Admissibility of the financial statements and characterisation of the conceded payments
22 The taxpayers relied on the statement expressed in these accounts - "Amounts owed by Starburst Enterprises Ltd" - and the adjacent number as evidencing that, inferentially, the foreign currency payments conceded to have been made by the Commissioner were loans. It was not suggested that any other conceded payments had been made by the trustee of the Wade Trust to Starburst. The taxpayers contended that the statements were business records admissible pursuant to s 69 of the Evidence Act 1995 (Cth) (the "Evidence Act") and were proof that each payment created a relationship of debtor and creditor. They did not, and could not, also rely upon s 1305 of the Corporations Act 2001 (Cth) (the "Corporations Act") as the documents were not books kept under a requirement of that Act. Section 1305 is in the following form:
Admissibility of books in evidence
(1) A book kept by a body corporate under a requirement of this Act is admissible in evidence in any proceeding and is prima facie evidence of any matter stated or recorded in the book.
(2) A document purporting to be a book kept by a body corporate is, unless the contrary is proved, taken to be a book kept as mentioned in subsection (1).
The Commissioner objected strenuously to the receipt into evidence of these financial statements. In his view, they were not business records for the purposes of s 69 of the Evidence Act and should otherwise be excluded pursuant to s 135 of the Evidence Act. Those provisions are as follows:
69 Exception: business records
(1) This section applies to a document that:
(a) either:
(i) is or forms part of the records belonging to or kept by a person, body or organisation in the course of, or for the purposes of, a business; or
(ii) at any time was or formed part of such a record; and
(b) contains a previous representation made or recorded in the document in the course of, or for the purposes of, the business.
(2) The hearsay rule does not apply to the document (so far as it contains the representation) if the representation was made:
(a) by a person who had or might reasonably be supposed to have had personal knowledge of the asserted fact; or
(b) on the basis of information directly or indirectly supplied by a person who had or might reasonably be supposed to have had personal knowledge of the asserted fact.
(3) Subsection (2) does not apply if the representation:
(a) was prepared or obtained for the purpose of conducting, or for or in contemplation of or in connection with, an Australian or overseas proceeding; or
(b) was made in connection with an investigation relating or leading to a criminal proceeding.
(4) If:
(a) the occurrence of an event of a particular kind is in question; and
(b) in the course of a business, a system has been followed of making and keeping a record of the occurrence of all events of that kind;
the hearsay rule does not apply to evidence that tends to prove that there is no record kept, in accordance with that system, of the occurrence of the event.
(5) For the purposes of this section, a person is taken to have had personal knowledge of a fact if the person's knowledge of the fact was or might reasonably be supposed to have been based on what the person saw, heard or otherwise perceived (other than a previous representation made by a person about the fact).
…
135 General discretion to exclude evidence
The court may refuse to admit evidence if its probative value is substantially outweighed by the danger that the evidence might:
(a) be unfairly prejudicial to a party; or
(b) be misleading or confusing; or
(c) cause or result in undue waste of time.
23 The Commissioner submitted that, for the purposes of s 69, it should not be inferred that the maker or makers of the documents had personal knowledge of the facts asserted in the notes, or that the fact asserted was on the basis of information directly or indirectly supplied by a person who had or who might reasonably be expected to have had personal knowledge of that fact. I respectfully disagree with that submission. The relevant "fact", in that respect, is the statement in the notes that certain amounts were "owed by Starburst Enterprises Limited".
24 One starts with the proposition that ordinarily books of account cannot be used to prove the existence of the underlying transactions which give rise to the entries made in them, subject now to the operation of s 1305 of the Corporations Act: see Potts v Miller (1940) 64 CLR 282 at 303 per Dixon J. What the accounts do is measure the financial performance of an entity, and they may usually be tendered as evidence of that performance (again, subject to the operation of s 1305, if applicable). However, for the moment, what is relied upon by the taxpayers is not an entry or entries in the balance sheet or profit and loss statement of the accounts of the Wade Trust, but rather the representation in the notes. If admitted as a business record, in my view, that statement is proof of the existence of a loan or loans between the Wade Trust and Starburst in the amounts stated for the 2004 to 2006 years. The fact that this statement appears in the accounts is neither here nor there. It is a statement in a business record of the corporate trustee of a trust.
