LOGAN J:
1 This is, or at least purports to be, a statutory appeal in the original jurisdiction of this Court from a decision of the Administrative Appeals Tribunal (Tribunal), constituted by one of its Deputy Presidents, in respect of the review of taxation objection decisions. It is necessary to add the qualification "purports", because such an appeal lies only on a question of law: s 44 Administrative Appeals Tribunal Act 1975 (Cth). As it was originally drawn, I doubt whether the notice of appeal stated any such question, as opposed, impermissibly, to seek to re-agitate questions of fact, decided against the applicants in the Tribunal. Even as it came further to be amended, the notice of appeal retains strong echoes of that vice.
2 Where, as here, the underlying taxation decisions are various taxation assessments, the effect of the Taxation Administration Act 1953 (Cth) is that the principal issue in the Tribunal (s 14ZZK(b)), as it is in a taxation appeal in the original jurisdiction of this Court (s 14ZZO(b)), is whether the applicant has proved those assessments to be excessive. As the learned Deputy President correctly appreciated (reasons, [37]), that position is not altered where, as he did here, the Commissioner of Taxation (Commissioner) contends that particular, relevant business structures and transactions were shams. Rather, the position is as stated by Lockhart J in Richard Walter Pty Ltd v Commissioner of Taxation (1996) 67 FCR 243 at 245-246 (Richard Walter):
Use of the word "sham", in some cases, and this is indeed one of them, obscures the fundamental issue between the parties. Essentially, it is for the taxpayer to prove that an assessment is excessive: .... The onus of proving that the assessment is excessive lies upon the taxpayer; although the evidentiary onus in a particular case may shift from time to time. In this case, the appellant has the burden of establishing that the alleged loans to it by Morlea are not income. It is common ground that if this burden is discharged and it is established that the payments here are in fact loans, then the appellant will succeed, provided it survives the possible application of s 260.
I mention this because it is a misconception in my view to assert that the Commissioner has the burden of establishing that a transaction is a sham. The Commissioner may, as he did in this case, submit that the relevant transactions were a sham and of no force or effect. In some cases the evidentiary onus may shift to the Commissioner to establish what the real transaction is for which the sham transaction is a cloak (assuming there is a real transaction); but at most this is an evidentiary onus which may shift back and forth depending upon the facts of the case and inferences which it is proper for the Court to draw. It remains that the burden of proving that an assessment is excessive lies upon the taxpayer.
[Footnote references omitted]
Observations to like effect were also made by Hill J (at 259) in that case.
3 The learned Deputy President concluded that the applicants had failed to discharge the onus of proof which fell on them. In respect of each review application, he affirmed the objection decision under review. It is a feature of the applicants' challenge to that conclusion that, comprehensively, it misunderstands the import for them before the Tribunal of the observations made in Richard Walter in respect of the discharge of the onus of proof that fell on them.
4 No better introduction to the background circumstances of this matter could be given than to adopt that offered by the learned Deputy President in his carefully expressed reasons. His description was not controversial on the appeal and is the source for the following.
5 For a number of years, Mr Suleyman Erdogan, the second applicant in the appeal, operated a business of supplying casual labour to meet the seasonal demands of orchardists and vignerons. Until June 2011, he did this via a company which he controlled, Alper Harvesting Contractors Pty Ltd (Alper). Alper contracted with growers to provide the casual labour required by growers and engaged employees to perform the work required by the growers. Alper was paid by growers and paid wages to the employees. It was required to account to the Commissioner for tax instalments required to be deducted from wages paid to employees (Pay As You Go - "PAYG" - deductions) and to the revenue authorities of the States for payroll tax.
6 In June 2011, the method of operation changed. A new entity, the first applicant, Sunraysia Harvesting Contractors Pty Ltd (Sunraysia), was incorporated. Sunraysia acted as the trustee of the Sunraysia Harvesting Contractors Trust (the Trust), a discretionary trust of which Mr Erdogan and his spouse, Mrs Hulya Erdogan, the third applicant, were beneficiaries. Sunraysia continued the role that Alper had in contracting with growers but, on the case the applicants advanced before the Tribunal, it no longer engaged employees. Instead, the applicants contended, it contracted (purported to contract, according to the Commissioner) successively with three other companies, Danood Pty Ltd (Danood), Jameron Pty Ltd (Jameron) and Kigra Pty Ltd (Kigra), for those companies to engage and pay employees, and, necessarily, to account for PAYG deductions and for payroll tax if necessary.
7 Following an audit of the affairs of Sunraysia, Mr Erdogan and Mrs Erdogan, the Commissioner concluded that the arrangements between Sunraysia and Danood, Jameron and Kigra were a sham. He gave effect to that conclusion by disallowing input tax credits claimed by Sunraysia on supplies said to have been made by those companies to it between 1 July 2011 and 31 December 2013. Additionally, goods and services tax (GST) shortfall penalties were imposed and a penalty was imposed on Sunraysia for its failure to deduct and remit PAYG amounts. So far as Sunraysia's income tax affairs are concerned, the Commissioner determined that amounts paid to Danood, Jameron and Kigra were not allowable deductions but instead allowed the deduction of an amount calculated by reference to industry standards. One consequence of that was that the net income of the Trust increased. That increase was attributed by the Commissioner equally to Mr Erdogan and Mrs Erdogan as beneficiaries of the Trust. Their taxable incomes for the 2012 and 2013 income years were increased accordingly and shortfall penalties imposed on them.
