Spassked Pty Ltd v Commissioner of Taxation

introduction 1 These three proceedings are being heard together and the evidence in each is evidence in the others. They are appeals by taxpayers against the disallowance by the respondent ("the Commissioner") of objections to assessments of income tax. The taxpayer-applicants are related companies, all being members of the Industrial Equity Ltd ("IEL") group of companies. For convenience, I will refer only to proceeding N 1362 of 1999 in which the applicant is Spassked Pty Limited ("Spassked"). 2 Objection is taken to the reading, on behalf of the Commissioner, of the whole of the affidavits of Stephen John McClintock, sworn 22 January 2002 and 13 March 2002 and to the admission into evidence of the exhibits to those affidavits. Mr McClintock is a Chartered Accountant and Partner of PricewaterhouseCoopers ("PwC"). He was retained as an independent expert by the Australian Government Solicitor ("AGS") on behalf of the Commissioner, to undertake work in connection with the proceedings. 3 Mr McClintock's instructions were recorded in an engagement letter dated 17 August 2001 which he sent to the AGS and which was subsequently countersigned on behalf of the AGS. The terms of the letter had been the subject of earlier negotiations between Mr McClintock and the AGS over a period. In his affidavit of 22 January 2002, Mr McClintock set out the relevant portion of the engagement letter in the following terms: "2. The Services we propose to provide are as follows: (a) review supporting documentation, comprising an analysis, in the form of narratives and flow charts, of various transactions and resulting balance sheet, dividend and interest positions at dates specified in the narratives and flow charts ('Transactions'); (b) review source documentation, provided to us by you, with respect to the Transactions, comprising ledger records, journal vouchers and other books and records, of approximately 34 companies ('Subcos') which held investments in the Industrial Equity Group; (c) advise whether the narratives and flow charts provided to us by you correctly describe or reflect the Transactions as recorded in the books and records of the Subcos; (d) advise of any omissions or inaccuracies identified in the narratives or flow charts based on our review of the supporting documentation; (e) where it appears that the books and records of the Subcos, on their face, contain a misdescription, specifically identify the misdescription; (f) following completion of the work referred to in (a) to (e), issue a report consistent with the format attached as Appendix A to this letter; and (g) prepare a financial overview (profit and loss account and balance sheet) for each Subco at each year end date. 3. In providing the Services, we will not be required to check transactions recorded in the books and records of the Subcos by reference to corresponding entries in the books and records of other companies in the IEL group. 4. We will draw to your attention any further documents or other material that we think should be provided to us in order to enable us to perform the Services. 5. Our work will be designed to enable us to issue the report included as Appendix A. 6. Whilst our engagement may involve the analysis of financial information and accounting records, it does not constitute an audit or an audit related service in accordance with Australian Accounting Standards, and accordingly no such assurance will be provided in our report. 7. Our Services will be primarily based upon the information provided by you. We shall be relying on and not verifying the truth or accuracy of all source documentation provided or made available to us during our engagement. We do not assume any responsibility and make no representations with respect to the accuracy or completeness of any source documentation provided. However, where it appears that the books and records of the Subcos, on their face, contain a misdescription, we will, in accordance with paragraph 2(e) above, specifically identify the misdescription." Later in his affidavit of 22 January 2002, Mr McClintock stated that in the event, he was not called upon to perform the work referred to in subpara 2(f) and para 5 of the letter. 4 According to the affidavit, during September, October, November and December 2001 and January 2002, Mr McClintock received from the AGS, pursuant to his engagement, sets of documents relating to the forty companies named by him in para 4 of the affidavit, which included Spassked. Mr McClintock refers to the forty companies as the "Subcos", intending, no doubt, to refer to companies which were subsidiaries of IEL. In respect of each of the forty Subcos, the documents received were of two kinds. The first was a series of narratives (in view of the way in which they were subsequently treated, they were in fact draft narratives provided by the AGS for Mr McClintock to work upon). They were in chronological table form and purported to be narrative descriptions of various series of transactions relating to respective Subcos (each narrative provided in the right-hand column references to "source documents" upon which each narrative was purportedly based). The second class of documents was "source documentation" (including, in some cases, working papers prepared by officers of the Australian Taxation Office ("ATO")). 5 Exhibit "SJM1" to Mr McClintock's affidavit of 22 January 2002 comprised forty volumes (the word "volume" as used in these reasons for judgment refers to a lever-arch file of papers). According to Mr McClintock's affidavit, exhibit SJM1 was the "final form of narrative and source documents in respect of each of the Subcos." 6 Mr McClintock describes in his affidavit the steps which he and staff working under his supervision took, as a result of which he satisfied himself that the narratives in their final form as contained in exhibit SJM1 correctly described the transactions "as recorded in the books and records of the Subcos which were included in the source documents". In the final paragraph of the affidavit, Mr McClintock expresses the opinion that upon the basis of the procedures outlined earlier in his affidavit, he considered that "the final narratives" contained in exhibit SJM1 correctly described the transactions as recorded in the source documents. He used the expression "the final narratives" because the version of them in exhibit SJM1 represented the result of his work on the drafts which had been sent to him by the AGS. 7 Unfortunately, the form of exhibit SJM1 which was exhibited to Mr McClintock's affidavit of 22 January 2002 at the time when that affidavit was sworn, has not, as events have transpired, proved to be "the final form" of that exhibit as tendered, at least in so far as it includes the narratives. After swearing his affidavit of 22 January 2002, Mr McClintock desired to make amendments to six of the narratives and, those six, or at least pages of them, were removed from the original form of exhibit SJM1 and replaced. 