16 I will refer to this partnership as the "CECK partnership". It was involved in the TVI Project. It is to be distinguished from the partnership formed in 1996 which I will describe later and which I will refer to as the "TVA partnership". The TVA partnership was involved in the TVA Project.
17 It is well-established that the test of purpose under s 177D(b) of the ITAA 1936 is to be determined objectively and that the subjective intentions of the relevant taxpayer are not relevant. Nevertheless, his or her actions (as distinct from subjective intention) prior to entering into a scheme may be relevant to the manner in which the scheme was entered into or carried out and this is a relevant matter to the ascertainment of purpose (s 177D(b)(i)).
18 I will now set out a brief summary of the evidence of the respective applicants as to what they did prior to and after entering into the Travel Vision Projects. The starting point is February 1994 when the CECK partnership decided to become involved in the TVI Project.
19 Mr Mate Tolich was born in 1943. His education consisted of four years at primary school. Before establishing Civil and Earth in 1988, he carried out what were, for the most part, labouring tasks or supervisory tasks in relation to construction sites. He said that in 1994 he was looking to invest, and that he and his fellow directors of Civil and Earth and the company's accountant formed the CECK partnership. The partnership decided to invest in the TVI Project.
20 Prior to doing so, Mr Tolich and his partners met with the directors of Travel Vision International Pty Ltd ("TVI"), Mr Peter Snow and Mr Bruce Gallash, and with Mr Sleight. Mr Snow explained the main details of the TVI Project to them. Mr Tolich said that at about this time he was provided with an information memorandum dated May 1994 ("1994 IM"). Some of the other applicants gave similar evidence. There is also an information memorandum dated 1993 ("1993 IM") and, having regard to the date of the meetings and discussions, it seems more likely than not that Mr Tolich and the other applicants were given the 1993 IM rather than the 1994 IM prior to those meetings and discussions. That would be consistent with the time at which they were provided with the document. However, this is not a factual issue which I need to resolve because although there are some differences between the 1993 IM and the 1994 IM they are not such as to be of significance in resolving the issues before me.
21 Mr Tolich said that he had some idea of how the Travel Vision system worked. However, due to his lack of education he relied on advice from Mr Vincenzo Princi and Mr Kevin Dorn that it was a good business for investment purposes. He also said that Mr Allen Prince told him that the investment was a good one.
22 As far as the agreements comprising the TVI Project and the TVA Project were concerned, Mr Tolich said that he did not fully understand the various agreements and that he relied on explanations from Mr Vincenzo Princi and Mr Dorn as to the effect of those agreements.
23 The Australian Trade Commission ("Austrade") prepared reports as to the Travel Vision Projects and the management company, Plutora Pty Ltd as trustee of the M&M Trust ("Plutora"), issued half-yearly reports. In addition, from time to time TVI issued news bulletins or press releases. The reports, news bulletins and press releases were sent to the CECK partnership to keep it informed about the Travel Vision Projects. Mr Tolich did not read any of that material but, rather, he relied on Mr Vincenzo Princi, Mr Dorn and Mr Prince to keep him informed. Mr Tolich said that he believed that the Projects ceased because of a lack of funds.
24 Mr Domenic Princi is 58 years of age. He has undertaken various manual occupations including panel-beating, motor mechanics, earthworks subcontractor, working director for Civil and Earth and, more recently, property development, bus driving and work as an inventor.
25 Mr Prince was Mr Domenic Princi's accountant and he had been his accountant for about 30 years. Mr Prince introduced Mr Domenic Princi and his fellow directors to Mr Sleight, who provided them with business opportunities from time to time. Mr Sleight introduced Mr Domenic Princi to Mr Snow and Mr Gallash and the TVI Project. Mr Sleight said that the project was a good one. Various meetings were held and Mr Domenic Princi said he was optimistic about the TVI Project, particularly after hearing a speech from the then Prime Minister of Australia about the future role of electronic communications. Mr Domenic Princi asked the representatives of TVI about the advantages of CDs over the internet. Mr Snow explained to Mr Domenic Princi how the proposed licensing system would work.
26 Mr Domenic Princi said that he relied on advice from Mr Prince to the effect that the projected returns were high and the investment was a good one. He was aware that the TVI Project may be eligible for grants from the Australian government. He attended a practical demonstration of the Travel Vision system by Mr Snow and Mr Gallash. He was also aware that a consultant to the TVI Project had what he considered to be very impressive qualifications in tourism.