8 Each of Sunraysia, Mr Erdogan and Mrs Erdogan objected to the various income tax or GST assessments or amended assessments but the objections were, in the main, disallowed. They then sought a review of the Commissioner's objection decisions by the Tribunal.
9 As they finally came to be expressed in the applicants' further amended notice of appeal, the questions of law were said by them to be:
1. In forming its conclusion that there was no legal relationship between Sunraysia (the First Applicant) and the subcontractors, but a sham, did the Tribunal err in the exercise of its fact-finding jurisdiction?
2. Having formed the conclusion that there was a sham, did the Tribunal err in making a consequential finding that Sunraysia was the employer of the farm workers?
3. On the facts as found by the Tribunal, including that of sham. was Sunraysia obliged, by either s 12-35 or s 12-60 in Schedule 1 of the Taxation Administration Act 1953 (Cth) ("TAA"), to withhold amounts from payments made by Danood, Jameron and Kigra to the farm workers, ex hypothesi, as employees of Sunraysia?
4. On the facts as found by the Tribunal, including that of sham, was Sunraysia entitled to a deduction under the first or second limb of s 8-1(1) of the Income Tax Assessment Act 1997 for its payments to Danood, Jameron and Kigra?
5. On the facts as found by the Tribunal, including that of sham, was Sunraysia entitled to input tax credits under the A New Tax System (Goods and Services Tax) Act 1999 in respect of its payments to Danood, Jameron and Kigra?
[sic]
10 In respect of these questions, the following grounds were, as they came finally to be amended, put forward by the applicants:
1. The Tribunal erred in:
(a) conflating Mr Erdogan's purpose of avoiding the statutory obligation to pay tax that would otherwise befall Sunraysia with his intention to create and execute legal obligations between Sunraysia and the subcontractors to effect that purpose (Reasons for decision, paras 65, 67)
(b) ignoring the legal fiction of separate corporate personality (Reasons for decision, paras 72, 73)
(c) applying an irrelevant "arm's length test" as a condition necessary to establish the existence of legal relationships between Sunraysia and the subcontractors (Reasons for decision, paras 38, 60, 62)
(d) applying an irrelevant "control" test by considering Mr Erdogan's common financial control of Sunraysia and the subcontractors told against the existence of legal relationships between Sunraysia and the subcontractors (Reasons for decision, paras 53, 60, 61, 62, 70, 81)
(e) by misstating and/or misapplying the legal concept of "sham" to the facts of the case, in that the Tribunal failed to recognise that the tax avoidance purpose could only be achieved if the legal relationships were as they purported to be, not as a cloak or disguise for some other relationship;
(f) in holding that Sunraysia did not make creditable acquisitions in its dealings with the subcontractors.
2. The Tribunal ought to have conducted the fact-finding process in accordance with the proper law of sham;
(a) by determining that a person's purpose of avoiding tax by the creation of a legal structure can only be effected if that structure is intended to be what it purports to be, not a sham for something else: Bell v FCT (1953) 87 CLR 548; Tupicoff v FCT (1984) 4 FCR 505
(b) by determining that the relationships between parties who are not alleged to be parties to the sham and other parties who are so alleged are lawful legal relationships: Sharrment Pty Ltd v Official Trustee in Bankruptcy (1988) 18 FCR 449; and
(c) by determining that a non-arm's length dealing between entities in common control is not for that reason a sham: Cecil Bros Pty Ltd v FCT (1964) 111 CLR 430.
3. The Tribunal ought to have found, conducting its fact-finding process properly in accordance with law, that the subcontractor arrangement was the antithesis of a sham in that Mr Erdogan intended to create the legal relationships that the sham documents purported to create, not some other secret relationship, so as to effect the purpose the Tribunal found him to have. The Tribunal should have determined the taxation consequences on that basis.
4. The Tribunal erred, having found sham, in finding that Sunraysia was therefore the employer and that the sham permitted Sunraysia to avoid remitting PAYG withholding deductions from amounts it paid to its employees (at [40]). This was embarking on a process of reconstruction rather than a finding of facts without statutory authorisation. The Tribunal ought to have treated the sham as a nullity and to have made findings, without reconstruction of the facts in existence in the absence of the sham. There was no legal basis upon which the real employment relationships between Alper and the farm workers and then Danood, Jameron and Kigra and the farm workers could be reconstructed as real employment relationships between Sunraysia and the farm workers.
5. The Tribunal erred (at [83]) in its application of sections 12-35 and 12-60 in Schedule 1 to the TAA to the facts as found, including that of sham and that Sunraysia was the employer of the individuals. The Tribunal having found that Danood, Jameron and Kigra made the payments of wages to individuals (the farm workers), was obliged to find that they, not Sunraysia were liable to withhold under s 12-35 irrespective of who employed the individuals.