25 Examining the 2004 accounts, it is clear that the maker of the statement was Moore Stephens and it was made from the "accounting records and information and explanations supplied to" that firm, at some time, I infer, in or before 2007. Moore Stephens, it will be recalled, managed the Wade Trust at this time. On the fourth page of the accounts there appears the signature of the trustee of the Wade Trust endorsing the following statement: "We approve these financial statements and confirm that all available information was provided for their preparation." Similar statements appear in the accounts for the 2005 and 2006 income years. In those circumstances, I infer that the maker or makers of the statement in the accounts either had personal knowledge of the fact asserted about the indebtedness of Starburst to the Wade Trust, or that the statement was based upon information supplied by someone that had that personal knowledge. The fact that the statements were made in 2007 (and not contemporaneously in the relevant income years) dilutes the force of that inference; but it does not defeat it. It follows that there was evidence before me that a loan or loans existed between Starburst and the Wade Trust from at least the 2003 year of income (being the earliest year referred to in the notes to the accounts). There being no contradictory contemporaneous evidence, I infer, on the balance of probabilities, that each of the conceded payments made between 2003 and 2006 by the trustee of the Wade Trust to Starburst constituted a loan or loans.
26 On the balance of probabilities, I infer that the conceded payment of £500,000 made in the 2002 year of income was also a loan. That is because the aggregate amount of debtors for the Wade Trust for the 2003 year of income, as recorded in the notes to the 2004 year of income account, was £13,403,385, and this matches the amount recorded as the Wade Trust's debtors in the pound sterling accounts struck for the 2003 year. Those accounts then record the aggregate debtors of the Wade Trust for the 2002 year of income as being £560,562, which matches the figure recorded as debtors in the pound sterling denominated accounts for the 2002 year. Absent any suggestion of other payments or loans made to Starburst by the Wade Trust, I infer that at least £500,000 of this amount was the first loan made to Starburst. Again, inferentially, it was an application of the £500,000 paid to the trustee by the "3i Group". I make this inference because the evidence in the Wade Trust's accounts from 2004 show that when the trustee of the Wade Trust made the conceded payments to Starburst it was by way of loan.
27 Three payments in pounds sterling were made by the Wade Trust to Starburst after the year ended 30 June 2006. However, pound sterling denominated accounts for the Wade Trust for the years ended 30 June 2007 and 2008 were not before me. As it was not suggested by the Commissioner that these payments bore a different and distinct character from those earlier payments made by the Wade Trust, I infer, on the balance of probabilities, that each said payment was also a loan.
28 Of course, we do not know the identity of the maker or makers of the asserted fact here. But that is of no moment. As Heerey J observed in Guest v Commissioner of Taxation [2007] FCA 193; (2007) 65 ATR 815 at [25]:
The terms of s 69(2)(a) do not suggest that it is an essential precondition of admissibility that the "person" in question be identified. The ordinary meaning of the language is that it is sufficient that the person who made the representation, whoever he or she is, had or might reasonably be supposed to have had, personal knowledge of the asserted fact. The policy behind the provision is clear enough. Routine business records, made before any legal proceeding arises or is contemplated (cf the exception in s 69(3)), have an inherent likelihood of reliability which outweighs the common law's aversion to hearsay evidence where the maker of a statement cannot be tested by cross-examination. The utility of s 69 would be greatly diminished if it were necessary to locate among large organisations, perhaps over a long period of time, persons who made representations, often in circumstances where the practical needs of the organisation did not require any identification at the time the representations were made.
See also DZE17 v Minister for Immigration and Border Protection [2018] FCA 1521 at [23] per Allsop CJ.
29 In Guest, records of a company, which a receiver and manager had taken control of, included loan account statements on which an unknown person had written in pencil the following: "cheque rec'd 2/10/87" and "cheque rec'd 4/1/88". These were admitted as evidence of the fact that certain repayments of funds had been made on the dates specified.
30 In my view, it would be very greatly inconvenient if factual representations in financial statements could only be admitted into evidence by calling the individuals who created them. That would diminish substantially the very point of having s 69 in the Evidence Act. That observation applies equally to descriptive statements about the quality or nature of a payment contained in those accounts.
31 The Commissioner also pointed out that there was no evidence that Starburst paid the Wade Trust any interest. I infer that this was because the loan or loans were not interest-bearing. There being no evidence of the terms of any loan, I would find that they were repayable on demand: VL Finance Pty Ltd v Legudi [2003] VSC 57; (2003) 54 ATR 221 at [39]-[40] per Nettle J. The Commissioner also complained that there was no evidence that the loan or loans were secured. However the making of unsecured interest-free loans to a wholly-owned subsidiary is, in my view, entirely unsurprising: Normandy Finance Pty Ltd v Federal Commissioner of Taxation [2015] FCA 1420; (2015) 102 ATR 409 at [84] per Edmonds J; overturned on appeal on a different issue: [2016] FCAFC 180; (2016) 104 ATR 491.
