THE DECISION IN SLEIGHT 136 FCR 211
22 Given the agreed basis on which the application for review before the Tribunal was heard, it is necessary to refer to those portions of the reasons of the Full Court in Sleight 136 FCR 211 going to the nature of the scheme and why a conclusion was reached that the dominant purpose of the scheme was to avoid tax within the meaning of Pt IVA of the Act. The structure of the project was described by Hill J at [7] to [8] as follows:
The legal structure of the tea tree oil project
7 Mr Sleight was an investment adviser. Not much was asked in cross-examination as to his activities. However it would seem that, at least among other products, he sold what may neutrally be described as tax effective income tax schemes. That is to say investment schemes carrying with them tax advantages. It would seem that Mr Sleight also invested in at least some of the schemes he offered for sale, including what may be referred to as the Northern Rivers Tea Tree scheme (the subject of the present assessments), a similar scheme which was concerned with cotton growing, and a scheme apparently if not identical, then very similar to that discussed by a full Court of this Court in Vincent v Commissioner of Taxation(2002) 124 FCR 350.
8 On 14 June 1995 there was lodged with the Australian Securities and Investments Commission a prospectus inviting applicants to apply for a minimum of two parcels of 500 A class $1 shares in Northern Rivers Land Company Limited (the Land Company). There was attached to each of the two parcels of shares a right to occupy a farm on land known as Bungawalbin in northern New South Wales. Acceptance of the invitation required completion of an application to purchase 1000 A class $1 shares. It was also required that the acceptor apply for a loan and thereafter enter into a loan agreement with Northern Rivers Finance Company Pty Ltd (the Finance Company). Finally, although this was optional, signature was required of a Loan Indemnity Agreement with the Land Company and the Finance Company. The application form gave, as will be seen, to the applicant among other options, the option to enter into a management agreement with Northern Rivers Plantation Management Ltd (the Management Company) for the management of the two parcels.
23 The prospectus was described in detail at [10]-[24]. In summary, it:
· Noted that the "investments" were considered "speculative" and advised that 'independent financial advice should be obtained'. The issuer of the prospectus was Mobandilla Cotton Management Limited said to be agent for Northern Rivers Plantation Management Ltd (NRPM). The minimum subscription was 350,000 'A' class shares of $1 each fully paid. In addition to the right to occupy the two farms one attached to each parcel of shares (ie a minimum of two "farms"), the subscriber had the right, but not the obligation, to have NRPM manage the farms on the terms of a management agreement which was included in the articles of association of Northern Rivers Land Company Ltd (NRLC).
· The land in question was, at the time the prospectus was lodged, the subject of a lease of 20 years from the then owner of the land to NRLC. The lease contained an option for NRLC to acquire the freehold subject to the lease. That option was proposed to be exercised, once the minimum subscription was reached.
· In consideration of the right to occupy that attached to the A class shares, NRPM was to receive from each holder of 1000 shares an annual administration fee, which in the first year was $1,000 for each 1000 A class shares issued to the holder. In years two and three the administration fee was to be $800 for the minimum two farms, and thereafter until 2015 the annual administration fee was to be 12.5% of the gross farm income.
· None of the investors did other than enter into a management agreement. That is not surprising, as it would seem to have been difficult, if not legally impossible, to attempt to farm the particular portions which were allocated to the investor under the agreements.
24 His Honour continued:
18 The A class shares were to convert to ordinary shares on 1 July 2015. The consequence would then be that the rights to occupy the individual lots would on that day cease and the land on which the "farms" had been established would belong to the Land Company which would then be able to take over the whole plantation and run it for the benefit of the shareholders/investors.
19 If a member entered into a management agreement with the Management Company certain rights, including the right to terminate the management agreement, were to require a special resolution of the shareholders in the Land Company. A farmer who had elected to have the Management Company manage his farm was required to pay initially the first years' management fee of $24,000 per two farms by equal monthly amounts in advance, or prepay the first year management fee at a reduced rate of $21,000. There was also a requirement to pay the Management Company $50 ($25 per farm for the minimum two farms) for the purchase of seed for germination as tea tree seedlings.
20 The member was to be introduced to a financier (the Finance Company) which was to advance to the member 100% of the Year one prepaid management fee ($21,000 for the two parcels of shares) and 75% of the Year one administration fee (this amounted to $750 for the minimum 2 farms). Interest was to be 18% payable monthly in advance unless the borrower should prepay the first year's interest in full on application (an amount of $3,045) in which case the interest rate would be 16% per annum. The rate for the second year was to be 18% per annum payable monthly in advance but to be reduced to 14% if prepaid on or before 30 June 1996. From year 3 onwards the interest rate was to be 4%. The first principal repayment was to be made by a borrower on or before 30 September 1995 or 90 days after the granting of the loan which ever was the later. The amount of the payment was to be approximately 34% of the principal sum or $7,400 for each loan of $21,750. Further principal repayments were to be made by seven annual instalments of $2,050 unless the borrower entered into an indemnity agreement.