6. The Tribunal erred (at [74)) in its application of s 8-1 of the Income Tax Assessment Act 1997 to the facts as found including that of sham and that Sunraysia was the employer of the individual fruit pickers. The Tribunal having found that Danood, Jameron and Kigra discharged Sunraysia's obligations to the farmers to procure individual fruit pickers, was obliged to find that Sunraysia's payments to Danood, Jameron and Kigra were incurred in the course of producing its assessable income, or necessarily incurred in carrying on business to produce assessable income.
7. The Tribunal erred (at [73]) in its application of Division 11 of the A New Tax System (Goods and Services Tax) Act 1999 to the facts as found, including that of sham and that Sunraysia was the employer of the individual fruit pickers. The Tribunal, having found that Danood, Jameron and Kigra discharged Sunraysia's obligations to the farmers to procure individual fruit pickers, was obliged to find that Sunraysia's payments to Danood, Jameron and Kigra were in connection with taxable supplies made by those companies to Sunraysia and were creditable acquisitions by Sunraysia from those companies.
[sic]
11 Understanding the fate of the case in the Tribunal and also what must be its fate on this appeal requires some further elaboration of its background. The Tribunal summarised uncontroversial aspects of that. This summary was not sought to be made controverted by the applicants on the appeal. The following draws upon the Tribunal's summary.
12 Alper was incorporated in August 2007. Mr Erdogan and Mrs Erdogan were its only directors until July 2011 and they were its only members. Mr Andrew Dunner was appointed liquidator of Alper in a creditors' voluntary winding up on 11 October 2011.
13 Sunraysia was incorporated on 7 June 2011. At incorporation, its sole director was Mr Mustafa Keles, Mr Erdogan's brother-in-law (and Mrs Erdogan's brother). Mr Keles continued in that role, and was the holder of all of its issued capital, until 1 July 2013 when he was replaced by Mr Erdogan in both of those roles. Sunraysia's registered office and principal place of business was, and remains, the address of an entity called "SME's R Us", described in the material before the Tribunal as "Commercial Business Consultants". It advertised itself as giving advice to small to medium enterprises on corporate and personal insolvency, asset protection and tax minimisation. Ms Samantha Toffoletti was a "consultant" with "SME's R Us". Although Ms Toffoletti's precise role at "SME's R Us" never clearly emerged in the evidence before the Tribunal, it was not controversial that Mr Erdogan dealt with her. Ms Toffoletti was the settlor of the Sunraysia Harvesting Contractors Trust, created by deed dated 7 June 2011. Mr Erdogan was the appointer of the Trust and the only named beneficiary of the Trust. The deed described other eligible beneficiaries including, relevantly, the spouse or children of a named beneficiary. The trustee of the Trust had an absolute discretion to decide to distribute any part of the income of the Trust to the persons named as beneficiaries or to persons who were members of any of the classes of eligible beneficiaries. By virtue of clause 9 of the trust deed, in the event of the trustee failing to exercise the discretion to distribute the income, the income not distributed would be held on trust for the "named beneficiaries" alive on 30 June.
14 Danood was also incorporated on 7 June 2011. Its only director and member was Mr Danny Woods. It was wound up on a creditors' voluntary winding up pursuant to a resolution of 24 September 2012. Mr Dunner was appointed liquidator. Danood's registered office and principal place of business was at the premises of "SME's R Us".
15 Danood opened a bank account with the National Australia Bank on 28 June 2011. The account was styled "Danood Pty Ltd [as trustee for] Danood Trust"; however, there was no other evidence before the Tribunal that Danood acted as a trustee. The signatories on the account were Mr Erdogan and Mr Woods. The bank statements were addressed to Mr Erdogan's residential address in Mildura, apart from one statement sent "c/- NAB ... Mundubbera" at a time when Mr Erdogan was working at Mundubbera and requested a redirection of his mail. Mr Erdogan had a cheque book for the Danood account.
16 The Tribunal was "not satisfied, on the balance of probabilities, that payments by Sunraysia to Danood, Jameron and Kigra were made in accordance with a contract between those entities for the subcontracting company to provide labour to meet Sunraysia's obligations to growers" (reasons, [40]). As a footnote reference (fn 59, [40]) makes explicit, the Tribunal's use of the adjective "subcontracting" was only for convenience. That was because the Tribunal was "not satisfied the companies were, in truth, subcontractors". The Tribunal went further, and recorded ([40]), "were it necessary, I would have been affirmatively satisfied that Sunraysia's arrangements with Danood, Jameron and Kigra were never intended to create any legally enforceable obligation between Sunraysia and the subcontractor and were simply part of a scheme devised by SME's R Us to allow Sunraysia to avoid remitting PAYG deductions for persons who were, and remained throughout, its employees". The Tribunal was correct to put this conclusion conditionally. It would have been a perversion of the onus of proof, as explained in Richard Walter, for the Tribunal to have approached the review on any basis other than, materially, it fell to the applicants to show that the arrangements with Danood, Jameron and Kigra were not shams.
