Statutory Framework
85 Section 51 of the Income Tax Assessment Act 1936 (Cth) provides in subss (1) and (2):
"51(1) All losses and outgoings to the extent to which they are incurred in gaining or producing the assessable income, or are necessarily incurred in carrying on a business for the purpose of gaining or producing such income, shall be allowable deductions except to the extent to which they are losses or outgoings of capital, or of a capital, private or domestic nature, or are incurred in relation to the gaining or production of exempt income.
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(2) Expenditure incurred or deemed to have been incurred in the purchase of stock used by the taxpayer as trading stock shall be deemed not to be an outgoing of capital or of a capital nature."
86 The Commissioner in this case relies upon s 51 and also upon Part IVA of the Income Tax Assessment Act. That Part is concerned with "schemes" broadly defined in s 177A(1) as:
"(a) any agreement, arrangement, understanding, promise or undertaking, whether express or implied and whether or not enforceable, or intended to be enforceable, by legal proceedings; and
(b) any scheme, plan, proposal, action, course of action or course of conduct;"
The class of scheme to which Part IVA applies is defined in s 177D:
"177D This Part applies to any scheme that has been or is entered into after 27 May 1981, and to any scheme that has been or is carried out or commenced to be carried out after that date (other than a scheme that was entered into on or before that date), whether the scheme has been or is entered into or carried out in Australia or outside Australia or partly in Australia and partly outside Australia, where -
(a) a taxpayer (in this section referred to as the "relevant taxpayer") has obtained, or would but for section 177F obtain, a tax benefit in connection with the scheme; and
(b) having regard to -
(i) the manner in which the scheme was entered into or carried out;
(ii) the form and substance of the scheme;
(iii) the time at which the scheme was entered into and the length of the period during which the scheme was carried out;
(iv) the result in relation to the operation of this Act that, but for this Part, would be achieved by the scheme;
(v) any change in the financial position of the relevant taxpayer that has resulted, will result, or may reasonably be expected to result, from the scheme;
(vi) any change in the financial position of any person who has, or has had, any connection (whether of a business, family or other nature) with the relevant taxpayer, being a change that has resulted, will result or may reasonably be expected to result, from the scheme;
(vii) any other consequence for the relevant taxpayer, or for any person referred to in subparagraph (vi), of the scheme having been entered into or carried out; and
(viii) the nature of any connection (whether of a business, family or other nature) between the relevant taxpayer and any person referred to in subparagraph (vi),
it would be concluded that the person, or one of the persons, who entered into or carried out the scheme or any part of the scheme did so for the purpose of enabling the relevant taxpayer to obtain a tax benefit in connection with the scheme or of enabling the relevant taxpayer and another taxpayer or other taxpayers each to obtain a tax benefit in connection with the scheme (whether or not that person who entered into or carried out the scheme or any part of the scheme is the relevant taxpayer or is the other taxpayer or one of the other taxpayers)."
The reference to "purpose" must be read with the provisions of s 177A(5) which provides:
" 177A(5) A reference in this Part to a scheme or a part of a scheme being entered into or carried out by a person for a particular purpose shall be read as including a reference to the scheme or the part of the scheme being entered into or carried out by the person for 2 or more purposes of which that particular purpose is the dominant purpose."
87 The definition of "obtaining by a taxpayer of a tax benefit in connection with a scheme" is to be found in s 177C. Relevantly that provides:
"177C(1) Subject to this section, a reference in this Part to the obtaining by a taxpayer of a tax benefit in connection with a scheme shall be read as a reference to -
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(b) a deduction being allowable to the taxpayer in relation to a year of income where the whole or a part of that deduction would not have been allowable, or might reasonably be expected not to have been allowable, to the taxpayer in relation to that year of income if the scheme had not been entered into or carried out; or"
88 Section 177F, relating to cancellation of tax benefits by the Commissioner, as it stood at the time of the determinations relied upon in these proceedings was, in the relevant parts, in the following terms:
"177F(1) Where a tax benefit has been obtained, or would but for this section be obtained, by a taxpayer in connection with a scheme to which this Part applies, the Commissioner may -
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(b) in the case of a tax benefit that is referable to a deduction or a part of a deduction being allowable to the taxpayer in relation to a year of income - determine that the whole or a part of the deduction or of the part of the deduction, as the case may be, shall not be allowable to the taxpayer in relation to that year of income; or
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and, where the Commissioner makes such a determination, he shall take such action as he considers necessary to give effect to that determination."