21 Under the indemnity agreement the Management Company agreed to indemnify borrowers against personal liability under their loan agreement. The indemnity meant that if the borrower chose to prepay the first years' interest under the loan agreement, he then had the right (for a "once off" cost of $400) to full indemnity for the major portion of his principal and interest payments under the loan agreement. He or she would thus only be liable to pay the first principal repayment ($7,400) and the prepayment of the year two interest ($2,009) when, under the indemnity agreement the interest would be discounted from year two onwards to 4%. Repayment of the balance of the principal sum advanced (after the first principal repayment) was to be made by way of 50% of the "net profits of the Member's business until repaid." Likewise interest was to be payable out of the "income of the Member's business" without recourse to the investor for personal repayment of either principal or interest. If any amount of principal was outstanding as at 1 July 2015 it was to be paid by the Management Company which indemnified the investor accordingly. The lender was to look only to the Management Company and not to the investor for repayment of the balance of principal and interest.
22 The Prospectus noted the "Possible Tax Implications" of "a Member Engaging in Business" in a table which indicated what was said to be the position of an investor who purchased the minimum parcel of 1,000 A Class $1 shares, exercised the right to occupy the two portions of land, exercised the right to appoint the Management Company to manage the farm business, exercised all options available in borrowing 100% of the year one management fees and 75% of the Year one administration fees and entered into the Indemnity Agreement. The table assumes that the investor has a tax rate of 48.4%. The table shows the following calculation:
BUSINESS EXPENSES INVESTOR FUNDS BORROWED DEDUCTIBLE
PAYABLE DAY 1
Year 1 Management Fees $21,000 $21,000
Year 1 Administration Fee $250 $750 $1,000
Year 1 Interest $3,045 $3,045
Loan Indemnity Fee $400 $400
Seed Purchase $50
PAYABLE 90 DAYS
Principal Repayment $7,400 ($7,400)
PAYABLE 30 JUNE 1996
Year 2 Interest $2,009 $2,009
TOTALS $13,154 $14,350 $27,454
Tax Refund/Saving ($27,454 x 48.4%) $13,288
Less Investor Cash $13,154
Investor's Net Position (Not Including purchase ofShares) + $134
23 ...
24 The prospectus also contained projections of what the promoters thought the results should be (including tax) on certain assumptions. There was a note to the projections to the effect that agriculture was subject to risk factors which could affect the accuracy of the projections. The projections assumed inflation of 3% per annum, oil yield of 250 kg per hectare, sales revenue calculated on the price of oil being $65 per kg in the years 1996 and 1997 (which was said to be expected to rise by approximately $3 in subsequent years), and costs of oil production of $1,396 per farm in 1998 with an expected rise of 3% thereafter. It noted that a plus or minus 4% variation in the seedling price per kg or to the yield per farm would be approximately plus or minus $279,187 assuming 1200 units subscribed and $48,896 assuming 350 units subscribed in the year ending 30 June 1998. An increase or decrease of 5% in operating and overhead expenses would affect taxable income by plus or minus $167,512 based on 1200 units subscribed and $48,896 based on 350 units subscribed in the year ending 30 June 1998. The projections showed before tax cash distribution to growers of nothing for the years ended June 1995, 1996 and 1997 and thereafter $645 in the 1998 year, $685 in the 1999 year, $727 in the year 2000 with a total projected through to the year 2015 of $24,201 on the assumption that there were 350 units subscribed for. There were slightly lower figures in the event that 1200 units were subscribed for. (emphasis added)
25 At [67] his Honour detailed the applicable law concerning Pt IVA.
26 His Honour observed at [88]:
The commercial interest in tea trees which the outlays obtained was considerably less certain than the tax benefit. If the investment lived up to the projected figures in the prospectus many years were likely to pass before Mr Sleight and his wife would see their cash returned to them. In fact the prospectus indicated that in the 1999 and 2000 years their share of the proceeds of the sale of oil was only to be $685 and $727 respectively. The prospectus presents detailed calculation of predicted revenue for the first six years of the project, however, continuing these calculations into the future reveals that it would only be at the end of the 17th year that the investor would have earned, in case, the amount that was initially outlaid (excluding the $1,000 for the purchase of the shares) but subject to any dividend from the separate share purchase.
And at [93]-[94] Hill J concluded:
93 It was submitted before his Honour, and before us, that it could not objectively be concluded that Mr Sleight entered into or carried out the scheme for the dominant purpose of obtaining the tax deductions available where the value of the tax deduction fell short of the cash outlay. As already noted, the difficulty of valuing the tax deduction lies in determining what tax rate should be taken as applicable to Mr Sleight's taxable income. For the reasons already given, the deductions claimed for the cotton scheme and the Vincent scheme would, necessarily need to be heavily discounted. With respect to his Honour the projected yields from the tea tree project itself were far from as encouraging as his Honour appears to suggest. And that is before taking into account any difficulties which the project might in fact encounter. (emphasis added)
94 While the conclusion is one where minds might differ, I think that it is more likely than not that a reasonable person faced with having to draw the conclusion which s 177D requires would conclude that Mr Sleight entered into or carried out the scheme with the dominant purpose of obtaining the tax benefits available to him given the uncertainty attendant on the other deductions he had claimed and the uncertainty of the investment yields which the project might realise.