17 There was an ample basis to support that lack of satisfaction, explicitly identified in the Tribunal's reasons. A noteworthy feature of the applicants' case before the Tribunal, which did not escape the Tribunal's notice ([41]), was the unexplained absence of two witnesses whose evidence one might have expected would cast light on whether Sunraysia's arrangements with Danood, Jameron and Kigra were not shams. These were Mr Keles and Ms Toffoletti.
18 I have already referred to Mr Keles' role and relationship to Mr Erdogan and his wife. Like Mr Erdogan, he was a resident of Mildura, last seen by him about four months before the hearing in the Tribunal.
19 As to Ms Toffoletti, on Mr Erdogan's evidence, the purported arrangements between Sunraysia and Danood, Jameron and Kigra were structured as they were at her suggestion. Also on his evidence, although, as the Tribunal permissibly observed, this was far from clear, Ms Toffoletti had an ongoing role in the functioning of the three purported, "subcontractor" companies.
20 The Tribunal also noted other deficiencies in the applicants' case. Only one supposed employee of the purported subcontractors was called, a Mr Recep Aktepe. His affidavit was noteworthy for its brevity, doing nothing other than assert employment status with Danood, Jameron and Kigra but not exhibiting any group or PAYG certificates. His assertion that he had received these was "given in response to leading questions and through an interpreter" (reasons, [45]). The Tribunal was entitled to discount his credibility on these bases. The Tribunal noted the absence from the witness box of any other alleged employees and, even more so, "the supervisors, said by Mr Erdogan to be the link between the employees and Ms Toffoletti (on behalf of the employing company)" (reasons, [46]).
21 The material before the Tribunal included a document dated 20 October 2011. That document is described as a "Services Agreement". It purports to be between Sunraysia and Danood for the provision by Danood to Sunraysia of "Services", an expression said in the body of the document to be described in Item 2 of its Schedule. That item, and all other items in the Schedule, including the fee, the commencement and expiry date, and the payment terms, have been left blank on the document save for instructions on completing the items. The document has been signed for Sunraysia by Mr Erdogan and by someone described as "Danny Wood" (not Woods) for Danood.
22 Mr Woods, who was called by the Commissioner, gave unchallenged and uncontradicted evidence that the signature on this "Services Agreement" was not his and that he knew nothing of Sunraysia. Based on Mr Woods' evidence, the Tribunal found that he signed documents at the request of Ms Toffoletti to assist her set up other companies. The Tribunal found that he was paid by her initially to sign documents, including the opening of Danood's bank account, and then later to sign more documents in connection with the liquidation of Danood. Other unchallenged and uncontradicted evidence given by Mr Woods was that he did not use the Danood bank account or authorise anyone else to do so. That bank account, whilst opened in late June 2011, did not commence operating until 3 November 2011 when $29,156.90 was transferred to it from Sunraysia's account. Thereafter, until early September 2012, deposits to the Danood account were predominately transfers from Sunraysia. There were very many withdrawals, many described as "wages".
23 Also in the material before the Tribunal were in excess of 100 documents that purported to be invoices from Sunraysia to Danood. The first of them is dated 18 October 2011, prior to the date on which the "Services Agreement" was signed. The documents are all of a similar format. They are handwritten in a pre-printed and numbered invoice book, the type, as the Tribunal permissibly observed, able to be purchased at newsagents and stationers. The Danood invoices were, remarkably as the Tribunal also permissibly observed, written by Mr Erdogan. They record a very brief description of work, an extension of hours at an hourly rate and supervisor hours at a higher rate. The total is then grossed up by a "contractor's fee" at a percentage that varies, but is commonly 11.5%, and by GST at 10%. The last of the Danood invoices is dated 27 August 2012.
24 On 25 September 2012, Mr Dunner sent a circular to the creditors of Danood, which read, in part:
I advise that the Shareholders and Directors of [Danood] have approached this office and requested that I assist them in calling the necessary meeting for the placement of the company into liquidation.
The member of the company held [a] meeting on the 24th September 2012 for placement of the company into Creditors voluntary liquidation and Mr Andrew Leonard Dunner of this office was nominated the liquidator of the company...
25 As the Tribunal found, the circular went on to call a creditors' meeting on 4 October 2012. In evidence, Mr Woods accepted, and the Tribunal correspondingly found, that his signature appears on an ASIC Form 509, Summary of Affairs of a Company (which shows nil assets and creditors in excess of $450,000) and on a Form 205, Notification of Resolution (to wind up Danood). Mr Woods stated, and the Tribunal correspondingly found, that he knew nothing of the substance of these matters; he simply signed documents when asked to do so by Ms Toffoletti.
26 The material before the Tribunal also disclosed, and the Tribunal correspondingly found that, in the meantime, the second of the companies, Jameron, was incorporated on 10 September 2012. Its sole member and director was Mr James Cameron. Its registered office and principal place of business was at the premises of "SME's R Us". A bank account in the name "Jameron Pty Ltd [as trustee for] Jameron Trust" was opened at the National Australia Bank on 13 September 2012. Transactions commenced on that account in mid-November 2012 and continued until mid-July 2013. Throughout that period statements for the account were sent to Mr Erdogan's home address in Mildura. Mr Erdogan was the sole signatory on that bank account.