32 For these reasons, I would admit the Wade Trust's pound sterling denominated accounts into evidence, and accept the statement in the accounts identified above as evidence that the conceded payments were loans pursuant to s 69 of the Evidence Act.
33 The Commissioner nonetheless submitted that the accounting records should be excluded pursuant to s 135 of the Evidence Act, in particular because, it was submitted, their admission into evidence would be unfairly prejudicial to him. Focusing for the moment only on the pound sterling denominated accounts, his contentions were as follows:
(1) the maker of the representation was not called to enable the accuracy of the financial statements to be tested. Nor were the source records produced from Monaco. In cross-examination, Ms Osborne admitted that she had no role in creating or maintaining the accounts, and that she had not personally gone through the boxes discovered - Ms Longo had done this, but she had not been called to give evidence. Nor, as already mentioned, was Mr Evans called to give evidence;
(2) the 2004, 2005 and 2006 balance sheets were prepared in 2007, many years after the first conceded payment had been made;
(3) the statements in the notes did not establish the source or nature of the alleged liability or liabilities;
(4) there were irregularities or errors in the accounts which made them unsafe to rely upon without calling their maker. For example, it was submitted that the interest income disclosed in the pound sterling denominated accounts was different from the interest disclosed in the Australian dollar restated accounts for the same year. Between 2004 and 2006 the pound sterling denominated accounts disclosed interest income of about £129,000, whilst the Australian dollar restated accounts for those years disclosed interest income of about A$472,591. Another suggested discrepancy concerned which assets were treated as current and non-current. A further discrepancy concerned the financial statements for the 2003 year. The original pound sterling denominated accounts recorded a loss on disposal of an investment of about £29 million. The Australian dollar restated accounts show no loss at all. Mr Wade could not explain this discrepancy; and
(5) Mr Wade had given ambiguous evidence about whether he had borrowed from the Wade Trust. In cross-examination, he said that the first payment of £500,000 from the Wade Trust had instead been paid to him as opposed to Starburst.
34 The irregularities and discrepancies relied upon by the Commissioner give rise to a doubt about the numbers contained in the accounts. But I am not concerned with that issue. The Commissioner did not dispute that the payments set out in his table above at [9] had been made to Starburst. The issue is whether those irregularities affect the probative value of the statement in the notes to those accounts that Starburst "owed" an identified amount to the Wade Trust. In my view, I think not. I have no doubt that the maker or makers of that statement understood what a loan was and was not. In that respect, the following passage from the reasons of Heerey J in Guest is apt (at [31]):
In this context I note that senior counsel for the Commissioner referred to various criticisms of the quality of Rural Finance's accounting systems. Whether valid or not, such criticism does not affect the admissibility of the document under consideration. Section 69 is not confined to business records kept in accordance with the best accounting standards. At most, such defects as there may be in record-keeping go to weight. Whatever shortcomings there may otherwise have been in Rural Finance's accounting systems, the particular documents in question here are simple ones which record simple facts, basic to any money-lending business. If otherwise admissible, there is no ground for rejecting them, as senior counsel urged, under the discretion conferred by s 135(b) of the Evidence Act. The evidence that the cheques were received on 2 October 1987 and 4 January 1988 is not misleading or confusing; on the contrary, it is straightforward and direct.
Asserting that Starburst owed money to the Wade Trust is also, in my view, a "simple" fact.
35 I also reject the contention that the statement made in each of the 2004 to 2006 pound sterling denominated accounts of the Wade Trust cannot be admitted into evidence without the source documents which supported the entries made in those accounts. Commercial litigation would be frustrated if that were always a requirement for the admissibility of business records prepared and kept by a corporate entity.
36 As to the fact that neither Ms Longo nor Mr Evans were called to give evidence:
(a) I accept, on the evidence before me, that Mr Evans was probably the only witness who could have given direct evidence concerning the nature of the conceded payments made by the Wade Trust to Starburst. However, there appears to have been a falling out with Mr Evans in 2010 (I shall come to this) which probably explains his non-appearance: Fabre v Arenales (1992) 27 NSWLR 437 at 449-450; Commissioner of Taxation v Cassaniti [2018] FCAFC 212 at [92]-[97];
(b) Ms Osborne supervised Ms Longo. It was appropriate, I find, to call the more senior person at Moore Stephens. Ms Osborne has been the managing director of Moore Stephens at Monaco since 2010. It was not suggested that Ms Longo had any greater knowledge concerning the affairs of the Wade Trust than Ms Osborne.
As to the delay in preparing the accounts, as already mentioned, this dilutes the strength of the finding that the payments were loans. However, I note that the 2006 year accounts were prepared without significant evident delay.