89 Amendment of assessments pursuant to determinations is covered by s 177G:
"177G(1) Nothing in section 170 prevents the amendment of an assessment at any time before the expiration of 6 years after the date on which tax became due and payable under the assessment if the amendment is for the purposes of giving effect to subsection 177F(1).
(2) Nothing in section 170 prevents the amendment of an assessment at any time if the amendment is for the purpose of giving effect to subsection 177F(3)."
The Issues
90 The principal issues for determination in this case are:
1. For the 1995 year - whether Part IVA of the Act operates to disallow the claimed deduction of $21,300. No question arises as to whether the amounts claimed were allowable as deductions for the 1995 year. It is conceded by the Commissioner that the period during which he was permitted to amend the applicant's assessment for the 1995 year, other than under Part IVA, expired before the amended assessment was issued.
2. Whether for the 1996 year the business loss of $16,050 claimed was an allowable deduction pursuant to s 51(1).
3. If the amount of $16,050 claimed as a business loss for the 1996 year was deductible pursuant to s 51(1) did Part IVA operate to disallow that deduction.
Whether the 1996 Business Losses were Allowable Deductions under Section 51(1)
91 The question of deductibility under s 51(1) is logically anterior to the question of disallowance under Part IVA. If there is no deduction there is no tax benefit and therefore nothing upon which Part IVA can operate. It is therefore convenient to deal with the question of deductibility first even thought it arises only in respect of the 1996 year. The question whether Part IVA applies to disallow Ms Vincent's claimed losses applies to both 1995 and 1996.
92 The question whether the Second Year Fees were allowable deductions under s 51(1) requires consideration of the first limb of that subsection. To establish deductibility under the first limb it must be shown that the losses or outgoings claimed "… incurred in gaining or producing … assessable income". To satisfy that condition it is sufficient that the expenditure be made in the given year or accounting period and that it be incidental and relevant to the operations or activities regularly carried on for the production of income - Ronpibon Tin NL v Federal Commissioner of Taxation (1949) 78 CLR 47 at 56-57; Federal Commissioner of Taxation v Snowden and Willson Pty Ltd (1958) 99 CLR 431 at 443. The requirement that expenditure be "incidental and relevant" to the production of income goes to its essential character rather than its purpose - Lunney v Federal Commissioner of Taxation (1958) 100 CLR 478 at 496-497. The motive and purpose of the expenditure may have evidentiary significance and, in some cases, may decide its characterisation. They are not determinants of deductibility - Magna Alloys and Research Pty Ltd v Federal Commissioner of Taxation (1980) 33 ALR 213 at 222 and 234-235; Fletcher v Federal Commissioner of Taxation (1991) 173 CLR 1 at 17. In John v Federal Commissioner of Taxation (1989) 166 CLR 417 at 426-427 it was said that:
"It is readily understandable that, if no income has been gained or produced and a question arises as to whether the occasion would be expected to produce assessable income, consideration of the purpose for which the expenditure was outlaid might not be wholly irrelevant."
The broad approach taken by the authorities to the connection between losses and outgoings in the gaining of income allow that expenditure may be deductible although related only to income generated in years other than that in which it was incurred - Commissioner of Taxation v Finn (1961) 106 CLR 60 at 68; Ronpibon Tin (supra) at 56; Snowden and Willson Pty Ltd (supra) at 436; John Fairfax and Sons Pty Ltd v Federal Commissioner of Taxation (1959) 101 CLR 30 at 35 and 46 and Fletcher (supra) at 16. More recently in Steele v Commissioner of Taxation (1999) 197 CLR 459 at 475 it was said:
"The temporal relationship between the incurring of an outgoing and the actual or projected receipt of income may be one of a number of facts relevant to a judgment as to whether the necessary connection might, in a given case, exist, but contemporaneity is not legally essential and whether it is factually important may depend upon the circumstances of the case."