27 Mr Cameron was also called by the Commissioner to give evidence before the Tribunal.
28 Another document in the material before the Tribunal was one dated 10 November 2012 and described "Services Agreement" between Sunraysia and Jameron. Apart from the change in identity of one of the contracting parties, that document was relevantly identical to the Danood Services Agreement, right down to the uncompleted Schedule. The unchallenged and uncontradicted evidence of Mr Cameron, accepted by the Tribunal, was that he was paid by Ms Toffoletti - $2,000 on 14 September 2012 with a balance of $1,000 "to be paid when Jameron is liquidated" - to be the nominal director of Jameron but that what purports to be his signature on the Jameron Services Agreement was not his and that he knew nothing of Sunraysia's dealings with Jameron or Jameron's affairs generally. He executed various documents in connection with the liquidation of Jameron. Despite that, there was no evidence before the Tribunal that it had been put into liquidation; rather, application was made in April 2014 for its voluntary deregistration. That application was lodged with ASIC by Ms Toffoletti.
29 Also in evidence before the Tribunal were a number of invoices which appeared on their face to have been issued by Jameron, but in their content were similar to the Danood invoices. According to Mr Erdogan, these invoices were prepared by Ms Toffoletti from details provided to her by him. The Tribunal found that Jameron's bank account showed a similar pattern to that in Danood's account - large deposits or transfers from Sunraysia and multiple withdrawals, many noted as "wages".
30 On the material before it, the Tribunal permissibly made the following findings in respect of Kigra. It was incorporated on 9 July 2013, shortly before the last of the transactions on the Jameron bank account. Ms Kim Graco was its only director and member. It was deregistered on 20 July 2014. Once again its registered office and principal place of business was at the offices of "SME's R Us". A bank account in Kigra's name was opened with Westpac Banking Corporation on 12 July 2013. Substantial transactions commenced on the account in early September 2013. Bank statements were sent to the address of "SME's R Us". Mr Erdogan and Ms Graco were each signatories on the bank account and Mr Erdogan had a debit card linked to the Kigra bank account which he used frequently and which he continued to use up until March 2014 despite the fact that the last invoice from Kigra to Sunraysia was dated 30 December 2013.
31 The material before the Tribunal also included what purported to be minutes of a meeting of Sunraysia in its capacity as Trustee of the Trust, held on 25 June 2012 and apparently signed by Mr Keles, by which it was resolved that:
... the net profit of the trust for the year ended 30 June 2012 be distributed to Nisa and Sanem Erdogan so that their respective incomes from trust wages and trust distributions totals approximately $66,000 each and the balance of the profit be distributed equally to Suleyman and Hulya Erdogan.
The Tribunal also noted that there was a similar document in respect of the income of the Trust for the 2013 income year, apparently signed by Mr Keles, which recorded the minutes of a meeting held on 29 June 2013 by which it was resolved to distribute the net income of the Trust equally between Mr and Mrs Erdogan.
32 As to the evidence of Mr Woods and Mr Cameron, the Tribunal observed (at [38]), "to the extent to which it might be thought that the Commissioner has an evidentiary onus, that onus is plainly discharged, not least by the unchallenged and uncontradicted evidence of Mr Woods and Mr Cameron". This observation explicitly confirms what a reading of the Tribunal's reasons would otherwise in any event do, which is that the learned Deputy President was well seized of, and permissibly applied, the observations, quoted above (which he himself quoted), made by Lockhart J in Richard Walter.
33 The learned Deputy President took as his touchstone for the concept of sham transactions the following statement made by Mustill LJ (as his Lordship then was) in Hadjiloucas v Crean [1988] 1 WLR 1006 at 1019 (Hadjiloucas v Crean), which, subject to one qualification, was referred to with approval by Gleeson CJ, Gummow and Crennan JJ in Raftland Pty Ltd v Commissioner of Taxation (2008) 238 CLR 516, at [35] (Raftland):
... it is necessary to distinguish between three situations in which, aside from any question of rectification, the court may take an agreement otherwise than at its face value. The first exists where the surrounding circumstances show that the arrangement between the parties was never intended to create any legally enforceable obligation. The second is the case of the "sham," in the sense in which that word has been used in numerous cases, including Snook v London and West Riding Investments Ltd. Correctly employed, this term denotes an agreement or series of agreements which are deliberately framed with the object of deceiving third parties as to the true nature and effect of the legal relations between the parties. The third situation is one in which the document does precisely reflect the true agreement between the parties, but where the language of the document (and in particular its title or description) superficially indicates that it falls into one legal category, whereas when properly analysed in the light of the surrounding circumstances it can be seen to fall into another.