37 In assessing the prejudice to the Commissioner for the purposes of s 135 of the Evidence Act, I am mindful that he enjoys resources and powers not generally available to an ordinary litigant. In this case, Mr Wade had been the subject of an ATO Risk Review during 2004-2005. During that review the Wade Trust's pound sterling denominated financial statements for the year ended 2003 were given to the Commissioner. The Commissioner did not then suggest that there were no loans to Starburst. Mr Wade was the subject of another risk review for the 2006 and 2007 years of income. This took place over the 2009-2010 period. The restated accounts were given to the Commissioner. The Commissioner did not then suggest that there were no loans to Starburst. Mr Wade was finally the subject of a comprehensive risk review for the 2012 and 2013 years of income. Information requests were made and answered between 2014 and 2017. The opportunity also then existed for the Commissioner to use his powers to obtain information and evidence including the opportunity to issue offshore information notices pursuant to s 264A of the 1936 Act. Of course, the onus is on the taxpayer to demonstrate excessiveness on the balance of probabilities. But I would hesitate to exclude probative evidence bearing on a critical issue on the grounds of prejudice to the Commissioner, when he previously, by reason of his powers, had had a fair opportunity to test or address that material. In that respect, on the evidence before me, I accept, as already mentioned, that the only person able to give direct evidence about the payments made between the Wade Trust and Starburst was Mr Evans. He had complete control over the Wade Trust, and inferentially over Starburst. He chose to make the payments in issue here. However, the failure to call him, in the circumstances here, does not compel the conclusion that the pound sterling denominated accounts should not be received into evidence, at least with respect to the representations made about the amounts "owed" by Starburst to the Wade Trust.
38 My reliance upon the statements in the pound sterling denominated accounts is broadly consistent with the following observation of Nettle J in VL Finance Pty Ltd at [30]:
In the circumstances I think it suffices to say of the book entries point that, in the absence of any suggestion of sham, there is no reason why loans agreed to by made by a family company to members of the family cannot be created orally or by conduct and sufficiently evidenced by book entry …
It is also consistent with Edmonds J's reliance upon the accounts for the purposes of establishing a loan in Normandy Finance Pty Ltd at [85]-[86]; again, overturned on appeal on a different issue: [2016] FCAFC 180; (2016) 104 ATR 491.
39 There were other irregularities and deficiencies which the Commissioner pointed out in relation to the Australian dollar restated accounts of both the Wade Trust and of Starburst. I have not addressed these because I generally agree with the Commissioner's submission that these accounts are not proof that the payments made by the Wade Trust to Starburst between 2002 and 2007 were intended to be loans. They did not contain the same or similar representations about the indebtedness of Starburst to the Wade Trust. In particular, it would appear that they were mostly prepared by Ms Tabury of Moore Stephens, who had travelled to Australia for that purpose together with staff at Davidsons. There was also some evidence before me, given by Ms Faraone that Mr Evans had been involved in reviewing and finalising these accounts. However, that evidence was very limited and did not describe with any precision the role played by Mr Evans. Moreover, Ms Faraone, was not personally involved in the preparation of those restated accounts. She did not check them for accuracy. Ms Tabury was not called to give evidence, and in those circumstances, whilst I accept that she worked at Moore Stephens, I cannot be confident that she either had a personal knowledge that the foreign currency advances made in 2002 to 2007 were loans or that Mr Evans told her they were loans. The only evidence about her was that she was an "accountant" at Moore Stephens who left that firm in 2010. Ms Faraone met her in Monaco in 2008 and dealt with her on occasion. In that respect, I accept that all of the witnesses called by the taxpayers before me were told that the payments were loans and their evidence went no further than this. In relation to the Australian dollar denominated accounts of the Wade Trust and Starburst after 2009, I again infer that they were prepared on the assumption that the conceded payments made between 2002 and 2007 were loans.
40 I should mention a spreadsheet tendered into evidence which ostensibly was a record of advances and repayments made between the Wade Trust and Starburst. It was prepared for the year ended 30 June 2012 by Davidsons. The evidence was that Ms Faraone, who by 2013 was a director of the new trustee of the Wade Trust (then Sole Luna - see below), saw this spreadsheet before signing a resolution of the trustee providing for the documentation of the loan or loans between the Wade Trust and Starburst, and for the repayment of the foreign currency loans (described below). The resolution was in the following terms:
It was noted that:
1. Starburst Enterprises Limited (Starburst) is indebted to the Trust for the following amounts:
• GBP 10,376,512.06
• EUR 5,362,039.90
• USD 1,848,733.50
• AUD 12,157,987 (the Debt).