The existence of a disproportion between the outgoing and the income to be derived may raise a question of characterisation which requires consideration of the objectives and advantages which the taxpayer sought in making the outgoing. In that case what is needed is a commonsense or practical weighing of all the factors - Fletcher (supra) at 18-19. That is to say, beyond the simple case in which assessable income exceeds the outgoing, there is an evaluative, and possibly multi-factorial, judgment to be made in determining the character of the outgoing for the purposes of s 51(1).
93 The Management Agreement under which Ms Vincent paid the Second Year Fees was for a term of two years - the "Management Term". It involved the assumption by ACM of obligations with respect to implantation of embryos, delivery of progeny and sale which extended out to a period of forty weeks after the end of the second year. The Lease Agreement with Viking was also for a term of two years. The content of management services and the fees payable for them after the expiry of the two year Management Term was "… to be determined and agreed upon by the Manager and the Owner or his representative". The lease of recipient cows was subject to options to extend for up to two additional terms of six months each. It was clear however, from the cash flow projections in the ACM brochure, that Ms Vincent was not to expect any profit from the project before Year 3. The Commissioner submitted, on the basis of the formal commitment of two years made by Ms Vincent, that the expenditure she incurred could not be expected to produce any assessable income.
94 In my opinion the disconformity between the terms of the Management Agreement and the Lease Agreement on the one hand and the seven year timeframes of the cash flow projections and the Loan Agreement on the other, is not, of itself, fatal to the deductibility of the Second Year Fees. The duration of Ms Vincent's prospective and intended involvement was not limited by the terms of the agreements. As I have found, she contemplated continuing beyond the two year period for which she leased the recipient cows. She initially expected that she would be involved for the period contemplated by the projections. She did not consider the possibility that the project might fail. The fact that she had effectively an option to terminate her involvement after two years does not affect that position.
95 It was further argued by the Commissioner that the three recipient cows which Ms Vincent proposed to lease could not produce sufficient progeny or volume of genetic material to earn income. Reliance was placed in this respect on Mr McMichael's evidence and, in particular, the Events Timetable which has been mentioned earlier in these reasons and which appears as Table 2 to his report. As is evident from the report however, Table 2 was directed to the viability of Ms Vincent's investment on the assumption that it was to be assessed over the period of two years. What he said in this respect in his report was:
"Drawing together a reasonable outcome for Ms Vincent (refer Table 2, Page 6) and a financial outcome after the period of the management services agreement plus the lease agreement ceasing; it would appear there is a deficit of $22,000 (approximate) plus the ownership of two heifer calves approximate value $4,400 (refer Table 3, Page 10) at the end of this period. This is not a viable outcome."
As I have already indicated, in my opinion the judgment as to deductibility in this case is not to be limited by the assumption, derived from the terms of the agreements, that Ms Vincent's involvement was subject to an a priori limitation of two years.
96 The characterisation of the outgoings in Year Two is not determined by the ex-post facto assessments of the commercial viability of the project offered by Messrs Singleton and McMichael. Had Ms Vincent, been in the words of Mr McMichael a serious livestock or cattle breeder, armed with the relevant expertise and had she raised the questions about the breeding program identified by Mr McMichael and had she inquired about the working capital position she might have come to the conclusion that the project was not going to yield assessable income. In my opinion, however, it is not a condition of the deductibility of outgoings under the first limb of s 51(1) that the taxpayer has conducted what an expert in the relevant field would regard as all necessary inquiries to assess the return to be derived. In so saying it must be accepted that a failure to conduct any inquiries at all or wilfully disregarding easily ascertainable risks that the project will yield little or no return could support the conclusion that the outgoing was not genuinely incurred in gaining or producing assessable income. But mere imprudence on the part of the taxpayer or failure to make adequate or full inquiry does not of itself take the outgoing out of the scope of the section.
97 In this case the investment had been suggested by Ms Vincent's accountant of ten years whom she trusted. The projections promised an income stream over a seven year period. She had a number of conversations about it with her accountant and read literature which he passed to her. She discussed the investment with her father whose judgment she trusted and with her partner and her partner's father. She considered other investments at the time. The fact that she hoped to repay her father's loan out of the tax refund does not negative the overall purpose of the outgoings as the derivation of assessable income. There would, after all, be little point in investing in the project if the best she could hope to achieve were the repayment of the money she borrowed to invest in it.