[Footnote reference omitted]
The learned Deputy President was correct to do this. The qualification made in Raftland, at [35] - [36], was that an absence of any intention to create legal obligations need not necessarily entail fraud. Scott v Commissioner of Taxation (No 2) (1966) 40 ALJR 265 at 279 (Windeyer J) offers an example of just such a conclusion. The Deputy President's identification of the present as a case falling into the first of the categories identified by Mustill LJ indicates that he was aware that the presence of fraud was not necessary. The adoption of the term "sham" both in his reasons and for that matter in these is in its less pejorative sense: Raftland, at [36].
34 In Australia, some aspects of the law of sham have, since the Tribunal's decision, been considered by the Full Court in Millar v Federal Commissioner of Taxation (2016) 243 FCR 302 (Millar). What proved controversial in Millar was the relevance with respect to intention of the absence of evidence from the tax adviser in circumstances where a material transactional document was signed not by that adviser but by the clients themselves, who gave evidence, which was accepted, of an intention that they take effect according to their terms. The Tribunal noted but ultimately did not draw any inference adverse to the applicants arising from the absence from the witness box of Ms Toffoletti, the adviser from "SME's R Us" (see [70], quoted below). If anything, the determination, by majority, in Millar of the relevance of the absence from the witness box of the adviser would serve only to bolster the Tribunal's conclusions.
35 Referring to the categories of sham identified by Mustill LJ in the passage quoted from Hadjiloucas v Crean, the learned Deputy President concluded ([67]), "the present case falls into the first of these categories - the arrangements between Sunraysia and Danood, Jameron and Kigra were never intended to create any legally enforceable obligation. He offered ([68] to [71]) the following reasons for this:
68. First, Mr Woods and Mr Cameron were "straw men" - they were paid to assume a role as member and director in their particular company. There is no reason to suppose that Ms Grace was in any different position. Neither Mr Woods nor Mr Cameron performed any function in the management of their companies: they knew nothing of the affairs of the companies, they undertook no transactions on the companies' bank accounts and they knew nothing of Sunraysia.
69. Next, the documents that purport to record the contracts between Sunraysia and Danood and Jameron have been executed on behalf of the subcontractor by someone who was not, but was pretending to be, the director. Moreover the critical details of the contract are, in each case, not completed.
70. Next, Mr Erdogan is demonstrated to have exercised considerable control over the financial affairs of each of the subcontracting companies and there is a complete absence of acceptable evidence of any other person exercising financial control. It is not a question of drawing adverse inferences, there is simply no evidence from either Mr Keles or Ms Toffoletti that they played any role in the subcontractor's affairs and I am simply unable to accept Mr Erdogan's evidence about the involvement of Ms Toffoletti in these matters.
71. Finally, there is the body of evidence that demonstrated a "business as usual" approach with little of substance changing when, on Sunraysia's case, Danood, Jameron and Kigra were acting as its subcontractors.
36 These were, to say the least, logical and legally permissible bases for the Tribunal's conclusion. Notably, they were preceded by the following in the Tribunal's reasons:
(a) at [64]:
There were numerous documents that demonstrated that Sunraysia had acted as if were the employer of the workers where, for example, it paid for workers' clothing, or for embroidering that clothing with its name, or for workers' accommodation, or for medical attention for workers, or for workers' compensation, or for equipment for workers, or been identified as the employer for the purposes of compensation medical certificates. These are matters where it might have been expected that the subcontracting company would have met these expenses rather than Sunraysia.
[sic]
(b) at [65]:
It is right to say, as Sunraysia does, that each of Danood, Jameron and Kigra existed as companies duly incorporated with a real person as a director in at least two cases. And it is also true that documents that purported to be tax invoices from subcontracting companies to Sunraysia have been produced. Those invoices may even reflect work performed by employees. But I am not satisfied that the arrangements between Sunraysia and each of Danood, Jameron and Kigra were as they purported to be. On the contrary, I consider that the circumstances overwhelmingly point to the conclusion that Danood, Jameron and Kigra were part of a façade created by Ms Toffoletti to permit Sunraysia to avoid remitting PAYG deductions.
37 The expectation, referred to in [64], serves further to explain why the Tribunal regarded each of Danood, Jameron and Kigra as facades. It was put for the applicants that [65] demonstrated that the Tribunal had conflated "Mr Erdogan's purpose of avoiding the statutory obligation to pay tax that would otherwise befall Sunraysia with his intention to create and execute legal obligations between Sunraysia and the subcontractors to effect that purpose". That is not so. First and foremost, this submission proceeds from the false premise, as to the asserted purpose, that Mr Erdogan discharged the onus of proof that fell on him. For the reasons persuasively given by the Tribunal, he did not. Next, the Tribunal's use of the word, "façade" is deliberate and completely congruent with the conclusion as to sham reached at [67]. Further, it is always a mistake to read the reasons of an administrator or administrative tribunal narrowly and with an eye for error: Minister for Immigration and Ethnic Affairs v Wu Shan Liang (1996) 185 CLR 259. Considered as a whole, the learned Deputy President's reasons are thorough, methodical, relentlessly logical, well grounded in legal principle both as to the operation of the onus of proof and the doctrine of sham and amply explain why the objection decisions were confirmed.