2. The Trust has been provided an Assignment Agreement pursuant to which the Trust will accept the assignment of Starburst's assets listed in Annexure A as part payment of the Debt.
3. As at 25 March 2013, the term deposits listed in Annexure A will be valued at AUD 29,847,929.
4. As at 25 March 2013, the loan receivable from Snowflake Holdings Pty Ltd as trustee for the Snowflake Investment Trust will be valued at AUD 4,028,110.
5. As at 25 March 2013, the Other Assets listed in Annexure A will be valued at AUD 659,131.
6. The Trust has been provided with a Loan Agreement documenting the terms and conditions of the outstanding Debt, after the assignment of assets has been completed (the Loan Agreement).
RESOLUTION
The director of the Company, resolves as follows:
1. The Trust accept repayment of an amount of AUD 34,535,170 of the Debt owed by Starburst by entering into an Assignment Agreement for Starburst's assets equal to AUD 34,535,170.
2. The Trust enter into the Loan Agreement with Starburst in respect of the outstanding Debt.
3. The Trust do everything necessary to complete the assignment and execute the Loan Agreement by 25 March 2013.
41 The spreadsheet was difficult to interrogate because of the tiny font size used in it. With a magnifying glass it did not appear to me that the balances matched those recorded subsequently in the 2013 Loan Agreement. Moreover, if it matters, because the document was prepared by Davidsons, I find that it was not proof of a relationship of indebtedness between the Wade Trust and Starburst. Section 1305 of the Corporations Act was not otherwise relied upon in relation to this document even though by the time of its preparation both entities may have migrated to Australia (as to which see below).
42 In finding that the conceded payments made by the Wade Trust to Starburst were loans or a loan, I have also had regard to the objective reality of the circumstances as they existed between Starburst and the Wade Trust as privately owned entities. In my view, and practically speaking, Starburst could have only received the conceded payments in one of three ways. The payments (in whole or in part) might have been: (i) a gift; (ii) a contribution of capital; or (iii) a loan. The memorandum of association and articles of association of Starburst were before me. Clause 7 of the memorandum provided that the authorised capital of the company was US$50,000. I infer, that the payments to Starburst, to the extent they exceeded this sum, were not contributions of capital. I reject the Commissioner's contention that the directors could always have increased the amount of authorised capital as speculation. Nor, I infer, were the payments a series of gifts. If they had been they probably would have been booked as a profit by Starburst in its accounts: cf Federal Commissioner of Taxation v Slater Holdings Ltd (1984) 156 CLR 447 at 460-461 per Gibbs CJ. They were not. The Commissioner contended that because the balance sheets were not accurate, this inference was not available to be made. In my view, that observation diminishes the force of, but does not preclude, the making of the inference that the payments were not a gift. It follows that, on the balance of probabilities, it is more probable than not that the payments were advances by way of loan. When all the circumstances are taken into account, that inference accords "with the probabilities of ordinary human experience": The Republic of Nauru v WET040 [No 20] [2018] HCA 60; (2018) 93 ALJR 102 at [35].
43 I do not otherwise accept that I should find that the payments were "off the books" transfers of money. That was never put to a witness. Moreover, the business records produced close in time to the conceded payments (the pound sterling denominated accounts of the Wade Trust) described those payments as loans and booked them as such.
44 The foregoing conclusion is consistent with the evidence of Ms Osborne that there existed a "standard practice" at Moore Stephens whereby trust assets would be:
… held by a limited liability company, which is a [wholly-owned] subsidiary of the trust. The financing is in the form of nominal share capital and long-term loans from the trust; the loans are generally interest-free and repayable to the trust on demand, for example when funds are required for distributions or other trust expenditure.
I infer that this practice was adopted in relation to those trusts which Moore Stephens managed. I accept that this evidence rose no higher than a general observation, and that there was no direct evidence before me that this practice was adopted specifically in relation to the Wade Trust. Nonetheless, the making of loans as a means of funding a wholly-owned subsidiary is relatively commonplace and unremarkable: cf Total Holdings (Australia) Pty Ltd v Federal Commissioner of Taxation (1978) 20 ALR 152; 8 ATR 664.
45 I do not think that the sighting by the Commissioner of an express contemporaneous loan agreement entered into by another wholly-owned subsidiary of the Wade Trust, namely McQueen Services Limited, and Starburst, bearing a date of 1 February 2007, requires a contrary conclusion. The loan identified appeared to be a very specific one used to purchase a Cessna Citation 550 aircraft.
46 Because I am satisfied that the conceded payments were loans, it is not otherwise necessary for me to consider the utility and admissibility of the Australian dollar restated accounts of the Wade Trust and Starburst.