8 The reference to "interest option" referred to a clause in a loan agreement which was part of a package of documents prepared by the promoter of the arrangement Allrange Tree Farms Pty Ltd ("Allrange") which documents Mr Puzey in due course executed. The loan agreement was between Sandalwood Finance Pty Ltd ("Sandalwood") therein described as "lender," (a company with a subscribed capital of $1 held beneficially by Allrange) and the investor in the project (therein described as "borrower"). The agreement provided for two alternative interest options, described as "Option 1" and "Option 2". Option 1 provided for interest at 7% per annum calculated on daily balances and payable by monthly instalments in arrears on the 1st day of each month commencing on 30 July 1997. Option 2 provided that interest was to be:
"Seven percent (7%) of the proceeds from the sale of the timber grown on the Land referred to in Item 8 nett of all costs and is payable upon receipt of sale proceeds by the Borrower on the Scheduled Repayment Date."
9 The loan agreement executed by Mr Puzey provided for a loan to be made to him of $79,800 to be advanced in two instalments of $39,900, the first instalment to be advanced on 30 June 1997 and the second on 30 June 1998. Partial repayment of the sum lent was to be made by two instalments each of $13,900, the first on 15 August 1997 and the second on 15 August 1998. The balance, $52,000, was expressed to be repayable on demand, but with the proviso that, save for default on the part of the borrower, or his insolvency, demand could not be made before whichever was the first to occur of receipt by the borrower of the proceeds of the sale of the timber to be grown on the land or 30 December 2012. Although, as the learned Primary Judge observed, the documents left uncertain when the harvest of the timber was to occur, it was represented that the harvest would take place 15 years after the commencement of the project, that is to say "in 2012". It was recommended that Mr Puzey take the interest Option 2, which he did.
10 In May 1997 and before committing to the project Mr Puzey sought more information and received a spreadsheet calculating the results of investing in the project. The spreadsheet commenced with the 1997 fiscal year and showed an outgoing for purchase of seedlings of $40,000 but an "actual outgoing" of $14,000. These figures were repeated in the next fiscal year. Other outgoings shown for the 1997 year were stamp duty ($443) on the lease and loan. It was said that the net after tax cost to the grower in that year was $288. The second year had an additional outgoing shown as "establishment costs": of $2,000 and showed a net after tax cost to the "grower" of $1,030. Thereafter outgoings were shown as rent, increasing from $1,200 in the 1999 year to $1,992 in the year 2011-12, plantation management increasing to $1,328 in the 2012 year and thereafter a harvest showing timber sales for sandalwood calculated at $20,000 per ton of $573,600 and other timber sales of $18,000 with harvest costs of $8,000 and loan repayment of $52,000.
11 Other documents in the package which Mr Puzey executed were an option to purchase seedlings from Allrange, a lease of land upon which the seedlings were to be planted and a management agreement.
12 Under the option agreement, Mr Puzey for an option fee of $100 to be applied in part purchase of the seedlings, exercisable one month from its date, was granted an option to purchase seedlings for $80,000 payable as to $100 on exercise of the option, $39,900 on 30 June 1997, $100 on 15 July 1997 and $39,900 on 30 June 1998.
13 The lease was in respect of a plot of land of approximately one hectare in the Ord River Irrigation Area for a term to continue from 1 May 1998 when possession was to be given until 30 November 2013. There were, apparently, 115 other lots which were expected to be leased. The rental payable under the lease was $1,200 and was reviewable annually.
14 The management agreement was between Lincfel Enterprises Pty Ltd, ("Lincfel") therein referred to as the "Plantation Manager" and Mr Puzey whereby Lincfel agreed to provide "plantation services" for the period from entry into the agreement until the date of harvesting. Lincfel was to plant trees and thereafter maintain them on the lot. Under this agreement Mr Puzey was to pay a "preparation and establishment fee" of $2,000 and an "annual plantation management fee" of $800. Lincfel was a company controlled by Mr and Mrs Heading. Mr Heading had formerly been employed by the Department of Agriculture in its tropical agricultural research division. The Department subsequently became the Department of Conservation and Land Management ("CALM").
15 In addition Mr Puzey and others who participated in the scheme signed a pro forma letter designed to convey the impression that each participant had independently made his or her own arrangements for leasing and management and thus to cause the Australian Securities Commission ("ASC") to give an exemption to the project from compliance with certain provisions of the Corporations Law.
