (TC page 16.32). He was then forced to agree that there was nothing in the affidavit suggesting survey information had been obtained from wholesalers (TC page 17.12). He then said that he conducted surveys with both retailers and wholesalers. Then when asked to identify the information from surveys which informed TM08 he was unable to do so.
33. Mr. Mitchell referred in paragraph 59(b)(ii) to the concept of "integral nexus". He then said that the first that he knew of integral nexus was when he read the affidavit (TC page 55.17). In fact when he was first confronted with the words "integral nexus" when they appeared in his affidavit in the statement "there's an integral nexus between retail selling price and the wholesale where goods are sold on consignment" he was asked "what do you say the nexus is" he answered (somewhat plaintively) "dear". After a stammering utterance he then (not for the first or last time) said "I would have to refer back to - I do apologise, I am a bit vague there" (TB page 611.10-TB page 611.17).
34. It quickly emerged that he didn't have a clue what integral nexus meant (TB page 612-613.10) and it is as plain as a pike staff that this whole concept is something that infiltrated the affidavit. This is somewhat dramatically demonstrated when he was questioned about paragraph 59(b)(ii) and (iii) which forced him to admit that paragraph 59(b) was diametrically opposed to what he had been saying "a moment or two ago". When asked to face up to it, Mr. Mitchell said "it would appear to be" (TB page 616.24).
35. In terms of Mr. Mitchell's expertise as a valuer, it was put to him that "integral nexus" it was not a concept that was "relevant or referred to in valuation" to which Mr. Mitchell replied "No, sir" (TC page 56.13).
36. Finally, the Commissioner submits that underlying Mr. Mitchell's valuations is a false premise that, simply because particular stock items are on hand at the end of 18 months or the end of 36 months, does not, ipso facto demonstrate that the stock is unsaleable. That this premise is false is amply demonstrated by the analysis undertaken by Mr. Kosutic to which particular reference is made in paragraphs 324 and 325, below.
37. Secondly, age of stock does not in fact affect its saleability. Again, this is shown in Mr. Kosutic's analysis at paragraph 401.
38. Next, Mr. Mitchell's assessment rests solely on age and the premise early referred to does not enable it to be ascertained whether there might conceivably be another 20 or 30 identical items which did sell within the 18 months leaving only one item which celebrates its 18 month or 36 month birthday (TB page 585.21).
39. Obviously enough in that scenario the fact that one item is on hand at the end of 18 months when 20 or 30 have sold in the previous 18 months tells you nothing at all about saleability.
40. What is more compelling and cogent evidence and what tells the Tribunal more about saleability is the fact that Mr. Ciprian, an experienced retail jeweller and purchaser of stock, on occasions when the last item of Aged Stock was sold after reaching its 36th month birthday, immediately, or shortly thereafter, purchased for consignment identical replacement stock to that supposedly unsaleable item.
41. Accordingly, the Commissioner submits that the Applicants have not discharged their onus of establishing that the assessments are excessive. Their case depends upon, as their written submissions at paragraphs 34 to 37 acknowledge, the intellectual integrity of the wholesale percentage write down mechanism developed by Mr. Mitchell. In the Commissioner's submission the process undertaken by Mr. Mitchell is irretrievably flawed and does not constitute a bona fide attempt to ascertain "market selling value" and for that reason alone the Applicants have not discharged their onus of proof.
42. The evidence of each of Mr. Gerard and Mr. Sechos depends for its intellectual underpinnings on the integrity of the process undertaken by Mr. Mitchell. If Mr. Mitchell's process is irretrievably flawed then the evidence of Mr. Gerard and Mr. Sechos is similarly affected and not worth the proverbial hill of beans.
43. The evidence of Mr. Alford and Ms. Foley shows that it is possible to value jewellery, but most assuredly not in the manner contemplated by Mr. Mitchell. Contrary to Mr. Mitchell, experienced valuers would not rely on the stock lists to provide sufficient information for accurate valuation, nor would they do such a valuation on a sight unseen basis, but rather a sampling technique would be adopted. Further, in Mr. Alford's opinion (paragraph 53 and following of his affidavit) it would be most unlikely that a retail jeweller would sell jewellery for scrap as assumed by Mr. Mitchell.
44. There is no onus on the part of the Commissioner to positively establish what the Applicants' proper taxable income is, as a matter of fact, or indeed to adduce any evidence at all. In this case, however, in addition to the veritable plethora of internal inconsistencies and the irretrievably flawed nature of Mr. Mitchell's analysis, which is, without more, enough for the Commissioner to succeed, positive evidence has been adduced through Mr. Kosutic to further demonstrate the absurdity of Mr. Mitchell's analysis, including in particular, the so-called integral nexus.

1. The Applicants at paragraph 59 of their submissions object to the evidence of Mr. Kosutic on the grounds of relevance and foundation. They assert, he is not an expert on the matters to which his statements are directed, and that he has focussed on retail sales by Allay subsequent to the balance date, and that Mr. Kosutic has not established the requisite qualifications and experience to design, assemble and interpret the statistical model that he has attempted.
2. The Applicants assert (submissions paragraph 59) that 'Retail sales by Allay are not relevant to market selling value of Aged Stock in the hands of Jade as a wholesaler'. The Applicants assert that Mr. Mitchell's write-down percentages take into account sales experience prior to the relevant balance dates.
3. Lest there be any doubt on the matter, and, notwithstanding that the concept of 'i_ntegral nexus'_ was a late insertion by the lawyers in Mr. Mitchell's affidavit, at paragraph 59(b)(ii) and (iii) this is what Mr. Mitchell had to say about retail selling price and the wholesale selling price of Aged Stock on consignment:

'There is an integral nexus between retail selling price and the wholesale selling price of aged stock especially where goods are sold on consignment. Wholesalers will take their cues from retailers in respect of the level of discounts to be applied to the wholesale of aged stock. For example, if an 18 month old diamond ring is being sold by the retailer at a 50% the wholesaler must discount the price of that item by at least 50% if he is to sell that same product to retailers.

The wholesale price must be written down by a proportional amount to what the retail selling price is written down by, otherwise no retailer will buy that stock from the wholesaler.' (Emphasis added)

1. Again, so there can be no doubt about Mr. Mitchell's methodology, he has stated at paragraph 59(f)(i) and (ii) of his statement as follows:

'If after three years, where an item of stock would have been offered for sale during at least two Christmas periods (the peak retail period), an item has not sold, that item is simply not going to sell. In determining the value of such stock we assume the jeweller has taken active steps to sell the stock, such as applying significant discounts and the like. That being the case the only value that item has is scrap value.

If a retailer has an item of stock on its shelves that has not sold after three years, the likelihood is that retailer will not purchase that item from a wholesaler at, let alone for scrap value. A sale of stock which is three years old from a wholesaler to a retailer (or another wholesaler) for anything other than scrap value will be very unlikely.'

1. Again, lest there be any doubt, Mrs. Ciprian at paragraphs 19 and 20 of her affidavit had this to say concerning the discounting of Aged Stock at the retail level:

'If an item of stock has been offered for sale during a Christmas trading period and has not sold it is highly unlikely that that item of stock will be saleable at its current price. Therefore once an item reaches 18 months in age that item will have been through one Christmas trading period and if unsold will need to be discounted to effect a sale. . . .

An item that has reached over 24 months old has been through two Christmas trading periods, and usually has been already marked down. If such an item has not sold, the chances of selling the item at its current, albeit already discounted, price is highly unlikely. Such items will need to be even further discounted if they are to sell. An item which is over 36 months has been through three Christmas trading periods, and if unsold is unlikely to ever sell. The best we can hope to recover from such an item is its scrap value. The longer the item remains on the shelf, the greater the loss to the business.'

1. More specifically at paragraph 42 Mrs. Ciprian has stated as follows:

"From time to time 'sales' would be conducted for the purpose of encouraging the sale of aged stock.... Often the item would be marked down to an extent greater than the discounted amount which appeared on the stock sheet; ie the retail 'sale' price would be less than that calculated by the program." (Emphasis added)

1. Notwithstanding the palpable deficiencies in Mr. Mitchell's analysis exposed above, the analysis conducted by Mr. Kosutic was a direct response to Mr. Mitchell's core assumption, that the retail value of Aged Stock diminished rapidly with age and, as a consequence, the wholesale value of that Aged Stock needed to be reduced on a proportionate basis.
2. Using this proportional reduction approach, Mr. Mitchell determined that, across all categories of Aged Stock, the retail price achieved for that Aged Stock would diminish by approximately 70% and, as a consequence, the wholesale value of that Aged Stock on hand to the Applicants was also be reduced across all categories of Aged Stock by that very same percentage. The written down value of Aged Stock was its scrap or melted down value. Mrs. Ciprian claimed in evidence that 'I think we would be very lucky to get that amount' (TB page 53.4), that is the written down amount.
3. What Mr. Kosutic has done by his analysis is to test that core assumption that retail value of Aged Stock diminishes rapidly with age and, as a consequence, the wholesale value needed to be reduced on a proportional basis. Mr. Kosutic's analysis shows that that core assumption is demonstrably false.
4. The analysis undertaken by Mr. Kosutic is voluminous, though not complex. After all, all that he has done is to sort through the Applicants' own documents, that is, primarily their own stock reports. It is an analysis that would be open to the Tribunal to undertake, if so minded, in any event. This is because it is, at the end of the day, simply an inspection, identification and sorting of primary evidentiary material that is properly before the Tribunal.
5. Notwithstanding that Mr. Kosutic's affidavit and annexures has been available since 10 January 2001 the Applicants have chosen not to produce any competing analysis of that primary evidentiary material and, thereby challenge the integrity of Mr. Kosutic's analysis.
6. Mr. Kosutic's analysis is relevant and admissible and, more importantly, cogent and compelling.
7. The primary source material examined by Mr. Kosutic was, of course, the business records and stock sheets of Allay and not the Applicants trading as Jade Wholesalers. Such sale reports by the Applicants trading as Jade Wholesalers were not made available to Mr. Kosutic (TC page 328.7) and such sales reports were called for (TC page 328.14). No such sales reports were produced to the Tribunal in response to the call.
8. Mr. Kosutic's analysis is directed at the following matters:

(a) The Applicants went straight to the top rate write-down, discussed infra at paragraph 296 and following.

(b) In respect of Aged Stock the Applicants treated the economic "retail cost" as the aggregate of the original wholesale cost paid by the Applicants together with the sales tax paid on the written down value of the item, discussed infra at paragraph 305 and following.

(c) Aged Stock, in the 1996 and 1997 income years, on average was discounted at retail level by 14% and 18%, yet contrary to Mr. Mitchell's core assumption, the "market selling" value of Aged Stock was written down on average by 74% and 72% respectively, discussed infra at paragraph 315 and following.

(d) Mr. Mitchell undertook the valuation exercise for at least 10 jewellers and, in respect of each jeweller, arrived at almost identical write-down percentages in respect of each category, discussed infra at paragraph 339 and following.

(e) Items of Aged Stock were sold post 30 June 1996 in the 1997 income year, but were not shown on closing stock lists as at 30 June 1996, discussed infra at paragraph 354 and following.