8 Mr McClintock's later affidavit of 13 March 2002 seeks to make clear what happened. Annexure A to that affidavit sets out all of the changes made to the original "final narratives". He states that on 13 March 2002, prior to swearing his second affidavit, he removed the original "final narratives" for six Subcos from exhibit SJM1 and replaced them with amended versions incorporating the changes he identifies in annexure A to that affidavit. 9 This removal from exhibit SJM1 of six of the original "final narratives" and the replacement of them with amended narratives should never have occurred and is to be unequivocally condemned. The integrity of an affidavit, its annexures and exhibits must always be maintained. The document to which an oath or affirmation has been subscribed must always remain available in its original form for reasons which are so obvious as not to require explanation. The proper procedure would have been to leave exhibit SJM1 intact, to identify in the later affidavit the amendments desired to be made, and, no doubt usefully, to exhibit, or simply to hand up, amended forms of the relevant narratives incorporating the changes. (In fairness to those concerned, I should record that not only does Mr McClintock identify in annexure A the changes which he made, but also exhibits as exhibit "SJM4" the original narratives which he removed and replaced.) 10 Also exhibited to Mr McClintock's second affidavit were exhibits "SJM2" and "SJM3". Exhibit SJM2 is a four volume report and exhibit SJM3 comprises four volumes of material referred to in that report. The general purpose of those exhibits is to provide expert opinion evidence of a "but for" nature. The objective is to establish the financial and tax positions which would probably have existed but for what the Commissioner characterises as a scheme within Part IVA of the Income Tax Assessment Act 1936 (Cth) ("the Act"). According to Mr McClintock's second affidavit, thirty eight of the forty narratives referred to earlier are included in his report. 11 A fundamental objection raised by Mr Slater QC for Spassked is that the affidavits and exhibits are not relevant to any issue I will be called upon to decide. The debate in relation to relevance occupied a considerable part of yesterday's hearing. Inevitably, the submissions which were put on both sides were of the very kind one would expect to hear at the end of the day. In fact, that is when I propose to hear them. I have come to the view that at this stage I should not exclude the affidavits and their exhibits on the ground of relevance. This is not to say that I did not find any cogency in what was put for Spassked, but it is a strong measure to exclude on that ground, at this early stage of the hearing before the total evidentiary picture is known, virtually the whole of the evidence tendered on behalf of the Commissioner. Perhaps it does not do justice to Mr Slater's submissions made in support of the relevance objection for me to say no more than what I have just said, but in order to deal comprehensively with those submissions, I would need to do the very thing which I find it premature to do at present. 12 A particular submission was that if I was against the relevance submission generally, at least I should make it clear that Mr McClintock's testimony is admitted as relevant only to the Commissioner's case under Pt IVA of the Act. I do not think I should take that course either. It may be that ultimately I will conclude that the evidence in question is irrelevant to the issue of deductibility posed by s 51 of the Act, but I am not persuaded at this stage that that is necessarily and clearly so. Moreover, if the evidence is to be admitted as relevant to Pt IVA, there seems to be no good reason why the issue of its relevance to the s 51 issue should not be addressed when that of its relevance to Pt IVA is addressed - in final submissions. 13 Another objection taken by Mr Slater QC is that Mr McClintock based his opinion on a selection of documents provided to him by the AGS. An accountant who has inspected the financial records of a business may summarise their effect and the summary is receivable into evidence: cf Potts v Miller (1940) 64 CLR 282; R v Seifert (1956) 73 WN (NSW) 358 at 361, 364-5; Re Montecatini's Patent (1973) 47 ALJR 161 at 169. Mr McClintock did not inspect the Subcos' records and select those relevant to the opinions he was called on to form and express. But his evidence is that the documents provided to him suffice to ground the opinions he formed. Moreover, another affidavit read by or on behalf of the Commissioner, that of John Sheldon sworn 19 March 2002, goes to the procedure by which the source documents in exhibit SJM1 were collected. Finally, there is the possibility of cross-examining both Mr McClintock and Mr Sheldon. Taken together, all these considerations overcome any problem. 14 Mr McClintock's affidavit of 22 January 2002 exposes the identity of all the documents on which he in fact based his opinion. It may be that I will conclude that his opinion is unpersuasive because I am not satisfied that he saw all relevant records, but that is for an occasion subsequent to the reception into evidence of Mr McClintock's opinion. 15 Mr Slater QC made other submissions, some of which were variants of the submissions to which I have already referred. He submitted that Mr McClintock was not shown to be qualified to express some of the opinions he expressed; that some of the narratives can be seen not to be based upon the companies' records or even on those of them that were supplied to Mr McClintock; and that the Court's Practice Direction of 15 September 1998, "Guidelines for Expert Witnesses in proceedings in the Federal Court of Australia" ("the Guidelines"), was not followed by Mr McClintock. 16 Although it may be that some aspects of the opinions expressed by Mr McClintock fall less clearly than others within the scope of his expertise, at this stage, I do not think his opinions should be ruled inadmissible on that ground. Moreover, whether the narratives are fairly based upon the company documents will be a matter for submissions. The assumptions made by Mr McClintock could have been more "clearly and fully stated" as required by the Guidelines, but I think the assumptions he made are sufficiently well identified. 17 In the result I propose to allow the two affidavits to be read. As well, exhibits SJM1, SJM2, SJM3 and SJM4 are admitted into evidence. I certify that the preceding seventeen (17) numbered paragraphs are a true copy of the Reasons for Judgment herein of the Honourable Justice Lindgren.