98 These considerations lead into the Commissioner's further argument that there was a disproportion between Ms Vincent's outgoings and the assessable income which was to be explained by her pursuit of a taxation advantage. The disproportion argument was based upon a comparison of her outlay with the projected and actual assessable income. I accept that a factual basis for the disproportion argument existed. As earlier observed, where there is disproportion, characterisation of the outgoing requires a common sense or practical weighing of all the facts including the objectives and advantages which the taxpayer seeks from the expenditure. One of the factors which may be taken into account is that, from Ms Vincent's point of view, the Loan Agreement did involve the assumption of an obligation, however light it may have been, by virtue of the limited recourse condition. The repayment arrangements under that agreement would have affected the income stream projected over the seven year period covered by the ACM brochure. It is also appropriate to have regard to the limited financial advantage she obtained when the actual reduction in her taxation liability is set off against her cash outlay. Counsel for Ms Vincent submitted that in 1996 the extra tax properly payable, if the deduction of $16,050 had not been claimed was $5,545.93. Set off against her actual cash outlay (not including TEIborrowings) of $5,250, the net benefit was $295.39. Counsel argued, albeit in the context of Part IVA, that what this demonstrated was that Ms Vincent's dominant purpose in entering the project was not to obtain tax deductions.
99 Having regard to these considerations and the findings I have already made against the contention that Ms Vincent did not intend to be involved in the project for more than two years, I do not accept that the disproportion between her outgoings and the assessable income defeat the characterisation of those outlays as incurred in gaining or producing assessable income within the meaning of the first limb of s 51(1).
100 The Commissioner submitted that the outgoings were of a capital nature which secured for Ms Vincent an interest in a business operated by ACM. She was a passive investor in someone else's business. The focus of this argument seemed to be on the two year term of the Management Agreement and the Lease Agreement and Ms Vincent's inactivity in relation to the actual operation of the project. Her failure to extend these agreements was said to indicate that what she did in investing in the project was no more than make a one off arrangement for the delivery of progeny. Reference was made to evidence of her passivity as an investor. She did not ensure that the terms upon which ACM had contracted to deliver her progeny were complied with. She did not monitor ACM's management of the recipient cows or when or how the First Year and Second Year Fees were spent. She kept no records of expenditure made on her behalf and lost some of the information she was provided with. She did not monitor progress and breeding. The factual aspects of these contentions were substantially accurate. It does seem that in 1996, after paying her Second Year Fees, Ms Vincent lost interest in the project. She was going through a difficult time. Her evidence was not contradicted that her twelve month old child had contracted a serious illness in that year and she had to focus on looking after him. In my opinion her failure to follow up the performance of the project in that year does not indicate that her outgoings were of a capital nature.
101 The Commissioner referred to Clowes v Federal Commissioner of Taxation (1954) 91 CLR 209 and Milne v Federal Commissioner of Taxation (1976) 133 CLR 526. These cases concerned the characterisation of proceeds from investments in timber plantations as capital in the hands of the investors rather than as assessable income. In each case the taxpayer had paid a lump sum for a lot upon which timber was grown and sold with costs being deducted from the proceeds remitted to the taxpayer. Dixon CJ said in Clowes at 218:
"From the taxpayer's point of view it was nothing but a casual investment of capital in hope of enlargement at the end of many years. It was done in the course of the taxpayer's business. There is no suggestion that it formed part of any system or practice. It is likely enough that it was nothing but the result of yielding to a canvasser."