(f) Items of Aged Stock, on occasions sold for a retail discount equal to or greater than Mr. Mitchell's write-down percentage, but the average age of such items was 7.43 years and not 12 months, 18 months or 3 years, discussed infra at paragraph 356 and following.

(g) Of nearly 4200 items of Aged Stock sold, only 18 were sold at a loss, that is, for an amount less than retail cost, discussed infra at paragraph 366 and following.

(h) In respect of all 1922 items of Aged Stock sold in the 1997 year, those items were, on average, written down by Mr. Mitchell by 66% of their cost, but such items were sold at retail for an average mark up of 112%, that is, 2.12 times their retail cost, discussed infra at paragraph 375 and following.

(i) Aged Stock was written down to the maximum amount (because the Applicants went straight to the maximum write-down) solely on the basis of its age, that is, on its 18th month anniversary irrespective of its sales pattern in that 18 month period. The "clock was not reset" by a sale, only a repurchase of the same stock, discussed infra at paragraph 380 and following.

(j) When Aged Stock was sold out, identical replacement stock was purchased, rather than the Applicants moving out of that difficult to move line of merchandize, discussed infra at paragraph 386 and following.

(k) Items of Aged Stock were sold at a discount at retail during sale months and subsequently sold, in later non sale months, for full ticket price, notwithstanding their further aging, discussed infra at paragraph 398 and following.

(l) After 18 months the profile of Aged Stock held in the Katanning store mirrored the Albany and Ciprian stores, notwithstanding that, as a new store, the Applicants had an opportunity to stock it exclusively with fast moving stock, discussed infra at paragraph 394 and following.

1. Each of these propositions are discussed in turn.

1. By exhibit TMO3 (Mitchell affidavit page 19) stock in category one, being diamond rings greater than $500, was recommended to be written down by 54% after 18 months and 61% after 36 months. Exhibit BK88 (folio 2261 and following) contains the stock revaluation reports for Allay.
2. However the Applicants have not implemented Mr. Mitchell's stock assessment. Rather the Applicants have gone straight to the top rate applicable to items aged 36 months and over and applied that rate immediately to stock aged 18 months (TC page 308.1 - 308.5).
3. Thus for example, at folio 2261, the write-down percentages in category one for diamond rings over $500 was shown as 54% at 18 months and 61% at 36 months. However the Applicants have gone straight to a write-down percentage of 61% at 18 months and there is the handwritten annotation "54, 54, stet" setting out the correct percentages.
4. Similarly by way of example in category 27 (bracelets and bangles) the write-down percentages were 50% and 75%. However the Applicants have gone straight to the 75% write down at 18 months and there is the handwritten correction "50" immediately adjacent to the incorrect write down of 75% at 18 months (folio 2261).
5. The effect of the incorrect implementation of the write-down percentages is, of course, that the Applicants secure for themselves the maximum available write down at the earliest opportunity in contravention of Mr. Mitchell's own two step write down procedure. In the case of watches there is, of course, a third step involving an initial write down at 12 months.
6. Whilst Mr. Kosutic was not aware of this accelerated write down procedure at the time of the making of the amended assessments it is a fact indicating at least carelessness on the part of the Applicants and is a relevant consideration that the Tribunal can take into account as part of its review of the additional tax by way of penalties.
7. The assertion at paragraph 29 of the Applicants' written submissions that due to a misunderstanding by Mrs. Ciprian stock was not written down to the full extent recommended by Mr. Mitchell is wrong.

1. The records of the company Allay pick up in their actual records the concept of retail cost. This is also referred to as the economic cost (TC page 311.10). The retail cost, being the economic cost of a particular item, is the wholesale cost on acquisition by Jade plus the sales tax on the written down value (TC page 310.12).
2. Thus, for example, BK93 (folio 3188 and following) contains a full list of the Aged Stock which was sold in the 1997 financial year and therefore on hand as at 30 June 1996. Thus, item one on folio 3188 shows stock number 030288 being purchased on 24 October 1993 at a wholesale cost of $273.60. It is on hand as at 30 June 1996 and, accordingly, has been written down by Mr. Mitchell's recommended percentage write down of 61%. The written down value is thus $106.70 being 39% (that is 100% written down by 61%) of $273.60. Sales tax is then calculated at the rate of 32% on that written down value, that is, 32% of $106.70 which equals $34.14.
3. In paragraphs 29 and 31 of the Applicants' written submissions it is suggested that the sale by Jade to Allay was at "written down value plus the 6% uplift factor". That assertion in the Applicants' written submissions is wrong. In the example in the paragraph above, from folio 3188, sales tax (32% of $106.70 which equals $34.14) is calculated on the written down value only. There was no 6% cost uplift. Mrs. Ciprian is mistaken in her belief that "I have always thought that is how the program operated" (TB page 199.5)
4. The retail cost or economic cost is the original wholesale cost of the item ($273.60) plus sales tax of $34.14 (that is 32% of $106.70) which two amounts add up to $307.74, which is the figure appearing in column eight line one at folio 3188 under the heading retail cost. The retail cost of the economic cost is thus the break-even point at which the aggregate economic unit consisting of Jade Wholesalers and Allay must sell the item to break-even. That is, they must cover the original acquisition cost together with the sales tax (TB page 219.8).
5. For completeness, aged stock item number one on folio 3188 was sold on 16 July 1996 at a retail sale price of $695 which, though it represents a discount of 13% on the retail ticket price (folio 3188 column 10), nonetheless it represents a sale at a mark up of 126% over the retail cost or the economic cost.

1. The full retail ticket price is in the nature of an ambit claim. The retail ticket price is marked up by a factor of 3 in the case of items worth between $0 and $500. In the case of higher priced items the mark up factor is reduced. Thus a jeweller at retail level is able to discount the ticket price without imperiling his profit (TC page 575.23 to 577.40).
2. Wholesale profit margins are considerably smaller, somewhere in the region of 30% to 40 % (TC page 577.22). Thus, 27% off a retail mark up of 327% is vastly different to a 27% reduction in the wholesale price (TC page 577.19).
3. As a practical matter, the other effect of adopting Mr. Mitchell's write-down percentages for Aged Stock is that sales tax is reduced in respect of the sale of Aged Stock items. If an Aged Stock item is sold at full retail ticket price, the Applicants make a super normal profit because sales tax is calculated on the written down value, but the retail ticket price is constructed on the assumption that sales tax will be 32% (or whatever is the applicable rate) on the wholesale cost (TC page 5769 to page 576.20).
4. The jeweller would thus be able to reduce the ticket price of an Aged Stock item by the amount of the sales tax saving and still achieve his full undiminished gross profit margin.
5. One surprising effect of adopting Mr. Mitchell's write-down percentages for Aged Stock is that the Applicants' business performs better by selling Aged Stock, at full ticket price, or alternatively offering some discount to the customer out of the sales tax saving on Aged Stock, than it does for selling new stock to customers at full ticket price.
6. Mrs. Ciprian candidly admitted "we are actually generating more profit at retail level with aged stock, than with non-aged stock" (TB page 46.4). That profit is, of course, at the expense of the Revenue.
7. Perversely, the Applicants' business performs better if it moth balls its stock for the perfunctory 12 or 18 month period. One is immediately reminded of the caustic observations of the High Court in the J Rowe and Sons case (supra) to the effect that the more the business grows the more its profit diminishes.

1. Annexure BK98, results analysis 1, contains an analysis of the sale in the 1997 year of Aged Stock that was on hand as at 30 June 1996. The analysis appears at folio 3268 and following. A similar analysis appears in respect of the 1998 financial year at folio 3382 and following.
2. The objective of results analysis 1 and 6 is to compare the percentage write down in Mr. Mitchell's stock assessment with the retail discount for the purposes of testing the integral nexus argument.
3. Thus Mr. Kosutic 'wanted to see for example, if Mr. Mitchell wrote something by 50% whether the retail price was also reduced by 50%' (TC page 314.20).
4. More particularly the analysis sought to test the proposition advanced by Mr. Mitchell and Mr. Gibson 'that the write downs were supportable because there was a relationship between percentage write downs at retail level being replicated at the wholesale level' (TC page 316.23).
5. Thus, at folio 3268 the sales of Aged Stock in the 1997 financial year are set out in respect of the Ciprian store and the relevant sales for the Albany and Katanning stores appears at folios 3269.
6. With respect to the Ciprian store, line 1 on folio 3268 shows that in July 1996 a total of 38 Aged Stock items were sold in the month (column 3). Of those 38 Aged Stock items, 27 were sold for full retail and 11 were sold for some retail discount (columns 4 and 5 respectively). In that month there were no Aged Stock items sold for a retail discount that was equal to, or greater than, Mr. Mitchell's wholesale stock write-down percentage (column 6). In percentage terms, for that month, 71% of sales of Aged Stock were at full retail price and 29% of sales were at some retail discount (columns 7 and 8 respectively).
7. In respect of those 38 Aged Stock items sold in that month, Mr. Mitchell's average wholesale write-down percentage for those Aged Stock items sold was 70% (column 10). However, the average retail discount percentage for those Aged Stock items sold in that month was only 9%.
8. The total figures for the Ciprian store for the 1997 financial year showed 850 Aged Stock items sold, of which 406 were sold for full retail price (some 48%) some 444 were sold for some retail discount (that is 52% of Aged Stock sales) and 41 items (5% of Aged Stock sales) were sold for a retail discount that was equal to or greater than the wholesale percentage write down.
9. More particularly for the Ciprian store, for the whole of the 1997 financial year, Mr. Mitchell's average wholesale write down in respect of all Aged Stock items sold was some 74%. However the average retail discount given in respect of the sale of those Aged Stock items was only 18% (folio 3268).
10. The aggregate figures for all three stores for the 1997 financial year appear at folio 3269. Thus across all stores, 1922 Aged Stock items were sold in the 1997 financial year, of which 962 were sold for full retail price, 960 items sold for some retail discount and there were 178 Aged Stock items that sold for a retail discount that was equal to or greater than the wholesale percentage write down (folio 3269 column 6). The discrepancy between the figures of 1922 and 1898 for Aged stock for 1997 is caused by the stock sheets missing at the time of the preparation of Mr. Kosutic's statement.
11. Thus in percentage terms for the 1997 financial year, across all stores, the average wholesale write down percentage for the Aged Stock items sold was 72%. However, the average retail discount given in respect of those Aged Stock items sold was only 18% (folio 3269).
12. The same analysis was conducted using actual dollar values rather than a percentage number of items.
13. The analysis in actual dollar values for the 1997 financial year appears at folios 3270 and 3271. Thus, 1898 items of Aged Stock were sold, of which 961 were sold for full retail price and 937 were sold for some retail discount (columns 4 and 5 folio 3271). Those 1898 items of Aged Stock had a wholesale cost of $124,329.81 (folio 3271 column 6) and as at 30 June 1996 the written down value (that is, on the Applicants' analysis the "market selling value") of those 1898 Aged Stock items was $41,954.82 (folio 3271 column 7). The average wholesale write down percentage for those 1898 Aged Stock items was 66% (column 8, that is $41,954.82 is 34% of $124,329.81). The full retail ticket price of those 1898 Aged Stock items sold was $396,603.31 (column 9) and the aggregate retail selling price of those 1898 Aged Stock items was $290,646.29 (column 10). The average retail discount for those 1898 Aged Stock items was thus 27%.
14. The corresponding analysis in respect of the 1998 financial year appears at folio 3382 and following. Thus, in terms of the actual number of Aged Stock items, some 2210 were sold in the 1998 year of which 1223 were sold for the full retail ticket price, some 987 were sold for some retail discount and 82 Aged Stock items were sold at a retail discount that was equal to or greater than the wholesale percentage write down (folio 3383 column 6).
15. The average wholesale write-down percentage for all 2210 Aged Stock items sold in the 1998 year was a write down of 74%. However, the average retail discount percentage given in respect of all 2210 Aged Stock items sold was only 14% (folio 3383 column 11).
16. The analysis of all Aged Stock sales in the 1998 financial year expressed using actual dollar values appears at folios 3384 and 3385. Thus, in summary form in respect of the three stores the 2210 Aged Stock items sold had an aggregate wholesale cost of $115,446.88 (column 6). The actual written down value of the 2210 Aged Stock items sold was $35,419.81 which represents an average wholesale write down percentage for all 2210 Aged Stock items sold of some 69% (folio 3385 column 8, that is $115,446.88 reduced by 69% equals $35,419.81). The full retail selling price (that is the ticket price) of the 2210 Aged Stock items sold was $382,701.24 (column 9) and the actual retail selling price achieved on the 2210 Aged Stock items sold in the 1998 financial year was $303,647.14 (folio 3385 column 10). Thus, the average retail discount in actual dollar values was only 21%.
17. The results analysis at BK98 (folio 3268 and following) and BK112 (folio 3382 and following) demonstrate that the so-called integral nexus is, at best, without rational foundation, and at worst, total nonsense.
18. Lest there be any doubt in that respect the relevant passages from paragraph 59 of Mr. Mitchell's affidavit are set out above together with paragraphs 19, 20 and 42 of Mrs. Ciprian's affidavit together with Mrs. Ciprian's oral evidence.
19. By Mr. Mitchell's own admission the integral nexus argument was a late addition to his affidavit and, empirically, it is just plain wrong.
20. The analysis undertaken by Mr. Kosutic was thorough and analysed the sale of approximately 4,200 Aged Stock items so as to ascertain if there was "some sort of pattern . . . which we could use as a guide to what they were worth' (TC 323.32).
21. The analysis covered every single item of Aged Stock that was sold over the two year period (TC 324.25). And of course the analysis 'picks up every single item of Aged Stock that was sold no matter how long ago it was purchased' (TC 325.26).
22. The sale of every Aged Stock item over that two year period is representative of what happens to Aged Stock (TC 324.35).
23. Approximately 50% of Aged Stock items on hand at the beginning of a financial year will sell during the course of that year. Thus on 1 July 1996 there were approximately 4,500 Aged Stock items and approximately 2,000 were sold in the 1997 financial year (TC 327.3).
24. It is instructive to compare the analysis above with the conclusion expressed in Pontifex Jewellers v FC of T 2000 ATC 4642 at page 4648 paragraph 16 that "on occasion, old stock, did sell for full original price, but this was not usual, ... [in] general I am satisified the retail sales could only have be effected at very substantial reductions." In the 1997 and 1998 financial years of the 4,132 items of Aged stock sold by the Applicants, the full retail ticket price was achieved on 2,185 occasions, that is 53% of the Aged Stock sales were for full price. Contrary to the finding in Pontifex, here it was the exact opposite, it was usual for the sale to be at full ticket price and it did not occur on occasion. Moreover the retail discount, either expressed as per number sold or dollar value, is a fraction of Mr. Mitchell's write-down percentage.