16 Earlier in 1997 Allrange had entered into a contract with Lincfel under which Lincfel agreed to provide services as "nursery manager" of the project. Under this contract Lincfel was to supervise the erection of a seedling nursery for Allrange, install machinery and carry out the propagation of sandalwood seedlings in that nursery for a fee of $115,000. Lincfel was to commence its duties under this contract in March 1997 and it was to continue until seedlings were handed over to the plantation manager on behalf of individual growers. Lincfel undertook that seedlings would be deliverable by May 1998. In September 1997 Allrange entered into a license agreement with CALM under which CALM was to provide information to Allrange on the growing of Indian sandalwood in the Ord River area and to supply technical support.
17 On 3 June 1997 Mr Puzey exercised the option so that by 30 June 1997 he became one of approximately 310 participants in the project.
18 On 26 June 1997 Allrange as trustee of a unit trust said to be carrying on the business of propagating and selling sandalwood seedlings purported to contract with itself as trustee of a trust, said to be carrying on business as a consultant, to assist Allrange in its former capacity to market seedlings for which Allrange as consultant was to be paid $24,000 for each seedling contract which Allrange entered into as trustee of the unit trust. The purpose of this was that of $28,000 to be paid by project participants out of tax refunds $24,000 was to be paid to Allrange as trustee of the unit trust. Also in June 1997 Allrange offered to lend to Sandalwood an amount up to $25 million for a term ending on 30 June 2011. Under the loan which was made on acceptance of the offer interest was said to be payable at 6.95 per cent on the daily balance of the amount borrowed with the first interest payment being due on 1 July 1998 and thereafter annually. As the learned Primary Judge pointed out the date the loan was repayable was 18 months prior to the date on which the amounts advanced to the participants would become payable to Sandalwood.
19 These agreements allowed exchanges of cheques to take place at Allrange's bank on 27 June 1997. The banking entries showed the withdrawal from the Allrange account of $12,369,000 and the deposit of that sum in Sandalwood's account; (ie as a loan to Sandalwood) the withdrawal of the same sum from Sandalwoods' account by 310 cheques each drawn in an amount of $39,900 and the deposit of these cheques in the Allrange account ie as loans by Sandalwood to each participant and paid on the participant's behalf to Allrange.
20 As was contemplated by the sales literature Mr Puzey in his taxation return for the 1997 year of income claimed as a deduction the sum of $40,000 for the purchase of seedlings to be delivered to him around May 1998. In fact they appear to have been delivered around April of that year. Under the self assessment regime Mr Puzey received, around 25 August 1997 a refund of income tax of $18,876.88, as PAYE tax had been deducted at source from his salary for that year. The refund would have included some other minor deductions but substantially reflected the tax on the claimed $40,000 deduction.
21 Also on 28 July 1997 Mr Puzey applied under s 221D of the 1936 Act to reduce his PAYE instalments for the 1998 year of income on the basis that he had a deduction in the 1998 year of $42,000 being outgoings to be incurred in that year as a "Grower of Sandalwood and other Tropical Forestry Trees". The PAYE instalments were reduced accordingly. In the return lodged for the 1998 year of income Mr Puzey claimed a deduction of $42,575 being $40,000 for the acquisition of seedlings, $2,000 for plantation establishment costs, $400 for manager's fees and $175 for other fees and charges.
22 The project underwent, at least to some extent, a reconstruction in the 1998 year of income as a result of the ASC revoking the exemption it had granted to the project when it became clear to that body that there had been no individual negotiations between investors and landowners and that as a result the provisions of the Corporations Law dealing with offering "prescribed interests" should have applied without exemption. After considerable negotiations between the Allrange interests and the ASC investors were given the chance to opt out of the project and receive a refund of all monies invested. By doing nothing they were to be taken as participating in the reformed project. Mr Puzey did not opt out.
23 In the result a unit trust known as the Kununurra Tropical Forestry Project was established by a trust deed dated 12 May 1998 under which Professional Funds Management Pty Ltd was appointed trustee. Investors who did not opt out were beneficiaries of this trust. The leases, management agreements and loan agreements previously entered into were unaffected and thus continued in force. The Consultancy Agreement under which Allrange purported to contract with itself was abandoned or terminated. Allrange undertook to establish an "Administration Fund" of $300,000 for the purposes of the trust. Another company Allrange Tree Farms Management ("Allrange Management") was a party to the trust deed and undertook to provide services to the trustee as manager of the "Trust and the project". The directors of Allrange Management were the three individuals who were also directors of Allrange and they held three of the five issued shares in that company. The trust fund established under the deed was to consist inter alia of all monies otherwise payable to Allrange or any other party under the agreements which remained in force. The fund was to be applied by the Trustee in paying on behalf of investors moneys which the investors were liable to pay under the agreements which continued in force.