In Milne it was held that the facts of the case could not be distinguished in any relevant way from the facts in Clowes' case. The Commissioner also relied upon Enviro Systems Renewable Resources Pty Ltd v Australian Securities and Investments Commission (2001) 80 SASR 1. That case involved the question whether a scheme offering members of the public an opportunity to participate in the growing and selling of timber was a franchise for the purposes of the Corporations Law. Martin J, in the Supreme Court of South Australia, held that the scheme was not a franchise because the participants were predominantly passive investors not running their own businesses. None of these authorities, in my opinion, supports the characterisation of the Second Year outgoings as capital. I reject the Commissioner's contentions that they were. In Federal Commissioner of Taxation v Lau (1984) 6 FCR 202, Beaumont J (Jenkinson J agreeing) rejected a submission by the Commissioner, in reliance upon Clowes and Milne, that payments made by a taxpayer leasing land with a number of others in a forest management scheme for the purpose of establishing and maintaining a pine plantation were on capital account. The relationship of the parties was characterised by his Honour as differing from that in Clowes' case and Milne's case, the taxpayer having an identifiable interest in specific trees in the area under lease. He said, at 221:
"In this context, it is appropriate to refer to the contractual quid pro quo to determine the nature of the outgoing … and, prima facie, moneys outlaid in return for such recurrent services are paid on revenue account. In my view, the circumstance that the fee is to be paid as a lump sum in advance is not sufficient to displace this presumption. The important considerations are the nature of the services to be rendered and the periodic manner in which they are to be rendered. In my opinion, the outgoings fell within s 51, being directed not to the profit-yielding subject of the taxpayer's business but to the process of operating it."
102 The Commissioner also submitted that apart from the cash payments she was required to make in the second year, Ms Vincent incurred no obligation pursuant to the Management Agreement. This argument was based upon the proposition that the Loan Agreement was a sham. It was submitted that the Loan Agreement created the facade that Ms Vincent's payment obligations as set out in the Management Agreement were real. This was, however, only one of three agreements which together constituted an arrangement for Ms Vincent's participation in the project. The fiction was said to become apparent when the Loan Agreement was considered in the context of the interdependent set of agreements of which it formed part.
103 It was submitted that on the face of the agreements, if Ms Vincent were to walk away from the project at the end of the two year term no moneys would ever be paid in reduction of her supposed liability under the Loan Agreement. The Loan Agreement was for a seven year term whereas the Management and Lease Agreements were for two year terms. Nothing in the Loan Agreement required Ms Vincent to extend the project beyond the two year term given it by the other agreements and she knew that. She was bound only to carry on the farming and cattle breeding business described in the Management Agreement. Over the two year term of that agreement it was not contemplated by anybody that the project would yield funds from which the loan might be repaid. It was said to follow, that Ms Vincent must have known that the loan was a pretence. She could not genuinely have thought, it was said, that the money would be paid to ACM on her behalf in circumstances where it was plainly never to be repaid.
104 The sham argument reflects the Commissioner's pleading in par 22 of the Response to the Statement of Claim. In this context it is desirable to go back to what Diplock LJ said in Snook v London and West Riding Investments (1967) 1 All ER 518 at 528:
"One thing I think, however, is clear in legal principle, morality and the authorities… that for acts or documents to be a "sham", with whatever legal consequences follow from this, all the parties thereto must have a common intention that the acts or documents are not to create the legal rights and obligations which they give the appearance of creating. No unexpressed rights of a "shammer" affect the rights of a party whom he deceived."
See also Sharrment Pty Ltd v Official Trustee in Bankruptcy (1988) 18 FCR 449 at 454 (Lockhart J).
105 I am not prepared to infer that Ms Vincent entered into the Loan Agreement other than in the belief and with the intention that she would be bound by its terms and that the obligations it purported to create were obligations which she assumed. The fact that, upon reflection, it might have been open to her to conclude that the loan was ultimately unenforceable because she could walk away from the project after two years does not alter the position. What may be discerned by a lawyer's analysis, undertaken retrospectively, of the operation of the agreement under certain circumstances, does not require a finding that, in the words used by the Commissioner, "the applicant must have known the loan was a pretence".
106 A further submission was made by the Commissioner that if the loan contemplated by the Loan Agreement was not made then Ms Vincent's obligations under the Management Agreement did not arise. This was based upon the interrelationship of the agreements. In this context reference was made to Osric Investments Pty Ltd v Woburn Downs Pastoral Pty Ltd [2001] FCA 1402 and Jekos Holdings Pty Ltd v Australian Horticultural Finance Pty Ltd (1996) 34 ATR 41. Even if that submission be correct it does not, in my opinion, negative the characterisation of Ms Vincent's 1996 cash outlay as an allowable deduction under s 51(1). A payment does not have to be made pursuant to a legal obligation in order to qualify as an allowable deduction under the first limb.