Comparison with ten other jewellery enterprises

1. Mr. Kosutic, as part of his duties with the jewellery industry project had access to other stock assessments prepared by Mr. Mitchell for other jewellers. Ten were picked at random with the Applicants used as the template (Kosutic statement 10 January 2001 paragraph 37).
2. Different jewellers allocated different category numbers to particular categories and goods. Thus, jeweller number 10, for example, might describe diamond rings over $500 as category 24 whereas the Applicants allocated category 1 for those items (TC 332.7).
3. BK 75 (folio 376) sets out the comparative write-down percentages for each of the ten jewellers in respect of the particular category by its description, irrespective of the category number allocated by the particular jeweller.
4. When the categories of each of the ten jewellers were synchronised it is then possible to compare Mr. Mitchell's write-down percentages for each of those ten jewellers.
5. BK75 (folio 376) discloses that 'but where the categories were identical, the write downs were identical' (TC 332.17). Decimal points are used on occasions. But mere fractional differences cannot disguise the fact that there is uniformity in the write-down percentages. Thus, at folio 376 line one, in respect of the category of diamond rings over $500, the write-down percentages have a remarkable uniformity of 0, 54, and 61. One jeweller does, apparently, have the fractional percentage of 58.9.
6. Paragraph 48 of Mr. Mitchell's affidavit of 26 April 2001 conveys the impression that the technical description of an item, for example, '9CTYGOYL8X6 GARNET 10X.01 DIA RIN' was relied upon by Mr. Mitchell and formed the basis of his write-down percentage.
7. If, indeed the technical description for each item, as set out by way of illustration in paragraph 48 of his affidavit, was the basis of the percentage write down, then the write-down percentages for each of the ten sample jewellers should be different because each jeweller would be holding a different profile and quantity of stock (TC 334.25).
8. However that is not the case. Virtually similar write-down percentages, if not outright identical ones, were arrived at by Mr. Mitchell by reference to the category or department.
9. That Mr. Mitchell valued by category or department can be demonstrated by reference to sample jeweller number four. That jeweller adopted the apparently maverick practice of not describing his categories or departments in conformity with the stock standard categories or departments so readily understood by Mr. Mitchell (Mr. Kosutic's statement paragraph 43 and exhibits BK55 and BK56).
10. The list of departments for sample jeweller four appears at BK56 (folio 342). The unique nature of the categories or department adopted by jeweller four is apparent when compared with the standard categories of the Applicants as set out in TMO2. Thus, for example, jeweller four has 79 categories as opposed to the Applicants' 40, and jeweller four has unusual categories such as category 52 (Pierre Cardin) and barometers/thermometers.
11. It is instructive to observe Mr. Mitchell's reaction to the extraordinary categories nominated by jeweller four. Thus Mr. Mitchell to Mr. Gibson at exhibit BK55 (folio 341) as follows

'I have now completed an inspection of . . . jewellers stock cards and as we recently discussed it is very difficult for us to assess values. However I have listed below the various catalogues [sic] with the average percent discount that would apply to Aged Stock.

1. Thereafter Mr. Mitchell provides write-down percentages for the stock standard 38 categories ordinarily encountered.
2. In the second round valuation for jeweller four on 6 October 1994 Mr. Mitchell, when again confronted with the unusual categories and departments, wrote as follows

'I have recurved [sic] the stock report your reference 3594 but as the items are not grouped I have given discounts for the various product groups which your client apply'.

1. Contrary to what Mr. Mitchell asserts, by inference, in paragraph 48 of his affidavit that the technical stock description was sufficient and each item was valued by reference to that stock description, Mr. Mitchell has not attempted to value each item individually with a percentage write-down for that jeweller for that item.
2. He has simply provided jeweller four with the stock standard template and standard write-downs with the expectation that hopefully 'this will give you a basis for your assessment' and the template is something 'which your client can apply'.

Stock sold in the 1997 financial year but not listed as on hand at 30 June 1996

1. An analysis of the sales records for Aged Stock sold in the 1997 year discloses 66 items of Aged Stock which are sold but which do not appear as being on hand as at 30 June 1996. The analysis is contained at BK96 (folio 3263 and following). No explanation is available and the analysis is included to show that for these items it was possible to calculate a wholesale cost or a written down value (folio 3263 columns 4 and 5). The retail cost of these 66 items is $3,572.62 (folio 3265) of which some $996.41 is accounted for in one diamond ring over $500 (line 38 folio 3264).
2. The effect of the exclusion is de minimis.

Aged Stock selling for a retail discount equal to or greater than Mr. Mitchell's write-down percentage

1. The basis of the valuation methodology and wholesale percentage write-downs arrived at by Mr. Mitchell is based exclusively upon the age of item in question. The relevant passages from Mr. Mitchell at paragraph 58(h)(ii) and paragraphs 19, 20 and 42 of Mrs. Ciprian's affidavit and her oral evidence is set out above.
2. Of course, the milestone events selected by Mr. Mitchell occur at 12 months (in the case of watches) 18 months and 36 months.
3. On 178 occasions Aged Stock items sold for a retail discount which was equal to or greater than the wholesale percentage write-down recommended by Mr. Mitchell (BK101 folio 3275 and following).
4. Thus, for example, item stock number 230901 (line 1 on folio 3275) was purchased on 30 November 1991 for a wholesale cost of $46.97. It was subjected to a wholesale write down of 50% and accordingly its written down value was $23.49 (column 5). That item was sold on 4 October 1996, almost five years after the date of its acquisition, for a retail sale price of $60 (column 9) which represents a retail discount from the ticketed price of 73% (10). The retail cost (that is the economic cost) of the item was $54.49 so that, at a sale price of $60 the item was still sold at a profit.
5. The point of the analysis in exhibit BK101 is to record those instances, where, if the integral nexus argument is to have any credence, the retail discount matches (and/or exceeds) the wholesale percentage write down (T338.15). What Mr. Kosutic was endeavouring to ascertain 'is how many times is the retail discount the same or greater than the wholesale write down because it's at the heart of their arguments' (TC 340.23).
6. In respect of these 178 items of Aged Stock, which sold for a retail discount greater than the wholesale percentage write down advocated by Mr. Mitchell, nonetheless, the items sold at a profit. The retail cost of the 178 items was $17,457.83 and the sale price was $24,079.82 (folio 3281).
7. Exhibit BK100 (folio 3274) contains an age profile in respect of these 178 items of Aged Stock where, in conformity with the integral nexus argument, the retail discount was equal to or greater than the wholesale percentage write down.
8. The age profile discloses that six items only were two years old at the point of sale, 11 items were three years old on sale, and so on (folio 3274). Most significantly 29 items were aged six years or more on sale, 28 items were seven years or older, 30 items were eight years old on sale and another 30 items were nine years old on the day of sale. Aged Stock items between 6 to 9 years inclusive, in fact accounted for 117 items out of 178. Additionally, nine items were 16 or more years old on the day of sale.
9. The average age of all 178 items of Aged Stock sold at a retail discount equal or greater than Mr. Mitchell's recommended wholesale write down was 7.43 years and not, most significantly, any of 12 months, 18 months or 36 months. However, it must be noted that there were many items of this age or older which sold for the full retail price. This analysis only covered items where the retail discount matched or exceeded the wholesale write down.
10. The selection of milestone events at 12 months, 18 months and 36 months is arbitrary, accelerated, and premature.