38 The applicants submitted that it was irrelevant for the Tribunal to take into account an absence of arm's length relations as between Sunraysia and Danood, Jameron and Kigra and Mr Erdogan's control. That is not so. These were but part of an overall factual matrix comprehensively analysed by the Tribunal. All of the Tribunal's findings fell within what was termed in Haritos v Federal Commissioner of Taxation (2015) 233 FCR 315, at [201], the "zone of discretion". This submission was nothing more than an impermissible endeavour to re-agitate, under the guise of a question of law, matters of fact in relation to the discharge of the onus of proof in a tax case where sham was alleged.
39 Cecil Bros. Pty Ltd v Commissioner of Taxation (1964) 111 CLR 430 (Cecil Bros), a case relied upon by the applicants in making this submission, has got nothing to do with the present case. On the evidence presented in that case, the trial judge, Owen J, was persuaded (at p 434), contrary to a contention by the Commissioner, that the critical dealings between the taxpayer and another company, in the course of which the claimed deductions were alleged to have been incurred, were not sham transactions. On appeal, this conclusion was upheld (at p 442) but his Honour was reversed in relation to the non-application, as the Full Court saw it, of the then general anti-avoidance provision, s 260 of the Income Tax Assessment Act 1936 (Cth). Cecil Bros is just a case which, in relation to the former s 260, stands for the proposition that, where it applied, it destroyed a non-sham transaction but did not permit the Commissioner to re-construct another on the resultant ruin. Rather, it was to that ruin that the tax legislation then had to be applied. Long before Cecil Bros, it had been settled that, "A sham transaction is inherently worthless, and needs no enactment to nullify it": Jaques v Federal Commissioner of Taxation (1924) 34 CLR 328 at 358 per Isaacs J. Millar is a recent example of this proposition in the modern era.
40 The applicants also put forward that a person's purpose of avoiding tax by the creation of a legal structure could only be effected if that structure were intended to be what it purported to be, not a sham for something else. Sometimes, the need for a structure or transaction to have legal effect in order to achieve an apprehended, fiscally beneficial purpose can offer a good reason why it should be concluded that the relevant parties intended them to have that effect: Accent Management Limited v Commissioner of Inland Revenue [2007] NZCA 230 at [63]. Tupicoff v Federal Commissioner of Taxation (1984) 4 FCR 505, a case to which the applicants referred, offers, at p 518-519 per Beaumont J (with whom Fisher J generally agreed and with whom Jenkinson J agreed), a local example of such reasoning, on very different facts, so as to reach a conclusion that an adopted substitute business structure was not a sham. But if, on the whole of the evidence, the behaviours of the key parties or those who control them are incongruent with that purpose and effect, leading to a conclusion that they never intended the substitute to take effect, all that means is that the avoidance structure is but an adviser's arid theory and its purported adoption in the particular case but a façade. It is just a case where documents were not "intended by the parties to have legal effect according to their tenor": Raftland, at [56]. It bears repeating that, in this taxation objection decision review, it was for the applicants to prove that this was not so. This, for the reasons given by the Tribunal, they did not do. Once again, the contention to the contrary on this appeal was just an impermissible endeavour to re-agitate questions of fact permissibly concluded against them by the Tribunal. To put forward that the "subcontractor arrangement was the antithesis of a sham" was but a different way of advancing this same impermissible argument.
41 A case cited by the applicants in support of the contention just dismissed was Bell v Commissioner of Taxation (1953) 87 CLR 548 (Bell), another s 260 case. In marked contrast to the present case, Bell was one where the elaborate succession of transactions necessary to achieve the apprehended minimisation of tax was undertaken with "sedulous care" (at 572). As it happened, notwithstanding that care, an evident purpose of tax avoidance was disclosed and the resultant annihilation left the taxable facts upon which the Commissioner had assessed. A patent absence of such care in the present case formed part of the reasoning process which, permissibly, informed the Tribunal that the purported arrangements here were but a façade.
42 Another submission was that the Tribunal has ignored "the legal fiction of separate corporate personality" applicable to Sunraysia and each of Danood, Jameron and Kigra. This was said to be evident from [72] and [73] of the Tribunal's reasons:
72. Reference should be made at this point to the evidence of Sunraysia's solicitor, Mr Konrad Wojtasik, and the work undertaken by him in reconciling subcontractors' invoices with funds moving from Sunraysia's bank account into the subcontractor's bank account and apparent wage payments coming from the subcontractor's bank account. Notwithstanding the industry of Mr Wojtasik in undertaking the task, I am well short of being satisfied that it does anything other than emphasise the depth of the charade. The fact that money may have moved in the manner to be expected in a conventional contractor and subcontractor relationship does not deal adequately with all of the indications to the contrary. When coupled with the absence of credible evidence about the day-to-day operations of the subcontractors, Mr Wojtasik's analysis is not of assistance to me.