107 The question remains whether the failure by TEI to make the promised advance to ACM in 1996 affects Ms Vincent's ability to claim the amount of that promised advance as an allowable deduction. In my opinion the advance never having been made, Ms Vincent was under no obligation arising out of her Loan Agreement in relation to its repayment. That is to say she was not even under the qualified obligation imposed under the limited recourse provisions. The sum of $10,800 which comprised part of the sum of $16,050 claimed by her for the year ended 30 June 1996 was therefore not an allowable deduction.
108 Ms Vincent's position can be no better under the second limb of s 51(1) than under the first and it is therefore unnecessary for me to express a concluded view about it. Nevertheless, having regard to her non-involvement in the operation of the project and the way in which ACM managed the herd as undifferentiated group of cattle without regard to the rights of particular investors, I could not accept that her outgoings were necessarily incurred in carrying on a business for the purpose of gaining or producing assessable income. I would therefore not have allowed the deduction under the second limb of s 51.
The Validity of the Part IVA Determinations
109 At the threshold of the argument about the operation of Part IVA in this case was the contention advanced by counsel for Ms Vincent that Mr Shawcross, who signed the necessary determinations under s 177F, did not have authority to do so and, alternatively, failed to do so in an appropriate form indicating that he was acting on behalf of the Commissioner or a delegate of the Commissioner. In my opinion there is no substance in either of these contentions. The affidavit of Mr Chapman, which was not contested, makes it clear that Mr Shawcross was given the relevant authority by a delegate of the Commissioner who had power to make such determinations. A delegate may authorise another to exercise delegated powers on his behalf - O'Reilly v The Commissioners of the State Bank of Victoria (1983) 153 CLR 1; Carltona Ltd v Commissioner of Works (1943) 2 All ER 560 at 563.
110 Provided the person purporting to make the determination has power to do so, it is not a condition of that power, to be found in the Act or otherwise that he could not effectively exercise the power unless he did so expressly in the name of the delegate. In any event in the present case the determinations made by Mr Shawcross were headed, inter alia, "DETERMINATION MADE BY THE COMMISSIONER…". Nor is there anything in the other point taken on behalf of Ms Vincent that her individual circumstances were not considered in the exercise of the discretion to make the determination. Provided the requisite factors were considered the power to make the determination was enlivened. It is the Court's task to decide whether Part IVA applied and thus whether or not the amended assessments were excessive.
The Application of Part IVA
111 The Commissioner contended that the scheme to which Part IVA applies comprises the making of the Management Agreement, the Lease Agreement and the Loan Agreement and the steps and transactions carried out pursuant to those agreements. I accept that this defines a scheme to which Part IVA may apply. It is then necessary to consider, pursuant to s 177D, whether Part IVA does apply to the scheme so defined.
112 The first condition of the application of Part IVA is that a taxpayer has obtained, or would, but for s 177F, obtain a tax benefit in connection with the scheme. In this case Ms Vincent has obtained deductions for the years 1995 and 1996 which she would not have obtained in relation to those years of income if the scheme had not been entered into or carried on. For the 1995 year, the relevant benefit is the deduction claimed and allowed in the sum of $21,300. For the 1996 year, the benefit is the sum of $5,250. It is to be remembered that the inclusion in the original 1995 assessment of the full amount of the deduction claimed for that year, including the loan payment that was never made, cannot be the subject now of any amended assessment by reference to s 51(1) having regard to the lapse of time since the original assessment was made. That does not, however, prevent the application of Part IVA to the deduction allowed in relation to that year.