1. As set out above Mrs. Ciprian has stated in paragraphs 19, 20 and 42 of her affidavit that an item over 36 months has been through three Christmas trading periods "and is unlikely to ever sell [and] the best we can hope to recover from such an item is its scrap value".
2. In oral evidence she has opined that Mr. Mitchell's percentage write-down amounts were generous and that we would be very lucky to get that amount. That evidence is just plain wrong and ought not be accepted by the Tribunal.
3. Of the 4,132 Aged Stock items examined by Mr. Kosutic, in the 1997 and 1998 financial years, only 18 items were sold for less than retail cost.
4. Retail cost is, of course, the Applicants' break-even point and is the wholesale acquisition cost together with the sales tax on the written down amount.
5. Exhibit BK147 contains the analysis of all 18 Aged Stock items, which sold for less than retail cost. Thus, stock number 320318 was purchased on 14 December 1988 for a wholesale cost of $16.96 and was written down by 50% to a written down value of $8.48 (BK 147 line 1). The retail cost was $17.98 and the item was sold on 27 July 1996 for a sale price of $16.50 which is a loss on sale of $1.48.
6. In the 1997 financial year 13 items of Aged Stock only, having an aggregate retail cost of $1,914.41 sold at retail for the aggregate amount of $1,860.00 which represents a total loss of $59.41 on those 13 items. Of that retail cost of $1,919.41 the amount of $1,461.71 is represented in one item stock number 010339 (line 12). In the 1998 financial year five items only were sold at less than retail cost and a loss of $22.38 was incurred.
7. The evidence of Mr. Mitchell at paragraph 58 and Mrs. Ciprian's evidence at paragraphs 19, 20 and 42 ought not be believed. Eighteen items out of approximately four and a half thousand does not establish the Applicants' were "lucky" to get that amount. Quite the contrary. The Applicants would be extraordinarily "unlucky" to have to sell an item of Aged Stock below its retail cost.
8. Mrs. Ciprian's evidence at paragraph 42 of her affidavit is set out above. For ease of reference this is what she said: "Often the item would be marked down to an extent greater than the discounted amount which appeared on the stock sheet; ie the retail 'sale' price would be less than that calculated by the program" (Emphasis added). Unlike the conclusion in Pontifex that statement does not stand a modicum of scrutiny, when over half of sales of Aged Stock items are for full ticket price and eighteen (18) items only sold for less than retail cost (economic cost), let alone less than the wholesale written down value. Paragraph 42 is, in that regard demonstrably false.
9. Mrs. Ciprian in cross-examination, must be taken to have realized, and resiled from, the absurdity of what is written in paragraph 42. She was asked if the Applicants discounted at retail the same amount as at the wholesale level. Her answer speaks volumes "Not unless we absolutely had to otherwise the door would be shut" (TB page 218.9 to page 219.1) "Unless absolutely had to" is not "often".

Comparison of retail mark-up with wholesale percentage write down

1. Exhibit BK106 (folio 3288) and exhibit 120 (folio 3399) are mirror image analyses in respect of the 1997 and 1998 years respectively. That analysis is directed towards testing another aspect of the so-called integral nexus argument advocated by Mr. Mitchell. That is to say it involves a comparison of the actual mark-up achieved on the retail sale as compared to the wholesale percentage write down amount as determined by Mr. Mitchell.
2. At folio 3288 in respect of the 1997 financial year 1922 items of Aged Stock were sold in that year. 962 items, or approximately 50%, sold for full retail price. The retail cost (that is the economic cost or the break-even amount) of those 1922 Aged Stock items was $137,529.45. However, those 1922 items of Aged Stock actually sold for the amount of $292,162.74, a mark-up on retail cost of 112% (folio 3288).
3. Put simply the average wholesale write-down percentage in respect of all 1922 Aged Stock items sold in the 1997 financial year was 72%. However, those 1922 items of Aged Stock sold for a mark-up of 112% on retail cost, which retail cost is in turn the aggregate of wholesale price plus sales tax of the written down value.
4. The average wholesale write-down percentage in the 1998 financial year was 74% in respect of 2210 Aged Stock items sold in that year. However, those 2210 Aged Stock items had a retail cost (economic cost) of $124,977.82 but sold for the aggregate of $303,647.00, a mark-up of 143% (folio 3399).
5. The analysis contained in results analysis five and ten (folios 3288 and 3399) points out in that analysis "the significant disparity between the postulated market selling value on the write down approach compared with the reality of what happened at retail level on sales of all stock over the year and the mark up that was achieved" (TC 349.19).

Restarting the clock and sales within the 12 month, 18 month and 36 month period

1. Exhibit BK137 (folio 3504) contains an analysis of an Aged Stock item being written down immediately upon obtaining a defined milestone of 12 months, 18 months or 36 months age, irrespective of the selling pattern of that item.
2. Notwithstanding that items of stock may have sold during the first 18 months after purchase "the clock doesn't start again and even though there have been sales of the very same item the maximum write down percentage is applied the moment you get to the 18 month" (TC 370.14).
3. Thus, at BK137 (folio 3504) on 16 February 1995 six items of stock item number 281832 were purchased at a wholesale cost of $1.51. On 7 July 1996, that is, within the 18 month period, one item was sold for full ticket price of $19.95. The wholesale value of that item was $1.60 being wholesale cost plus 6%. Sales tax was 0.42 and the retail cost (economic cost) was $2.02.
4. Notwithstanding the sale of one of the items within 18 months of its acquisition the remaining five items were written down by 90.1% on 16 August 1996.
5. Accordingly, the written down value was $0.15, the sales tax on 15 cents was 5 cents and the retail cost (economic cost) was $1.56. On 2 October 1996 the second item from the original package was sold for full ticket price of $19.95. The remaining four items were sold in the course of the 1997 calender year.
6. Thus, the actual sales record of an item was irrelevant to the question of writing down the wholesale value. Age, more specifically the milestones of 12 months, 18 months and 36 months was the sole criteria.

"an item of jewellery which is 18 months old will not, except in very exceptional circumstances, be of 'current model' because trends and fashion in jewellery change very quickly. Whether or not an item is a current model is considered in determining the valuation." (Emphasis added)

1. In Exhibit BK97 (folio 3266) Mr. Kosutic examines whether Aged Stock items were repurchased or not. His methodology was as follows "We analysed every sale of Aged Stock over a two year period. Now, when an item of Aged Stock sold during a financial year we then went to the closing stock print for the end of that financial year to see if that same stock number was there and see if there was a new purchase date and to see if there was the same description as the items sold. Where the same stock number was there, where the description was the same and where there was a new purchase date we then entered that particular item into this spreadsheet, replacement Aged Stock 97 which is BK97." (TC page 371.13).
2. The same analysis is undertaken in respect of the 1998 financial year at BK111 (folio 3379 and following).
3. Thus, for example, on line 1 at folio 3266, Aged Stock item stock number 340311 was purchased on 25 November 1992 (column 3). It remained on hand for over three and a half years until it was sold on 9 July 1996 (column 4). The wholesale cost was $16.80 and it was written down by 90% to a written down value of $1.68. The item was sold for its full ticket price of $44.95 (column 8).
4. However, notwithstanding Mr. Mitchell's assertion that Aged Stock is not current model and Mrs. Ciprian's oral evidence that they would be very "lucky" to sell Aged Stock items over three years of age for the written down value, this specific piece of stock was repurchased and replaced on 27 August 1996, that is, approximately six weeks after this three and a half year old piece of stock was sold. Precisely the same stock was purchased as a replacement at a price of $17.25.
5. Exhibit BK97 identifies 22 Aged Stock items which have been replaced in this manner. In some instances (for example stock number 251697 at line 15) this replacement occurred within a matter of a couple of days after the sale of the Aged Stock. In respect of all 22 items the aggregate original wholesale cost was $1,618.13 which items were sold at retail for $3,958.20.
6. More significantly, not only were the 22 items replaced they were replaced at a discount, that is, the wholesale cost of the replacement stock was only $1,487.30.
7. In the 1998 financial year 60 such occurrences of the replacement and re-acquisition of Aged Stock items previously sold have been identified. The aggregate wholesale cost of those 60 items was $3,686.10 (folio 3381) and the written down value was $1,189.02. The 60 items were also replaced at a slight discount in the amount of $3,586.69.
8. It is also the case that significant lag times were involved. Thus item one at folio 3266 was on hand for three years seven months and, according to Mr. Mitchell not of the current model and not readily saleable, yet it was replaced within six weeks.
9. BK97 and BK111 establish that "notwithstanding that stock was written down, and showed that stock number by reason of alleged qualities or absence of qualities by reason of age, it is still deemed fit to be re-ordered . . . then sold profitably . . . [and] by and large repurchased from an external wholesaler at much the same price as the original stock, perhaps [and] at small discount, I think 2% or so". (TC page 373.22)
10. At paragraph 58(h)(ii) Mr. Mitchell did add the qualification that "Except in very exceptional circumstances" the stock would not be the current model.
11. In respect of these 82 items of Aged Stock sold in the 1997 and 1998 financial years, which Aged Stock were replaced with precisely the same stock after sale, not one iota of evidence has been led by the Applicants to suggest that these 82 particular Aged Stock items were, in any manner whatsoever, exceptional in the sense described by Mr. Mitchell.

1. The impression created by Mr. Mitchell in paragraph 58(f)(i) is that continuous efforts are required on the part of the jeweller to sell the Aged Stock, for example, "We assume the jeweller has taken steps to sell the stock, such as applying significant discounts and the like".
2. At paragraph 20 of her affidavit Mrs. Ciprian conveys the same impression. Thus she talks of terms of an Aged Stock item "The chances of selling the item at its current, albeit already discounted, price is highly unlikely and such items will need to be even further discounted if they are to sell".
3. At paragraph 42 of her affidavit Mrs. Ciprian says "Often the item would be marked down to an extent greater than the discounted amount which appeared on the stock sheet; ie the retail 'sale' price would be less than that calculated by the program".
4. However, Exhibit BK122 (folio 3413) discloses regular instances where Aged Stock was sold for full ticket price, then discounted for sale during special sale months and, at the conclusion of the sale months, then sold at full ticket price for the remainder of the year (TC 374.13).
5. Thus, Exhibit BK122 (folio 3413) discloses that eight individual items under stock number 161902 were acquired on 30 October 1995 at a wholesale cost of $16.58 and written down by 80% after 18 months to a written down value of $3.32. One item was sold on 2 January 1997 for full ticket price of $59.95. There was no retail discount.
6. However, in the month of April 1997, being a sales month for the Albany store, three items were sold at retail at a 50% discount at the price of $29.95. Of course, the discounted retail sale price far exceeds the retail cost (or economic cost or break-even amount) being $17.64.
7. The remaining three items on hand were then sold at full retail ticket price in the months after the conclusion of the sale in April 1997, in May 1997, December 1997 and January 1998.
8. Thus, the impression created by the evidence of Mrs. Ciprian and Mr. Mitchell that Aged Stock has to be consistently and persistently discounted in order to achieve a sale is just wrong.
9. Age is not a determinate. Aged Stock maybe sold on special during sales but it is sold again for the full retail ticket price after the conclusion of the sales month.