27 Mr Domenic Princi's knowledge of the effect of the licensing and other agreements was fairly basic. It was based on what Mr Snow had said. Mr Domenic Princi said that he formed the view that the management fees of $2,500,000 and the marketing fees of $540,000 for the first year were appropriate and reasonable. He was aware that the TVI Project had been successful in obtaining an export market development grant in relation to expenses incurred in the financial year ended 30 June 1994 ("1994 FY").
28 After entering into various agreements on 14 February 1994, the CECK partnership had continuing contact with Mr Snow, and received newsletters from TVI.
29 As to the agreements executed after February 1994, again Mr Domenic Princi states that he had a basic understanding of the agreements, although he did not understand (to use his words) "the entirety of the agreements".
30 Again, as to the management fees of $1,100,000 and the marketing fees of $240,000 for the second year, Mr Domenic Princi formed the view that they were appropriate and reasonable. In July 1995, Mr Domenic Princi made arrangements to visit TVI facilities in England and the United States of America but, ultimately those visits did not take place.
31 In 1994 and 1995 Mr Domenic Princi was aware that the TVI Project was not progressing as well as projected. TVI were attempting to form a global strategic alliance with IBM and the Société Internationale de Télécommunications Aéronautiques ("SITA"). The latter organisation was a co-operative of more than 600 airlines which operated the world's largest privately owned telecommunications network. He was given an explanation as to why the alliance had not been formed by mid-1996. He continued to ask questions of representatives of TVI as to why the internet was not the best medium for the system. He sought advice from Mr Prince as to whether he should be involved in the TVA Project.
32 Mr Domenic Princi also referred to the material sent to the CECK partnership by Plutora and TVI consisting of half-yearly reports, news bulletins and press releases. He understood that the Projects failed in 2000 because of a lack of funds. He thought that that was probably due to the development of the internet.
33 Mr Kevin Dorn is 63 years of age and has qualifications in mechanical engineering.
34 As I have said, in his application he complains only of the respondent's decisions in relation to the 1994 FY and the 1995 FY respectively.
35 Mr Dorn also gave evidence of meetings between those who subsequently became members of the CECK partnership, Mr Sleight and Mr Snow and Mr Gallash. He thought that there were three or four meetings and that at one or more of those meetings the Travel Vision system, proposed agreements and proposed returns were discussed. He was provided with a copy of the 1994 IM. Mr Dorn said that Mr Prince was instructed to investigate the commercial merits of the TVI Project and that he made no negative comments. Mr Dorn was aware of Mr Snow's qualifications and formed a favourable view of them. He also heard the then Prime Minister's speech about the future role of electronic communications and attended the demonstration of the Travel Vision system. He discussed the proposed investment with his partners on a number of occasions.
36 Mr Dorn had a basic understanding of the agreements, although he did not understand (to use his words) "the entirety of the agreements".
37 Mr Dorn formed the view that the management fees of $2,500,000 and marketing fees in the first year were appropriate and reasonable. He formed the view that the limited recourse loan was a commercially sensible option for the CECK partnership.
38 Mr Dorn said that he had contact with Mr Snow and Mr Gallash after the first year and he questioned them as to why the TVI Project did not go to plan in the first year. The CECK partnership received newsletters about the TVI Project from time to time.
39 Mr Dorn also formed the view that the management fees of $1,100,000 and marketing fees of $240,000 in the second year were appropriate and reasonable.
40 Mr Dorn gave evidence about the material which was sent to the CECK partnership by Plutora and TVI. In his opinion, the TVI Project failed because it was overtaken by the internet.
41 Mr Vincenzo Princi is 54 years of age and he has worked in various clerical positions, as a driver of large machinery and as a supervisor and project manager in the engineering and construction industry. He also referred to meetings with Mr Snow and Mr Gallash at which Mr Sleight was present. He was given the 1994 IM. He also thought that there were three or four meetings and that Mr Snow gave information about the Travel Vision system and the projected revenue and outgoings. Mr Vincenzo Princi described what occurred at one of the meetings in the following terms:
"Mr Snow at one of the meetings outlined the potential returns of investing in the Project which was supported by the global reach of the Project. It was also described by Mr Snow that the idea in TVI licensing the Travel Vision system in Australia to licensees, including the Partnership, was to sell advertising space on CDs to content providers such as hotels, airlines and holiday providers at a cost of about $500.00 per image. Mr Snow also provided a break down of the costs involved with the Project. The concept for overseas was to locate sub-licensees who would attempt to sell advertising space on the CDs on the licensees [sic] behalf. The idea was to have CDs updated every six months."
42 Mr Prince was instructed to investigate the commercial merits of the TVI Project and he told Mr Vincenzo Princi that the projected returns were high and that the investment was a good one. He also heard the then Prime Minister's speech about the future role of electronic communications. He was aware that the TVI Project may be able to obtain an export market development grant.