113 The second condition for the application of Part IVA requires a finding that a person or one of the persons who entered into or carried out the scheme or any part of it did so for the sole or dominant purpose of enabling the relevant taxpayer to obtain a tax benefit in connection with the scheme. This follows from ss 177A(5) read with s 177D(b). Each of the eight factors set out in s 177D(b) must be considered in making a finding on that issue. But while the section requires the Commissioner to have regard to each of those matters, the relevant dominant purpose may be so apparent on the evidence taken as a whole that consideration of the statutory factors can be collapsed into a global assessment of purpose - Commissioner of Taxation v Consolidated Press Holdings Ltd (No 1) (1999) 91 FCR 524 at 552. Nevertheless, even where the dominant purpose of those entering the scheme is apparent, it is still prudent for the decision-maker or the Court, as the case may be, to expressly have regard to each of the eight factors set out in s 177D(b). As Hill J observed in Peabody v Federal Commissioner of Taxation (1993) 40 FCR 531 at 543, the condition that each of the factors be considered does not require that they must all point to the necessary purpose referred to in the section. Some may point in one direction and others in another. As His Honour said:
"It is the evaluation of these matters, alone or in combination, some for, some against, that s 177D requires in order to reach the conclusion to which s 177D refers."
In what follows I refer to each of the eight factors:
114 1. The manner in which the scheme was entered into or carried out.
As submitted by the Commissioner, evidence from the agreed documents indicated that the scheme was promoted by Mr Jacobsen to a number of financial advisers on the basis of its taxation advantages and was otherwise widely marketed through use of the brochure. The information booklet made express reference to the taxation advantages to investors. As evidenced by Ms Vincent's experience investors were required to do no more than sign the relevant agreements and make the initial payments. The assumption of the obligations under the agreements including the making of the initial payments, generated the tax deductions. As to the carrying out of the scheme, ACM conducted its cattle breeding operation without close regard to the obligations which it owed to Ms Vincent or other investors in respect of their particular cattle under the Management Agreements.
115 2. The form and substance of the scheme.
I accept the submission made by the Commissioner that the form of the scheme as embodied in the transaction documents comprising it bore no relationship to its substance as operated by the ACM Group. The most salient features of the discrepancy between form and substance were the inability and failure of TEI to provide any loan money and the management of the herd with little or no reference to the requirements of the Management Agreement and the rights of individual investors, including Ms Vincent, thereunder. The disconformity between the terms of the Management and Lease Agreements on the one hand and the period of time necessary to establish an income stream on ACM's own projections threw up a matter of substantial discrepancy between its form and substance. Related to this was the disconformity between the limited terms of the Management and Lease Agreements on the one hand and the obligations for repayment of the loans under the limited recourse conditions on the other. Plainly the loans could not begin to be repaid out of income earned by individual investors until the third year when the ACM projections forecast sales.
116 3. The time at which the scheme was entered into and the length of the period for which the scheme was carried out.
Ms Vincent entered into the scheme in June 1995. The Management Agreement and the Lease Agreement expired in June 1997. ACM had a further forty weeks to deliver progeny. She did not take any steps to extend the agreements beyond the initial two years. The Commissioner makes the point that the time for which she was involved in the project was all that was necessary to generate the tax deductions she claimed.
117 4. The result in relation to the operation of this Act that, but for this Part would be achieved by the scheme.
As was submitted by the Commissioner the result of the scheme was that but for Part IVA, Ms Vincent became entitled in the 1995 year to deductions for the First Year Fees of $19,230 and prepaid interest of $2,070. In the 1996 year she became entitled to a deduction for the Second Year Fees of the amount she actually outlaid, $5,250, the loan amount of $10,800 not being allowable as a deduction under s 51(1) as it was never paid.
118 5. Any change in the financial position of the relevant taxpayer that has resulted, will result, or may reasonably be expected to result, from the scheme.
The relevant change is measured by the cash outlays that Ms Vincent made in 1995 and 1996, the entitlement to deductions that she thereby generated and the consequent reductions in her taxable income. In 1995 she was able to recoup all but $164.41 of her cash outlay from her tax refund. Having regard to the view I have formed about the deductibility of the loan payment in 1996, she would not be able to recoup all of her cash outlay from her tax refund properly assessed under s 51(1).
119 6. Any change in the financial position of any person who has or has had, any connection (whether of a business, family or other nature) with the relevant taxpayer, being a change that has resulted, will result or may reasonably be expected to result, from the scheme.
As a result of the scheme the ACM Group raised money from investors. With that money it acquired cattle, plant and equipment and land.
120 7. Any other consequence for the relevant taxpayer or for any person referred to in subparagraph (vi), of the scheme having been entered into or carried out.