1. The opening of the Katanning store in the course of the 1996 year of income provides a rare snapshot and an opportunity to test Mr. Mitchell's integral nexus hypotheses and that Aged Stock items need to be written down in value.
2. The evidence establishes that Mr. Ciprian had a wealth of buying experience. Thus on the opening of the Katanning store a strategic decision was required. Should it be stocked with Aged Stock from the other stores or should new stock be acquired. It appears that overwhelmingly the stock in the Katanning store was acquired as new stock. This is established by BK 149, in that at 30 June 1996 the Katanning store had 4510 items on hand, of which only 202 or some 4.48% was Aged Stock. Since, at 30 June 1996 the Katanning store was less than 12 months old and, accordingly had not reached any of Mr. Mitchell milestone dates, all 202 of those items had to come from Aged Stock in the other stores.
3. Given the Katanning store was predominately stocked with new stock, its opening presented with Mr. Ciprian with an opportunity to identify which items of stock were moving quickly and which items were likely to remain unsold after 12 months, 18 months and 36 months.
4. Put bluntly, the opening of the Katanning store represented an opportunity to clear the decks and stock the shop with items that were not going to age, languish and depreciate in value.
5. A right minded reasonable business person in Mr. Ciprain's position would, it is submitted, if Aged Stock did deteriorate in value in the manner postulated by Mr. Mitchell, take the opportunity to avoid having Aged Stock items on hand.
6. However, by the end of the next financial year, that is 30 June 1997, the age profile of the Katanning store in respect of Aged Stock on hand is virtually indistinguishable from the Ciprian and Albany shops. Thus, at 30 June 1997 the Katanning store had 4,396 items on hand of which some 1,393 or approximately 32% was represented by Aged Stock on hand, whereas, the relevant percentage of Aged Stock on hand for Ciprian is 35% and 46% for Albany.
7. The question then is how many of these 1,393 Aged Stock items in the Katanning store on 30 June 1997 were home grown Aged Stock and how many were transferred in. By looking at the acquisition date of the stock sheet for the Katanning store it is possible to identify those stock items which were purchased prior to the date of the opening of the Katanning store. There were only 146 such items out of the 1,363 Aged Stock items on hand in the Katanning store on 30 June 1997.
8. Within the space of just one calender year the Katanning shop had, on its books as stock on hand both fast and slow moving stock, which implies, as a consequence, that the age of the stock does not necessarily mean that its value has diminished.
9. The trading record of Katanning, as a new store, shows it is normal in the ordinary course of business to have both slow and fast moving stock in the jewellery industry.

1. The fundamental point which emerges from the analysis of Mr. Kosutic appears at BK98 (folio 3271 in respect of the 1997 financial year and BK112 at folio 3385 in respect of the 1998 financial year).
2. Thus, in respect of the 1997 financial year (folio 3271) 1898 items of Aged Stock were sold by the Applicants to Allay. Those 1898 items of Aged Stock were acquired at a cost of $124,329.81 (folio 3271 column 6). Yet, according to the wholesale percentage write downs advocated by Mr. Mitchell those 1898 items of Aged Stock should be written down in the books of Jade by 66% to the amount of $41,954.82.
3. That written down value is said to be the "market selling value" of that stock on hand to the Applicants.
4. Allay was able to sell, in the course of the 1997 financial year, those precise 1898 items of Aged Stock for an aggregate amount of $290,646.29. Allay is thus able to secure for itself a margin of $166,317 being the difference between $290,646 and $124,329. On an initial aggregate wholesale acquisition cost of $124,329 that profit margin of $166,317 (excluding sales tax) represents a mark-up of 134%.
5. Yet the Applicants represent to the Commissioner that the market selling value to the Applicants trading as Jade in respect of those 1898 Aged Stock items is not their cost of $124,329 but rather an amount written down by 66%.
6. Acquiring at cost, Allay secures for itself a profit of $166,317 being a margin of 134%.
7. Yet the Applicants represent to the Commissioner that a reasonable but not too anxious vendor in the position of the Applicants would be prepared to sell its stock at a market selling value of $41,954.
8. A reasonable not too anxious vendor would insist on at least recouping his cost and, in all probability, a margin on top, especially when, in turn, that purchaser is able to sell the stock at a mark-up above cost of 134%.
9. The same analysis can be repeated in respect of the 1998 financial year: see BK 112 at folio 3385. Thus 2210 Aged Stock items having a wholesale cost of $115,446, with a ticketed price of $382,701 were sold for an aggregate amount of $303,647. That represents a mark up of $188,201 or 163%. But the Applicants represent to the Commissioner the "market selling value" is only $35,419.
10. The suggested wholesale percentage write down and, as a consequence, the market selling value suggested by Mr. Mitchell is, with respect, arbitrary, capricious and perverse.

1. Additional tax was imposed under sec 226J of the 1936 Act at 75% and sec 226X(b)(i) being an additional 20% of the penalty under sec 226J, a total of 90% altogether (20% of 75% = 15% + 75% = 90%).
2. By sec 226J penalty is imposed if the tax shortfall was caused by "intentional disregard by the taxpayer ... of this Act or the regulations".
3. Sec 226X(b)(i) the penalty is imposed if "the taxpayer took steps to prevent or hinder the Commissioner from becoming aware of the shortfall"
4. The Commissioner's contention as to what constitutes an intentional disregard of the Act or Regulations derives from paragraphs 21 and 22 of Taxation Ruling TR 94/4. Although not binding on the Tribunal it is open to the Tribunal to have regard to the Commissioner's guidelines. The relevant paragraphs are in the following terms:

In a tax context, penalty is attracted if a taxpayer intentionally disregards the ITAA or the regulations. Whether a taxpayer's disregard of the ITAA or regulations is intentional may be determined on the basis of direct evidence of the taxpayer's intention, but will more likely need to be inferred from the surrounding circumstances and conduct of the taxpayer. A taxpayer who does not include in his or her assessable income an amount of interest income may be suspected of having done so intentionally, but in the absence of an admission from the taxpayer that the omission was deliberate or conduct which might imply deliberate evasion, it would be difficult to judge that the taxpayer had intentionally excluded the amount from assessable income resulting in a 75% penalty being payable. On the other hand, if the interest omitted was from a bank account which the taxpayer had opened in a false name, this would be a circumstance which would infer that the taxpayer had acted intentionally.

23. It may be noted that for a taxpayer to intentionally disregard the ITAA or the regulations requires the taxpayer to know what the obligations under the ITAA or regulations are, and to choose to disregard them. Where, for example, the assessability of a particular amount is unclear, and a taxpayer chooses not to return the amount, the taxpayer would not have "disregarded" the ITAA, but would have taken a view of its effect which differs from the Commissioner's view. Provided that view was honestly held, and was not frivolous or unfounded, penalty for intentional disregard would not apply. The taxpayer may, of course, still be liable for penalty for lack of reasonable care or recklessness." (Emphasis added)

1. Sec 31(1) of the 1936 Act allows a taxpayer to choose market selling value as the basis for accounting for an item of stock on hand. The Applicants assert that Mr. Mitchell's wholesale write-down percentages produce a proper measure of market selling value. In the Commissioner's submission, any view on the part of the taxpayer that the wholesale write-down percentages were an appropriate measure of market selling value cannot be honestly held, and is frivolous and or unfounded.
2. The view that Mr. Mitchell's wholesale write-down percentages were an appropriate measure of market selling value is based upon the following propositions:

(a) There was an integral nexus between the discount offered at the retail level and what the amount of the discount at the wholesale level;

(b) That the value of stock deteriorated with age and that the Applicants were "lucky" to sell it for the written down value and that "often" it was discounted so that "the retail sale price would be less than that calculated by the program".

(c) That at 18 months Aged Stock should be valued as if it were being sold back to the wholesale merchant; and

(d) That at 36 months Aged Stock should be valued as if it were being sold for scrap.

1. Propositions (a) and (b) have been fully dealt with in the submissions. To recap on one telling answer by Mrs. Ciprian, she was asked, did she discount at retail level as she did at wholesale and she relied "Not unless we absolutely had to otherwise the door would be shut".
2. Market selling value as set out above was found to be the amount that could be realised in the taxpayers own selling market in the ordinary course of the taxpayer's business. Market selling value does not contemplate a forced sale.
3. In relation to propositions (c) and (d) the write-downs for 18 to 36 months contemplate a sale at a hypothetical value in a hypothetical market. The written down value is based on the original cost of the item, which is then reduced by a pre-determined percentage that is solely based on time. The Applicants' methodology is, in effect, a form of depreciation. This value is not based on the Applicant's own selling market in the ordinary course of business.
4. The write-down for stock aged 36 months and over contemplates a sale of stock to a refiner for the purpose of meltdown. For stones it contemplates a sale back to the stone merchant. This is not the Applicants' own selling market in the ordinary course of business. Stock aged over 36 months is never disposed of in this way. The Applicant has an option of using this method to dispose of its Aged Stock if it wishes, but chooses not to do so because it would result in too great a loss. This is not the Applicant's own selling market in the ordinary course of their business. Sales of trading stock by this means can reasonably be considered to be a forced sale. Valuation by this means is contrary to the decision in Australasian Jam.
5. The Applicant's actions do not indicate a careful and cautious approach to their taxation affairs. Rather, their actions, objectively ascertained and scrutinized, establish a headlong and determined pursuit of a tax deduction to the exclusion of any modicum of reason or restraint.
6. Thus, on 20 January 1993 Mrs. Ciprian wrote to Mr. Gibson as follows:

"Dear Peter, As advised for showcase it is possible to depreciate old stock for tax calcs. Can you please advise us of (i) the formula (if there is one!) (ii) the method?"

1. In November 1993 Australian Sales Tax Consultants wrote to their clients, including the Applicants, and advised that the ATO "will not accept the sale of aged stock on or after 1 November 1993 at the revalued amount ... it remains our opinion that an independent valuation is the most appropriate mechanism to establish the true arm's length value of aged stock." (Emphasis added)
2. The letter outlines three choices namely, continue to claim the wholesale percentage write down and deal with the consequences if and when an ATO audit occurs, comply with the tax office interpretation, or sell all aged stock to your retail entity before the ATO appointed deadline of 31 October 1993.
3. The letter on its face cries out for a careful and cautious approach. A taxpayer in the position of the Applicants who know their own business and the selling patterns for Aged Stock should be put on notice, particularly by the words "an independent valuation" and a mechanism to establish "the true arm's length value of aged stock".
4. The Applicants knew, or must be taken to have known, at all times the true arm's length value of aged stock and that it did not deteriorate in value merely by age.
5. In November 1993 Australian Sales Tax Consultants obtained an opinion from Mr. A.H Slater QC. On 11 February 1994 (Exhibit DC07, page 37 Affidavit of Mrs. Ciprian) Australian Sales Tax Consultants wrote to the Applicants and advised of the existence of Mr. Slater's opinion that "the taxable value of sales of aged stock between associated entities need not exceed a price which a retailer dealing at arm's length would be prepared to pay for the goods."
6. However, the letter contained an odd twist which did not pass unnoticed by Mrs. Ciprian, namely, that "We are prepared to supply the benefit of Queens Counsel's opinion. We are prepared to show you the opinion, however, we are not in a position to supply you with a copy of same."
7. Mrs. Ciprian has rightly underlined the words "we are not in a position to supply you with a copy of same" and placed two question marks against those words in the margins.
8. As a matter of logistics " showing" the opinion means either the Applicants travelling from Albany to Sydney or vice versa.
9. The opinion by Mr. Slater is in evidence as Exhibit PG07 to the Affidavit of Mr. Gibson. It is worth noting, in full, the caveat to the opinion as follows:

"I add the cautionary note that the foregoing advice is predicated upon the value adopted being an arm's length value. The circumstance that an independent valuer, having no business connection with the wholesaler and retailer other than his engagement to provide a valuation, and having appropriate levels of expertise and experience, provides a valuation of the jewellery for the purpose of fixing the transfer price, is potent evidence that the price adopted is an arm's length price and it may, of course, be the fact that the valuer is simply wrong; in a dispute, a Court or Tribunal might adopt in preference a higher value attributed to the goods by a valuer called by the Commissioner. As the many cases in which competing valuations have been assessed by Courts and Tribunals indicate, independent valuers acting in good faith may reach different figures. However, if the valuer selected is accepted by the Taxation Office as being indeed and independent valuer, I should not expect there to be any contest over the figures adopted by him.