43 Mr Vincenzo Princi said that he attended the demonstration of the Travel Vision system and he was impressed by the qualifications of Mr Snow and Mr Gallash, and by the tourism qualifications of the person who was to be a consultant to the project.
44 Mr Vincenzo Princi and his partners discussed the project on a number of occasions and then decided to invest in it.
45 Mr Vincenzo Princi said that he had a basic understanding of the important features of the agreements. On the basis of Mr Prince's opinion and his assessment of the possibilities of the TVI Project, he considered the management fees of $2,500,000 and marketing fees of $540,000 for the first year were appropriate and reasonable. He considered that the limited recourse loan made commercial sense. He was aware of the newsletters about the TVI Project which were received by the CECK partnership. For the same reasons he had relied on in relation to management fees and marketing fees in the 1994 FY, he formed the view that the management fees of $1,100,000 and marketing fees of $240,000 in second year were appropriate and reasonable.
46 The TVI Project did proceed as well as planned in 1994 and 1995, and Mr Vincenzo Princi said that he also was told of the attempt to form a global strategic alliance with IBM and SITA, and the reasons that had not succeeded. Mr Vincenzo Princi was advised of the proposed restructure, that is, the TVA Project, by Mr Snow and was given a copy of an information memorandum dated May 1996 ("1996 IM"). He also was aware of the material sent to the CECK partnership by Plutora and TVI, including half-yearly reports, newsletters and press releases.
47 Mr Vincenzo Princi said that the Travel Vision Projects failed in late 1996 or early 1997 due to a lack of funds and he considered that the cause of its failure was the development of the internet.
48 Mr Allen Prince is 62 years of age and since 1985 he has conducted his own accounting practice.
49 In early 1994 he was asked to advise the directors of Civil and Earth about the opportunity to invest in the TVI Project. He was given a copy of the information memorandum. He said that he considered the forecast returns to be achievable and in line with the risks associated with a new business. He said that he considered the TVI Project a viable prospect with the underlying commercial activity being a sound business which had the prospect of growth. He was given a 2 per cent interest in the CECK partnership for "my prospective work involved in looking after the investment".
50 Mr Prince and the partners were introduced to the TVI Project by Mr Sleight who said that the project could generate substantial returns. Mr Prince attended the meetings with Mr Snow and Mr Gallash. He was provided with the 1994 IM. He formed a positive view of the projected returns and he advised the partners of his view. He said that he was impressed by the qualifications of Mr Snow and Mr Gallash. He considered that the management agreement, marketing agreement and limited recourse loan were good commercial options for the CECK partnership and he was of the view that the management fees of $2,500,000 and marketing fees of $540,000 for the first year were appropriate and reasonable for Plutora "operating the Australian business, securing advertisers, securing content providers, and locating and securing sub-licences overseas".
51 During 1994 the CECK partnership had contact from Mr Snow and received newsletters from TVI. The CECK partnership decided to invest in the project again. Mr Prince, for the same reasons he gave in relation to the first year, was of the opinion that the management fees of $1,100,000 and the marketing fees of $240,000 in the second year were appropriate and reasonable. Mr Prince was aware of the material being sent to the partnership by Plutora and TVI, being half-yearly reports, news bulletins and press releases and said that he remained in regular contact with Mr Snow.
52 One of the promoters, Plutora, apparently with the assistance of the accounting firm, Price Waterhouse, prepared and sent draft entries showing the financial effects of the transactions for the books of the CECK partnership. Mr Prince agreed that, apart from making the entries, the partnership did not prepare separate books of account.
53 Mr Sleight is 48 years of age and has worked mainly as an investment consultant or financial adviser. He has about 20 years experience in providing investment advice.
54 In late 1993 he met Mr Snow and Mr Gallash and was told of the Travel Vision system. He was given the 1994 IM. He was enthusiastic about the project. He spoke to Mr Prince about it and then he met the four directors of Civil and Earth.
55 Mr Sleight considered the projected returns of the TVI Project and the risks associated with it, and he was of the view that the projected returns reflected the risks.
56 Mr Sleight kept in contact with Mr Snow and Mr Gallash in 1994 and 1995 and he kept himself informed of the progress of the TVI Project. Mr Snow told him of the attempts to form a global strategic alliance with SITA.
57 Mr Sleight said that he did not form an opinion as to the reasonableness of the management fee of $6,500,000 in the financial year ended 30 June 1996 ("1996 FY") in relation to the TVA Project other than that it seemed reasonable, having regard to the forecast returns to the TVA partnership.