There is no dispute that there were no other consequences for Ms Vincent.
121 8. The nature of any connection (whether of a business, family or other nature) between the relevant taxpayer and any person referred to in subparagraph (vi).
Again, it is not in dispute that there was no connection other than the contractual relationships created by the transaction documents.
122 In this case I have already found, in connection with the issue of deductibility under s 51(1), that the obtaining of a tax deduction was not Ms Vincent's dominant purpose in entering into the project. That finding however does not obstruct the application of Part IVA to Ms Vincent's claimed deduction. The purpose which must be found in order to attract the application of Part IVA under s 177D(b) is that which a reasonable person would conclude was the dominant purpose of one or more of the persons entering into the scheme. That is to say, it is an objective purpose attributed to them. As Carr J said in Eastern Nitrogen Ltd v Federal Commissioner of Taxation (2001) 108 FCR 27 at 44:
"The whole tenor of the language in which s 177D(b) is expressed is that of ascertaining an objective purpose by having regard to objective facts."
See also CC (New South Wales) Pty Ltd (In Liq) v Federal Commissioner of Taxation 97 ATC 4123 at 4146-4147 (Sackville J), Federal Commissioner of Taxation v Spotless Services Ltd (1996) 186 CLR 404 at 424 and Peabody v Federal Commissioner of Taxation (supra) at 542 - a view the correctness of which was not questioned by the High Court on appeal. More recently in Federal Commissioner of Taxation v Consolidated Press Holdings Ltd (2001) 179 ALR 625 at 643, the Court said:
"One of the reasons for making s 177D turn upon the objective matters listed in the section, it may be inferred, was to avoid the consequence that the operation of Pt IVA depends upon the fiscal awareness of a taxpayer."
In that case the Court was considering the attribution of the purpose of a professional adviser to one or more of the taxpayers entering into a scheme. It acknowledged that in some cases the actual parties to a scheme subjectively might not have any purpose, independent of that of a professional adviser, in relation to the scheme or part of the scheme, but that would not defeat the operation of s 177D.
123 In my opinion, whatever the subjective purpose of Ms Vincent and her state of knowledge about the true nature of the scheme into which she entered, a reasonable person would conclude, having regard to the eight listed factors, that those taxpayers who entered into the project did so with the dominant purpose of obtaining a tax benefit in connection with it. From an objective point of view there was little other benefit to be derived.
124 Senior counsel for the Commissioner was unable to refer me to any authority on the question whether s 177D may operate to attract the application of Part IVA to a scheme by reference to the purposes of the scheme's promoters. In my opinion, the reference in s 177D to a person or persons who entered into or carried out the scheme or any part of it, extends to participants in the scheme such as the promoter or the entities which the promoter controls. In this case the relevant participants are ACM, TEI and Viking, all of which were controlled by the scheme's principal promoter, Mr Jacobsen. The companies and Mr Jacobsen were each "persons who entered into or carried out the scheme". They did so for their own purposes of financial gain but upon an objective view based upon factors some of which were not known to Ms Vincent, their dominant purpose was to enable her and other taxpayers to obtain tax benefits in connection with the scheme.
125 In the circumstances, I am satisfied that Part IVA of the Act did apply to the scheme and that the determinations made under that Part were properly made.
Penalty and Interest
126 The rate of penalty imposed on Ms Vincent by the amended assessments pursuant to s 226 of the Act was fixed at 10%. This represents a figure of $733.55 in relation to the 1995 year and $554.53 in relation to the 1996 year. The interest component of the amended assessments was $3,071.57 for the 1995 year and $1,721.90 for the 1996 year.
127 The notice of objection in each case asserted that the Commissioner should exercise his discretion to remit the whole or at least a part of the penalties payable by the taxpayer. In my opinion, however, the penalty rate has been struck at a low level that has proper regard to the circumstances of this taxpayer and I do not consider that I should interfere with it.
128 No separate submission was put in relation to remission of the interest level pursuant to s 170AA and I do not propose therefore to interfere with that aspect of the amended assessments.
Conclusion
129 In each case therefore the application will be dismissed and the objection decision confirmed. I will hear from the parties as to costs.