In this regard, I would point out that the consistent use by taxpayers (especially a group of taxpayers having a common advisor) of but one valuer may both lead the Taxation Office to question his independence, and indeed imperil that independence: the prospect of continued work (and revenue) may afford an incentive to make valuations which are more rather than less palatable to the client. A panel of independent valuers, amongst whom the work is spread, is likely to be both more reliable and more acceptable."

1. Mr. Slater's caveat could not be more direct, pointed and telling. There is, of course, no evidence that either any of the Applicants or their advisor, Mr. Harrison, actually read the Slater opinion. But nonetheless, it was, to the Applicants knowledge available on request.
2. On 3 February 1994 Mr. Gibson obtained advice from Borough & Partners (Exhibit DC20 page 75). This written advice was received by the Applicants. However, that advice in turn is subject to three specific caveats which set out in paragraphs five and six of the letter as follows:

"It should also be mentioned that the income tax concept of 'market selling value' has been considered upon a number of occasions by the Courts and has developed a relatively clear meaning. For example, it refers to the market selling value of the stock in the taxpayer's own selling market and not some other market. The Commissioner of Taxation also takes the view that selling expenses - i.e. costs which may be incurred in the future in effecting a sale of the goods do not come into the valuation of market selling value. You will appreciate from these comments that the Commissioner of Taxation might take issue with the amount ascribed to stock by an independent valuer upon the basis it does not reflect 'market selling value' in an income tax context.

It follows, therefore, that the adoption of the independent valuations proposed would not, subject only the above stated matters, be disputed by the Commissioner of Taxation. (We note again for completeness that the goods in question represent only certain stock lines and thus their sale at a loss should not result in an overall loss for taxation purposes being incurred by the wholesale entities. In the event such a loss were to be incurred, we understand you are aware of the various means by which this loss might be utilized)." (Emphasis in the original)

1. The Borough's advice is expressly qualified by reference to the sale in the taxpayers own selling market and not some other market, for example, a fire sale or an export market. It is also predicated on some specific items only being discounted and that no loss is disclosed at the wholesale level.
2. The Mitchell valuation is, of course, based upon a sale in markets that the Applicants do not trade in, namely, a sale back to wholesalers and a sale for scrap. The Applicants knew, or must be taken to have known, that they did not sell in those markets and that they could not satisfy the caveat. This is particularly so, given the "not" was emphasized in the Borough's letter i.e. "and not some other market".
3. Mr. Harrison understood the expression taxpayers own selling market to mean the wholesale selling market in which the Applicants operated (TB page 152.7).
4. Mr. Harrison also agreed that if 37 out of 40 stock items were reduced then perhaps "that doesn't tie in with that spirit" of the Borough's advise that the goods represented "only certain stock lines" (TB 154.2).
5. Mr. Harrison also understood that Borough's assumed that the wholesale percentage write-down would not result in an overall loss for taxation purposes being incurred at the wholesale level (TB 154.2). Mr Harrison was aware that the occurrence of such a loss at the wholesale level was precisely what happened in the Applicants' case (TB 154.3).
6. Accordingly, Mr. Harrison was actually aware of, and understood the implications of the three caveats in the Borough's advice, namely, the taxpayer's own market, certain items only written down, and there be no tax loss at the wholesale level.
7. On 21 November 1994 Australian Sales Tax Consultants wrote their letter entitled "IT'S TIME! STOCK REVALUATION".
8. The first paragraph of the letter referred to the previous valuation on 5 February 1993 and continued as follows "As it has been some time you should now repeat the exercise. Similarly, if you stopped revaluing stock late last year you should consider restarting as there are considerable advantages". Those advantages included, for example, that watches were now being written down at 12 months of age and stock over three years old was now being reduced by up to 90%.
9. Going on from the receipt of that letter of 21 November 1994 the Applicants have made a conscious decision to proceed with a further stock revaluation to secure "the considerable advantages" and such stock assessment was received on 23 June 1995 (DC10 page 41).
10. Not only did the Applicants proceed with the further stock revaluation but, in the implementation, of that further stock revaluation the Applicants accelerated to the maximum write down at the earliest date. The accelerated write down is explained above at paragraphs 296 and following.
11. Objectively viewed the Applicants, conduct can be described as the headlong pursuit of the tax deduction irrespective of their own knowledge of the sales performance of their Aged Stock and their own knowledge that they did not sell back to their wholesale suppliers or, much less, sell their Aged Stock into a scrap market. Further, their accountant was aware of the caveats contained in the Borough's advise and that the Applicants fell squarely within each of the caveats.
12. The Applicants' conduct in claiming the deduction shows an intentional calculated disregard of what were the proper requirements of a market selling value under section 31(1) of the 1936 Act.
13. The Applicants' purported view that the wholesale write-down percentages arrived at by Mr. Mitchell were appropriate valuations is, in all the circumstances, frivolous or unfounded within Taxation Ruling 94/4 paragraph 23.
14. Accordingly, additional tax by way of penalty is properly imposed under section 226J of the 1936 Act.
15. By section 226X further additional tax applies if the taxpayer took steps to prevent or hinder the Commissioner from becoming aware of the tax shortfall. In this context hinder means to obstruct or to obscure.
16. On 29 January 1998 (DC15 page 52) the Commissioner advised that the practice of devaluing Aged Stock generally held within an interposed wholesale company prior to sale to the associated retail company is not acceptable to the Commissioner and not in accordance with subsection 31(1) of the 1936 Act. The letter advised:

"This office does not consider that the written down value of the stock on hand in the wholesale jewellers' books of account satisfied the above provisions. Therefore, if you have used the written down value for the calculation of your income, you are required to review your valuation for stock on hand as at 30 June 1996. Should you find that there has been an error or omission made in your calculation, you are requested to advise this office in writing by 27 February 1998. The disclosure of any errors or omissions should include the name and file number under which your business lodges a taxation return, and the amount of any adjustment(s) required. Also, please include a brief explanation of why the error was made."

1. The letter concluded with a note that voluntary disclosures made at this time would result in the reduction of penalties to a rate significantly lower than would otherwise be imposed.
2. That letter produced a response from the Applicants on 20 February 1998, which reads in full as follows:

"Re: your letter of 29th Jan 1998. I am satisfied that no error nor omission was made in our calculation of income with regard to our stock on hand as at 30th June 1996."

1. As a matter of fact the letter of 20th February 1998 (DC16 page 59) did obstruct the Commissioner and cause the Commissioner to form the view, at least initially, that the Applicants were not using wholesale percentage write downs at all (TC 387.1, 387.10 and 387.34).
2. Under cross-examination Mrs Ciprian was asked: "So you knew full well as a result of receiving that letter of 29 January 1998 that you were not permitted on the Commissioner's view of things to continue to use the stock write down system?". Mrs Ciprian replied: "I knew that the Commissioner did not approve of that system" (TB 263.1).
3. The response by the Applicants was accepted by Mr. Kosutic and he was, in that respect, actually misled by the reply (TC 390.29).
4. Mr. Kosutic then noticed something that he thought was odd in that he received a number of replies which were worded in sort of or in a similar or identical manner to that of the Applicants (TC page 387.17). The Applicants' case was picked at random and selected for audit to ascertain what the reply actually meant (TC page 387.19).
5. In the circumstances the Commissioner was, as a fact, misled, obstructed, delayed and hindered from ascertaining the correct position regarding the Applicants' use of wholesale percentage write downs.
6. The origin of the Applicants' letter of 20 February 1998 is somewhat obscure. Mr. Harrison has no recall of drafting or assisting in the drafting of the letter (TB 148.5 to TB 148.9).
7. Mr. Gibson in cross-examination conceded that he may have suggested to Mrs. Ciprian that she could respond to the ATO letter in the manner that she did (TB 486.23). In re-examination Mr. Gibson has said he has no recollection of actually assisting Mrs. Ciprian and that he was unlikely that he did so assist, because he didn't advise in relation to income tax matters (TB page 488.20).
8. Accordingly, no professional adviser has any recollection of assisting in the preparation of the reply.
9. Mr. Harrison in his evidence understood that the Commissioner's letter of 29 January 1998 signalled a serious change in attitude on the part of the Commissioner (TB page 140.7). Mr. Harrison clearly understood, based on 15 years experience as a chartered accountant, that if a voluntary disclosure was made in response, penalties would be reduced below the level otherwise imposed (TB page 140.9). In a nutshell Mr. Harrison knew and understood that in January 1998 "the Commissioner didn't think that it [the write-down methodology] was 'okay'" (TB page 141.6).
10. Mr. Harrison has no recall of any professional input into the reply of 20th February 1998. He agreed that as a careful, cautious and prudent chartered accountant he would not have responded to the Commissioner in the terms of Mrs. Ciprian's letter (TB page 149.3 to 149.5).
11. Mr. Harrison agreed that a much more suitable response to the Commissioner's letter would have been in terms of "Receipt is acknowledged of your letter, my client disagrees with your assertion that the practice is unacceptable, nonetheless without admission here are the relevant figures that you have requested. My clients' rights to object are expressly preserved and I seek the Commissioner's confirmation that my client will qualify for the penalty remission" (TB pages 149.5 to 149.7). Mr Harrison agreed that that would have been "one possible response" and would have been "a suitable response".
12. Mr. Harrison also agreed that Mrs. Cirprian's letter dated 7 April 1998 (DC18 page 63) which included the words "Please find enclosed a supplementary return which we are willing to lodge on a without prejudice basis. We do not admit any liability and reserve the right to request a refund in the event that the technical issue is favourably resolved" was an altogether more careful and cautious response than the letter of 20 February 1998 (TB 150.3).
13. The letter of 20 February 1998 was startling in its coyness and was an exercise in excessive, pedantic literalism.
14. That is, the Applicant's assert they properly responded to the Commissioner, and answered precisely what the Commissioner had asked: that is, we have checked the arithmetic accuracy of our returns and there is no mathematical error or omission made in the calculation of our income regarding our stock in trade.
15. Objectively viewed, the letter was an exercise in obfuscation, and, as a fact, hindered and delayed the Commissioner from ascertaining the true position. Section 226X(b)(i) is satisfied in that additional tax equal to an additional 20% of the section 226J penalty is properly imposed.