24 An important provision of the restructure arrangement was that the individual areas leased were to be pooled and the investors were entitled to participate pro rata in distributions from the trust so that no longer was an investor to receive the net proceeds of timber sales from the particular area of leased land, but rather a shared interest in the net proceeds of sale obtained by the trustee which was thereafter to conduct the project.
25 On 29 June 1998 there was a second exchange of cheques at Allrange's bank. On that day a deposit of $14,084,700 was recorded in the account of Sandalwood from Allrange and a withdrawal from that account by 287 cheques each in the sum of $39,900 and three cheques drawn in the sum of $877,800 which were deposited to the account of Allrange. The 287 cheques represented monies advanced by Sandalwood to the investors under the loan agreements and paid at their direction to Allrange.
26 As the learned Primary Judge recorded, between May 1997 and October 1998 Mr Puzey paid two amounts each of $14,000 being the "deposits" he was obliged to pay for the purchase of seedlings. He did not, however, direct that the monies paid to Allrange be remitted to Sandalwood as part repayment of monies which Sandalwood had lent to him although the transaction was treated as if he had.
27 As already noted the first lot of seedlings was delivered for planting on Mr Puzey's leased land in April 1998. Between July 1998 and December 1998 sandalwood and host trees were planted on some 275 hectares of land leased to participants including Mr Puzey. As things turned out the area leased to Mr Puzey performed poorly and seedlings failed, apparently in part, at least, as a result of bad weather and poor drainage. Allrange Management resigned as manager and was not replaced. A Mr Underwood, who had been a manager of forestry research and general manager of CALM recommended replanting over almost the entire plantation. There were not funds available to do this. Mr Underwood noted that the project had not provided for forestry expertise to be employed to oversee the project. On the other hand a Mr Padmanabha, a forester with considerable experience with Indian sandalwood in India gave evidence that the venture could become a commercial venture if replanted and if an efficient drainage system was installed.
28 One important fact to emerge from the evidence of Mr Underwood was that the price of $80,000 for which Allrange sold seedlings to participants, was "extraordinary". A reasonable price for seedlings supplied would have been, in his opinion, which the learned Primary Judge accepted, in the order of $3,000. While it is true, as senior counsel for Mr Puzey repeatedly emphasised, that at the time the agreement was first entered into by Mr Puzey there was no supplier of seedlings in the market other than Allrange which at the time was taking steps to propagate seedlings from seeds emanating from CALM, it is also true that on 31 December 1997, approximately six months from Mr Puzey paying the first instalment of monies in June 1997, CALM offered to supply seedlings to a company called East Sandalwood Company Ltd, related to Allrange, for between $1,850 and $2,375 per hectare. At the lowest range (which took account of the suggestion that the Allrange nursery would be made available to CALM) the offer is not greatly different from the estimate of $3,000 which Mr Underwood regarded as the reasonable price.
29 Whether or not the figure of $3,000 is accepted, one consequence of the discrepancy between the real cost of seedlings and the amount which participants were required to pay for them using the loan funds advanced was, it can be inferred, that the cash payments actually to be made by participants in the first two years of the project as partial repayment of the loans advanced to them sufficed to cover the real costs of the project and the balance repayable on the loans at the end of the project represented the inflated amounts which were necessary for the participants to incur so as to be entitled (or so it was hoped) to claim taxation deductions sufficient to provide tax refunds in such amount as would enable them to make the cash payments.
30 On 24 January 2000 the Commissioner issued amended assessments disallowing the deductions claimed by Mr Puzey and imposing penalty tax for each year. Mr Puzey objected and the objections were disallowed. At the time the amended assessments issued the Commissioner had not made any determination under s 177F of the 1936 Act. On 31 January 2000 the Commissioner made determinations under s 177F in respect of each of the two years of income. It was contended on behalf of Mr Puzey that the determination made on 31 January 2000 could not be relied upon since it post dated the amended assessments. Accordingly on 8 November 2001 new determinations in the same terms were made "as a precaution". The Commissioner determined that the amounts of $40,000 otherwise allowable deductions in each income year were not allowable deductions. Amended assessments issued on the same day showing the same amount of taxable income and tax payable as was shown in the original amended assessments. Again Mr Puzey objected, and the objections were disallowed.
31 In the result there were two sets of appeals brought in the original jurisdiction of the Court against the two sets of objection decisions that had been made by the Commissioner. The parties agreed that the second appeal against the objection decisions relating to the amended assessments made on 8 November 2001 should be heard first and that the prior appeal proceedings should await its determination.
32 One conclusion that clearly emerges from the history of the project so far as it is known is that from the outset it was highly speculative.