73. Given that conclusion I accept, as the Commissioner submits, that there was no taxable supply; Danood, Jameron and Kigra were not making a supply for consideration, nor did any of them carry on an enterprise; they were simply players in an elaborate charade. It follows that Sunraysia did not make creditable acquisitions in its dealings with those companies. The Commissioner was right to deny Sunraysia input tax credits in respect of those dealings.
It is trite law that incorporation confers on a company a legal personality separate from its shareholders: Salomon v A Salomon & Co Ltd [1897] AC 22. That understanding, hardly surprisingly, self-evidently underpins the learned Deputy President's reference (at [72]) to "a conventional contractor and subcontractor relationship". It is a mark of the thoroughness of his consideration of the facts that he has considered these cash flows. It is just that, in the context of the evidence as a whole, they were not persuasive in terms of the discharging of the onus of proof that fell on the applicants. This ground of challenge also was but another misconceived endeavour to challenge conclusions of fact reasonably open to the Tribunal. A similar vice is evident in, ground 3 of the notice of appeal, which is predicated upon the Tribunal's conclusion that Danood, Jameron and Kigra were, with Sunraysia, "simply players in an elaborate charade" also informed the conclusion ([74]) that payments made by Sunraysia to any of Danood, Jameron or Kigra were not deductable under s 8-1 of the Income Tax Assessment Act 1997 (Cth). That was because, "They were not incurred by Sunraysia in gaining or producing its assessable income nor were they necessarily incurred in carrying on a business for the purpose of gaining or producing that income" (emphasis by Tribunal). The emphasis given by the Tribunal to the word "in" was consistent with the conclusion that none of Danood, Jameron or Kigra ever carried on an "enterprise". To the extent that it is any different from "enterprise" (and it is not necessary to explore that to decide this appeal), the Tribunal was not satisfied that any of them carried on a "business" or that the expenditures were otherwise incurred in gaining or producing any assessable income.
43 By ground 4, the applicants advanced a challenge based on asserted "real employment relationships". But the place for this assertion was in the Tribunal, backed by persuasive evidence, to the end of discharging the onus of proof that fell upon them. In this endeavour, the Tribunal concluded they had failed. The "real employment relationships" was a false premise upon which rested yet another impermissible attempt to displace findings of fact made against them in the Tribunal. Further, given the Tribunal's permissible conclusion that the new structure was but a charade for the old, what always remained was the old. There was no element of reconstruction in this only, contrary to the applicants' misunderstanding, a recognition that the "real employment relationships" had never changed. The Tribunal's consequential conclusion ([83]) that Sunraysia was obliged, by either s 12-35 or s 12-60 of Sch 1 of the TAA, to remit PAYG deductions to the Commissioner was unremarkable. By operation of s 16-30 of Sch 1, Sunraysia became liable to pay to the Commissioner a penalty equal to the amount not withheld (and not remitted by the Commissioner).
44 There was no "halfway house" position put to the Tribunal by Sunraysia whereby it contended that if, contrary to its primary position, its asserted arrangements with Danood, Jameron and Kigra were shams, it was nonetheless those three companies which had the PAYG remission liability, because they had paid the "wages". Unsurprisingly, the Tribunal did not address this contention, which was novel to the appeal. As it was, the conclusions reached by the Tribunal were completely destructive of this novelty. The Tribunal was not satisfied that Danood, Jameron and Kigra employed anyone, or that the asserted arrangements between Sunraysia and them were anything other than shams. It necessarily followed from the absence to show any intended change in the earlier position that the remission obligation remained with Sunraysia.
45 At one stage in the course of this proceeding, and at a cost to its final hearing not being in July, as opposed to December last year, the applicants raised what they submitted was a constitutional issue arising from an asserted incontestability of this penalty. It was also drawn to my attention that there are taxation recovery proceedings in the Supreme Court of Victoria in respect of the taxation liabilities as affirmed by the Tribunal's decision and contested on so-called questions of law in this statutory appeal. As it happened, it later became common ground (as it should have - Temples Wholesale Flower Supplies Pty Ltd v Federal Commissioner of Taxation (1991) 29 FCR 93 at 100) that Sunraysia's liability to penalty was an issue properly before the Tribunal and thus one in respect of which no question of an "incontestable tax" arose.
46 I have not separately identified the submissions made by the Commissioner in respect of the appeal. As to these, it suffices to record that the reasons set out above as to why this appeal has no merit accord with those submissions.
47 In design, the structure put to Mr Erdogan by "SME's R Us" looks to be but a crude, interposed company of no worth, run by a straw man (a feature reminiscent of the "bottom of the harbour" behaviours of a generation ago) with "phoenix" successors. Whatever fiscal efficacy that had depended on its intended adoption in fact by Mr Erdogan. As it happened, he failed to show that he ever intended the key legal elements of the structure to take effect. The Tribunal's conclusion that, in respect of each such company, he failed to do this was reasonably open, for the reasons given by the Tribunal. That being so, in an appeal of this nature a principled restraint is called for by this Court in respect of the applicants' endeavours to disturb it.
48 The appeal must be dismissed, with costs.
I certify that the preceding forty-eight (48) numbered paragraphs are a true copy of the Reasons for Judgment herein of the Honourable Justice Logan.