At paragraphs 281 and following of the Commissioner's original submissions it is contented that the evidence of Mr Kosutic was both relevant and admissible. This was put on the basis that, for example, Mr Kosutic had undertaken an inspection, identification and sorting of primary evidentiary material that was properly before the Tribunal and was, in any event the Applicants' own documentation.

Specific support for the admissibility of Mr Kosutic's evidence is provided by the decision in Potts v Miller [1940] HCA 43; (1940) 64 CLR 282 at pages 302.7 to 303.9 per Dixon J who relied upon the earlier decision in Myer v Sefton [1817] EngR 221; (1817) 171 E.R. 644. In that case evidence was proposed to be adduced from a witness who had examined the books and accounts of a bankrupt and, on the basis of that inspection, the witness was to give evidence of what the value of the property in question was.

At page 302.9 Dixon J said "From the very nature of the case, such an enquiry could not be made in Court, and therefore evidence on such a point must be given by someone who had had the means of enquiry, and who could state the result. With respect to the source from which the knowledge of the witness was drawn, in the present instant, a commission of bankrupt had issued, and the documents from which the result was obtained, had been rendered by the bankrupt."

Similarly, in this case, the sort of enquiry and analysis undertaken by Mr. Kosutic, though available to the Tribunal if it had the hearing time, could not realistically be made by the Tribunal itself and, evidence was admissible from an appropriate person who had the means of enquiry and, could state the result, and, the primary source material was identified.

Dixon J continued and noted that cases had arisen from time to time where under special circumstances accounts between master and servant, tradesman and shopkeeper, and banker and customer had been admitted as evidence in the cause. His Honour continued "When such an occasion arises and the books are allowed in evidence or their production is not insisted upon, an accountant's statement of the result of his examination is receivable as the evidence of a person of skill (citation omitted). Little English authority will be found explaining the grounds upon which the books of account kept according to an established system in organised business are receivable in evidence as proof, not of the occurrence some particular fact recorded or indicated by a specific entry or narration, but of the financial progress or result of business operations conducted on a large scale. Common sense has prevailed and such materials are used in practice without objection."

The Applicants assert in paragraphs 3 and 4 of their addendum that "ageing" affects the value of such stock and that Aged Stock in the mass produced jewellery industry is difficult to sell. However, the analysis by Mr. Kosutic examined all Aged Stock items sold in the 1997 and 1998 financial years. That analysis discloses one indisputable fact, namely, that approximately 50% of all Aged Stock items sold for full retail ticket price and only 18 items out of approximately 4,200 Aged Stock sold for less than retail cost.

The Applicants criticised Mr Kosutic for reliance upon photocopies and that there were two missing pages in his version of the stock reports. So much is readily conceded but, with respect, the criticism is nitpicking and de minimis. Contrary to paragraph 14(iii) of the addendum Mr Kosutic did seek an explanation from the Applicants as to the meaning of their stock prints: see paragraphs 49 to 102 of Mr. Kosutic's statement of 10 January 2001.

Some implied criticism of Mr Kosutic is raised by the Applicants in that he was not aware that Aged Stock was sold by Jade to Allay at the written down value only (addendum paragraph 14(iii)). Again, with respect, the sales prints for Jade to Allay were not available, were not produced to Mr Kosutic, and were not produced to this Tribunal notwithstanding a formal call for such documents: see Commissioner's submissions (at paragraph 293).

The Applicants (addendum paragraph 14(v)) point to entries recording a retail cost of one cent and the sale of stock that did not appear to be on hand at 30 June 1996. The question of stock items not on hand is dealt with at paragraphs 354 and 355 of the Commissioner's submissions. In respect of both items the Applicants have not produced one shred of evidence to suggest the effect is other than minimal.

The Applicants at paragraph 14(vi) point to service costs for fitting watch bands and resizing rings. But again, the Applicants have not adduced one iota of evidence to establish that these suggested costs of fitting a watch band and resizing a ring were anything other than peppercorn in nature. More so given that they have had the benefit of Mr Kosutic's analysis since January 2001.

The Applicants are critical that no account is taken of those items that were either not written down or, alternatively, the subject of a full 100% write down. In simple terms a zero percent write down meant that Mr Mitchell did not discount those items, for example, pearls. On the other hand a 100% write down shows the items were, in fact, given away usually under the description of miscellaneous gift. In any event, such gifts were again, insignificant in nature. There were 11 such gifts in 1997 (folio 3268-3269) and 13 in 1998 (see folio 3382-3383).

Most significantly the Applicants assert in paragraph 14(ix) that only 19% of Aged Stock is sold at full ticket price and that 81% is sold at a discount. However, that assertion is wrong.

The evidence relied upon is the mere assertion of Mr Gibson. Mr Kosutic analysed all sales of Aged Stock. Self serving assertion cannot prevail over clinical exhaustive logic.

Moreover, in cross examination Mr Gibson was asked "You don't have any material that you bring forth to challenge the accuracy of the material though, do you?" Mr Gibson's answer speaks volumes: "I don't have any material. No I don't have anything that challenges the accuracy of what he did". (TB page 487.24)

The expert evidence of Mr. McClintock was adduced at a time and on the assumption that primary reliance would be placed by the Applicants upon the evidence of Mr Mitchell. In view of the case presented by the Applicants in closing address much of the expert evidence relating to the preparation of accounts and accounting standards is now of lesser significance.

However, as Mr McClintock's evidence makes clear, he brings to the Tribunal a wealth of practical experience of preparing accounts and, in particular, whether the accounts are "true and fair and the directors or others [can] sign off as well, as being as true and fair" (TC 517.28).

As Mr McClintock has explained the accountant's concept of "net realisable value" is related to the tax concept of "market selling value" in section 31(1). That is to say net realisable value is a net concept and selling expenses such as commissions, freight costs, transport costs are subtracted in the calculation of net realisable value but not for the purposes of ascertaining a market value or a market selling value (TC 520.16). Accordingly, market selling value is likely to be higher than net realisable value (TC 520.25).

Accordingly, the process by which Mr McClintock ascertains net realisable value has some relevance to the ascertainment of a market selling value for the purposes of section 31(1).

What the evidence of Mr McClintock makes clear is that, for the purposes of presenting the accounts so as to show a true and fair view of the stock on hand, whilst in the first year a report from an expert as to the market selling value of stock on hand might be accepted without question, in the second year, Mr McClintock would consider "Whether or not the expert had made any assumptions in valuation and consider whether or not that expert could be normally expected to come up with the right answer." (TC 521.5).

The problem that Mr McClintock would be confronted with in the second year is that he would have evidence that Allay has been selling the stock at considerably higher values than it has been buying the Aged Stock at, and having regard to the relationship between Allay and Jade, that Allay's selling value is considerably higher than the market value given to the Aged Stock by Jade (TC 521.10).

More particularly "Jade is selling its stock at such a low value to Allay on the basis of the valuations that have been prepared and that it could make more money by selling it to other retailers or to other markets and that would leave me as an auditor to question whether or not the valuation was actually correct and notwithstanding I'm not an expert in jewellery valuation it's a common sense questioning." (TC 522.5)

Mr McClintock gave evidence concerning the very situation raised in submissions of a sale by Jade to Allay at a token peppercorn $1 and that Jade's market was Allay and Allay alone. Mr McClintock replied as follows: "I was just going to say in that context, deputy president, you could argue that the market is simply Allay and that's the market price but where would that end? I mean does that mean if Allay is prepared to offer a $1 then that's the market value under section 31? Shouldn't it be the market value if Jade was selling to Allay or into the market place selling to Allay or other retailers. That would in my mind constitute what I would look at in considering net realisable value for the purposes of the accounts." (TC 522.25)

In Mr McClintock's view in arriving at the net realisable value (which gives a true and fair view) by the deduction of any selling costs from market selling value for tax purposes, he would have regard to "the ultimate margin that was realised by Allay" (TC 523.10).

This is because Allay is earning a super normal profit, that is Jade bears the disproportionate risk of obsolescence and Jade is precluded from charging to Allay a proper market price and Jade has as a consequence a history of losses and is actually losing money in selling its stock to Allay (TC 529.30-TC530.19).

Inevitably Jade has, as a consequence of such losses, reached the point of having a net deficiency of assets and cannot continue without continued financial support by the Applicants or Allay. Contrary to the position in Pontifex 2000 ATC 4642 at page 4,647 paragraph 13, in this case there is actual evidence of Jade operating at a substantial loss and ultimately, having a net deficiency of assets.

In Mr McClintock's opinion a market value "cannot be determined in the context of trade between two related parties where one party is unfairly treated by the other" (TC 527.17). A true market value, or a market selling value for tax purposes, would need to be considered in the context of a wider market "because if Jade had a mind of its own why would it sell to Allay such that Allay earns the higher margins and why wouldn't it sell to a third party where that third party would be accepting lower margins" (TC 527.20).

In other words, a true and fair view of Jade's market selling value would be the value it could be sold to another retailer who did not abrogate to itself the right to earn super normal profits at Jade's expense.

Mr. McClintock's evidence is compelling. In practical terms his evidence speaks volumes. Professor Walker, on the other hand, had no practical appreciation of Jade's operations, he had, for example, not availed himself of the opportunity of reading Jade and Allay's accounts, was not aware that Jade bore no costs and most significantly, not aware that Jade was in a loss position. His evidence cannot be preferred to Mr. McClintock in that regard.

• This is a full 100% list of every aged stock item that sold over a two year period. This is not a sample; it is an objective list rather than a valuation that is subjective.

AGED SALES NO STOCK RECORD 97 & 98 - ALL STORES

• 97 Year. This is a list of items that were purchased before 30 June 1996 that were sold after 30 June 1996 but did not appear on the list for closing stock as at 30 June 1996.
• Same applies to 98 year.
• There appears to be a body of stock that is not recorded in the closing stock prints.
• Because we've only detected the items that sold there are probably other items still on hand which are not included in the total closing stock.
• Most of this stock appears to be purchased in the late 1980's.
• This seems to show that closing stock has been understated by approximately $3,000 in 1997 and $4,000 in 1998.

• This is a list of aged stock that sold and then replaced.
• This is not a complete list because of the limited information we worked from. For an item to appear on this list it needed to be aged when sold, then needed to be replaced after sale and then remain unsold before the end of the financial year.
• In 1997 stock costing $1,618.13 was replaced for $1,487.30. This stock was actually sold for $3,958.20. Of the 22 items that were replaced 14 cost equal to or greater than the original wholesale cost price.
• In 1998 stock costing $3,686.10 was replaced for $3,586.69. This stock was actually sold for $10,056.70. Of the 60 items that were replaced 37 cost equal to or greater than the original wholesale cost price.