58 After he had made his investment in the 1996 FY, Mr Sleight kept in regular contact with Mr Snow and received newsletters about the project published by TVI from time to time.
59 In 2000 Mr Sleight was informed by Mr Snow and Mr Gallash that the TVA Project could not continue. He attributed its lack of success, in part at least, to the development of the internet.
60 Mr Sleight was paid a commission for introducing investors to the TVI Project and TVA Project by Viscount Nominees and he received a commission in 1994, and again in 1996, for introducing, first, the CECK partnership and, secondly, Civil and Earth to the respective Projects.
61 This then is the evidence given by each of the applicants.
62 I turn now to summarise the evidence of the promoters and those associated with them. This evidence was also said by the applicants to be relevant to the determination to be made under s 177D(b) of the ITAA 1936.
63 Mr Snow was an executive director of TVI and a director of Plutora. He had a professional background in accounting and financial management and he had some experience in the tourism industry.
64 The Travel Vision system was developed in 1993 or 1994. It was to be exploited on a global basis and not just in Australia. TVI alone did not have resources to exploit the system and it needed to attract investors. It entered into licence agreements with various parties including the CECK partnership.
65 Mr Snow said that the calculation of the management fee was based on an estimate of the cost of a team to conduct the management and costs of managing the business of the CECK partnership in the Australian territories and that the fee covered all the infrastructure costs as well as personnel, equipment, support and approaches to advertisers to advertise on the system and travel agents to use the system. The marketing fee was calculated on a similar basis and the figure arrived at was $135,000 per overseas territory per year.
66 Mr Snow outlined the work undertaken in the overseas territories. TVI instructed Mr Ole Martinson to carry out certain tasks in relation to the marketing and promotion of the Travel Vision system. He designed and delivered a training course for international marketing consultants. The course was held in May 1994 and 12 people attended. After that, those people and Mr Martinson were retained as consultants by Plutora "to promote the Travel Vision system overseas with a view to identifying prospective sub-licencees with which to negotiate agreements".
67 Mr Gallash, Mr Martinson and several of the consultants undertook field trips to the overseas territories and Mr Martinson and several consultants went to overseas territories where the licensee was the CECK partnership. There were meetings with potential sub-licensees in the overseas offices of Price Waterhouse, and each consultant had a personal computer which was installed with the Travel Vision system software for demonstration purposes. In addition, each consultant was provided with a promotional folder and there was a procedures manual. A copy of the procedures manual is in evidence. It appears to be very comprehensive.
68 Mr Snow states that international regional representative offices were established in serviced office facilities in three overseas territories licensed to the CECK partnership, namely, San Francisco, California (for North America), London (for European operations) and Hong Kong (for the Asian region) with their own telephone and fax numbers and live answering services with plans for on-ground staff to operate from the serviced offices to provide support for and monitoring of sub-licensees on behalf of licensees.
69 In the context of operations in overseas territories, I note at this point that the CECK partnership was successful in obtaining an export market development grant ("development grant") under the Export Market Development Grants Act 1974 (Cth) in relation to its expenditure in promoting the Travel Vision system in overseas territories in the 1994 FY. The CECK partnership and other licensees made a claim for a similar grant in relation to the 1995 FY. The claim was rejected by the Australian Trade Commission ("the Commission") but upheld by the Administrative Appeals Tribunal. On appeal by the Commission to a single Judge of this Court, the decision of the Tribunal was upheld: Australian Trade Commission v Disktravel [1999] FCA 48. On a further appeal, the Full Court of this Court set aside the decision of the single Judge and the Tribunal: Australian Trade Commission v Disktravel (1999) 91 FCR 374. I will discuss the issues in those proceedings and their significance to the applications before me in due course.
70 As far as Australian territories were concerned, Mr Snow gave evidence that an Australian marketing team under a national sales manager was established and that this operated from a separate office from the consultants in relation to the overseas territories. A database was developed and approaches were made to accommodation providers and travel agency groups.
71 Mr Snow described the restructuring which occurred in 1996. The management fees and marketing fees were calculated in the same way as they had been calculated in the earlier years (see [65] above).
72 Mr Snow prepared the financial projections contained in the information memorandum and he gave evidence of the basis upon which he did so.
73 Mr Snow said that the limited recourse loans were linked to the management agreements, not the marketing agreements, and that the management agreements related to operations in the Australian territories.
74 In cross-examination, Mr Snow agreed that in relation to the transactions which were entered into on 13 February 1995 there was an exchange of cheques whereby the CECK partnership was given a cheque by the lender for $300,000 and provided two cheques totalling $300,000 as follows:
TVI $60,000 (licence renewals)
Plutora $240,000 (extension of marketing agreement)