(a) the number and percentages of items that sold for full retail price

(b) compares the average retail discount percentage to the wholesale writedown percentage

(c) it also compares the wholesale writedown percentage calculated by using dollar values to the retail discount percentage allowed calculated by using dollar values.

• Of the 1922 items sold 962 sold for the full retail price with 960 selling for some retail discount. This is over 50% of aged stock sold for the full price in the 1997 year.
• In percentage terms aged stock was written down by an average of 72% over the three stores whilst the retail discount allowed was 18%.
• Using dollar terms and comparing cost with WDV we find that aged stock was written down by 66% over the three stores whilst the retail discount was 27%.
• Stock costing $124,329.81 was written down to $41,954.82. This stock sold for $290,646.29 and had an original ticket price of $396,603.31.
• Mitchell's first affidavit at TM07 contains the NCJV Price Guide that contains recommended valuation mark up factors. The mark up is no greater than 3 and down to 1.9 on the most expensive items.
• Aged stock originally costing $124,329.81 sold for $290,646.29, this is a mark up of 2.3.
• Aged stock originally costing $124,329.81 had a ticket price of $396,603.31, this is an original mark up of 3.2 overall.
• The stock with a WDV of $41,954.82 is actually sold for $290,646.29, this is a mark up of some 6.9.

(Aged items sold totals are different for dollar terms because 24 items where sales prints were missing have been excised - the differences are between results analysis 1 and 1 workings).

• Simply the monthly totals for the various columns from the main spreadsheets. These totals have been used to construct Results Analysis 1.

• This is a summary where the retail percentage discount is equal to or greater than Mitchell's wholesale writedown percentage.
• There were 178 items out of 1,922 that sold for a retail discount that was equal to or greater than the wholesale discount.
• The average age of these items was 7.4 years rather than 18 months or 3 years where Mitchell's valuations are argued to begin to apply.
• The retail cost of this stock was $17,457.83 whilst the retail selling price was $24,079.82.

• This is an itemised list of the 178 items sold for a retail discount percentage that was equal to or greater than the wholesale writedown percentage (includes all three stores).

• This shows that 1,274 aged items were sold in non sales months, 863 of these selling for the full retail price (68% for full retail price).
• Only 32% sold for some retail discount.
• Average wholesale writedown percentage for all these items was 73%.
• The average retail discount percentage for all these items was 9%.
• Trading stock is valued as at 30 June. June is not a sales month in any store.
• Indicates that aged stock is returning to its full price after the sales months.

• Simply the monthly totals for the various columns from the main spreadsheets for the non sales months. These totals have been used to construct Results Analysis 3.

• This shows that 648 aged items were sold in sales months, 99 of these selling for the full retail price (15% for full retail price).
• 85% sold for some retail discount.
• Average wholesale writedown percentage for all these items was 71%.
• The average retail discount percentage for all these items was 34%.
• Trading stock is valued as at 30 June. June is not a sales month in any store.

• Simply the monthly totals for the various columns from the main spreadsheets for the sales months. These totals have been used to construct Results Analysis 4.

• This is a summary of Results Analysis 3 and 4.
• This shows that the retail cost to sales price mark up for aged stock is:

- Retail cost + 149% in non sales months (2.5 mark up on retail cost)

- Retail cost + 76% in sales months (1.8 mark up on retail cost)

- Retail cost + 112% for the whole year (2.1 mark up on retail cost)

• For the wholesale cost to final sales price mark up statistics see Results Analysis 1.

(a) the number and percentages of items that sold for full retail price

(b) compares the average retail discount percentage to the wholesale writedown percentage

(c) it also compares the wholesale writedown percentage calculated by using dollar values to the retail discount percentage allowed calculated by using dollar values.

• Of the 2,210 items sold 1,223 sold for the full retail price with 987 selling for some retail discount. This is over 55% of aged stock sold for the full price in the 1998 year.
• In percentage terms aged stock was written down by an average of 74% over the three stores whilst the retail discount allowed was 14%.
• Using dollar terms and comparing cost with WDV we find that aged stock was written down by 69% over the three stores whilst the retail discount was 21%.
• Stock costing $115,446.88 was written down to $35,419.81. This stock sold for $303,647.14 and had an original ticket price of $382,701.24.
• Mitchell's first affidavit at TM07 contains the NCJV Price Guide that contains recommended valuation mark up factors. The mark up is no greater than 3 and down to 1.9 on the most expensive items.
• Aged stock originally costing $115,446.88 sold for $303,647.14, this is a mark up of 2.6.
• Aged stock originally costing $115,446.88 had a ticket price of $382,701.24 this is an original mark up of 3.3 overall.
• The stock with a WDV of $35,419.81 is actually sold for $303,647.14, this is a mark up of some 8.6.

• Simply the monthly totals for the various columns from the main spreadsheets. These totals have been used to construct Results Analysis 6.

• This is a summary where the retail percentage discount is equal to or greater than Mitchell's wholesale writedown percentage.
• There were 82 items out of 2,210 that sold for a retail discount which was equal to or greater than the wholesale discount.
• The average age of these items was 7.3 years rather than 18 months or 3 years where Mitchell's valuations are argued to begin to apply.
• The retail cost of this stock was $5,245.04 whilst the retail selling price was $7,433.54.

This is an itemised list of the 82 items sold for a retail discount percentage that was equal to or greater than the wholesale writedown percentage (includes all three stores).

• This shows that 1,739 aged items were sold in non sales months, 1,121 of these selling for the full retail price (64% for full retail price).
• Only 36% sold for some retail discount.
• Average wholesale writedown percentage for all these items was 74%.
• The average retail discount percentage for all these items was 9%.
• Trading stock is valued as at 30 June. June is not a sales month in any store.
• Indicates that aged stock is returning to its full price after the sales months.

• Simply the monthly totals for the various columns from the main spreadsheets for the non sales months. These totals have been used to construct Results Analysis 8.

• This shows that 471 aged items were sold in sales months, 102 of these selling for the full retail price (22% for full retail price).
• 78% sold for some retail discount.
• Average wholesale writedown percentage for all these items was 72%.
• The average retail discount percentage for all these items was 31%.
• Trading stock is valued as at 30 June. June is not a sales month in any store.

• Simply the monthly totals for the various columns from the main spreadsheets for the sales months. These totals have been used to construct Results Analysis 9.

• This is a summary of Results Analysis 8 and 9.
• This shows that the retail cost to sales price mark up for aged stock is:

- Retail cost + 159% in non sales months (2.6 mark up on retail cost)

- Retail cost + 95% in sales months (2.0 mark up on retail cost)

- Retail cost + 143% for the whole year (2.4 mark up on retail cost)

• For the wholesale cost to final sales price mark up statistics see Results Analysis 6.

• This is a full list of aged stock that sold for a loss in both the 1997 and 1998 income years.

• In 1997, 13 aged items were sold for a loss.
• The total loss made on these 13 items was $59.41 (cost plus actual sales tax paid compared to actual retail selling price).
• The average loss per item for the 13 items was $4.57.
• The percentage of aged stock sold for a loss was 0.7 of 1%.
• Dollar value of aged stock writedown in tax return was $173,600.

• In 1998, 5 aged items were sold for a loss.
• The total loss made on these 5 items was $22.38 (cost plus actual sales tax paid compared to actual retail selling price).
• The average loss per item for the 5 items was $4.47.
• The percentage of aged stock sold for a loss was 0.2 of 1%.
• Dollar value of aged stock writedown in tax return was $218,936.

• Number sold for a loss was 18.
• The total loss made on these 18 items was $81.79 (cost plus actual sales tax paid compared to actual retail selling price).
• The average loss per item for the 18 items was $4.54.
• The percentage of aged stock sold for a loss was 0.4 of 1%.

Does setting up an interposed captive wholesale entity allow a taxpayer to write their own ticket? If there was no interposed entity and their writedowns were compared according to what is happening above, their proposition would be farcical. Their total writedown would be $81.79 over the two years compared with their actual writedowns of $173,600 and $218,936.

The question is, does the use of an interposed entity allow them to use imaginary values in an imaginary market in which no jeweller trades?

• This is a break up of the number of aged items that were sold from each of the categories written down.
• Break downs are provided for each year and both years combined along with a percentage analysis for the two year period.
• It shows that over 50% of aged stock is sold from 6 categories specifically:

• This shows that aged stock is not distributed equally through all the categories.

• This is an analysis of the number of aged versus new stock on hand for each category for each store for both years. It compares what proportion of stock on hand is aged.
• As at 30 June 1996, 71.19% (11,132 items) of stock was new and 28.81% (4,505 items) of stock was aged. However when the "new" store of KAT was excluded the figures reduce to 61.33% and 38.67% respectively.
• As at 30 June 1997, 62.25% (9,331 items) of stock was new and 37.75% (5,659 items) of stock was aged. However when the "new" store of KAT was excluded the figures reduce to 59.73% and 40.27% respectively.
• It appears that it is a normal occurrence for 40% of stock on hand to be aged in Jade's ordinary course of business. This appears to be consistent with the rest of the industry based on what I have been told by other jewellers.
• It is normal, in the ordinary course of business, for a jeweller to have both fast and slow moving stock in this industry. Slow moving stock is not abnormal and an automatic writedown is not justified. Age is not the only consideration in valuing stock.

• This is an analysis of the total number of all sales including new and aged items.
• The proportion of new stock that is sold for a retail discount is compared to the proportion of aged stock that is sold for a retail discount.
• There is a breakdown for each individual store with a breakdown for each individual month.
• The combined 2 year results reveal the following:

(d) 6,648 new items sold for some retail discount (23.31%)

(e) 1,947 aged items sold for some retail discount (47.12%)

• This supports the contention there may be some "ambit" component in the ticketed price as nearly one quarter of all new stock sells for some retail discount - see spreadsheet titled "Retail Discount on New Stock" at BK146.

• This is an analysis which determined the number of aged items which sold for a retail discount of equal to or greater than 50% during the sales months for each store.
• It was completed in response to the applicant's claim that it was common practice to sell a large proportion of aged stock at a retail discount of usually up to 50%.
• It revealed that 1,119 items were sold during the sales months and 478 of these were sold for a retail discount equal to or greater than 50% (43%). See also results analysis 16 for a full year analysis.

• This is an analysis that determined the number of aged items that sold for a retail discount of equal to or greater than 50% over both entire years.
• It revealed that 4,132 aged items were sold over both years and 640 of these were sold for a retail discount equal to or greater than 50% (15%).
• It appears that it is not a common occurrence to sell aged stock at a retail discount equal to or greater than 50%.

• In summary of the 4,132 aged items sold over the two years:

- 640 sold for a retail discount which was equal to or greater than 50% (15%);

- the remaining 1,307 sold for a retail discount which was less than 50% (32%)

• Comparing results analysis 13 & 14 aged stock may comprise approximately 40% of stock on hand at any one time but only 12.66% of sales during a year.
• Stock that is sold for a retail discount is not just restricted to aged stock. In volume more new stock sells for a retail discount than old. 6,648 new items sold for a retail discount (23.31%) compared to 1,947 aged items selling for some retail discount. This strongly indicates that there appears to be an ambit component in the retail price of all jewellery stock.