Vincent v Commissioner of Taxation

The Management Agreement. 21 This agreement was between Ms Vincent (described as "the Owner") and ACM (described as "the Manager"). It recited that the owner was the lessee of cows which were described in the Schedule by what were said to be their ear tag numbers (referred to as "Recipient Cows"). The recitals also stated that the owner wished to appoint the manager to: "i. manage, feed agist and care for the Recipient Cows, ii. implant the Recipient Cows with full-blood Poll Hereford embryos, iii. manage, feed and agist the full-blood Progeny resulting from such implantation, iv. grow the female Progeny and, using those females considered suitable, carry out Super ovulation and Artificial Insemination with semen from registered full-blood or pure-bred Poll Hereford bulls so as to create further Poll Hereford embryos, v. re-implant said embryos in Recipient Cows or freeze and store the embryos for later use, as the Manager in its absolute discretion shall decide, vi. extract semen from such of the male Progeny as the Owner shall decide for the purpose of sale or later use in Artificial Insemination, vii. cull and sell such male and female Progeny as the Owner shall decide, viii. display and show such Progeny as the Owner may desire to be shown, and ix. generally to assist the Owner in the growth and development of his Herd, on the terms and conditions hereinafter appearing." 22 ACM was to be the manager of the Recipient Cows and their progeny for a term of two years commencing on 19 June 1995. The duties of the Manager were spelled out in Clause 3. They were said to be in consideration of the fees set out in an item of the Schedule. The agreed duties were as follows: "(a) Implant the Recipient Cows with full-blood Poll Hereford embryos, test the Recipient Cows within 90 days of implanting and confirm that they are 'Pregnancy Tested in Calf' (PTIC); (b) Depasture the Recipient Cows and Progeny on such portions of land as the Manager may from time to time deem expedient; (c) Provide or cause to be provided during the Management Term complete and proper management and a high standard of animal husbandry for the Recipient Cows and Progeny; (d) Ensure at all time that the Recipient Cows and Progeny are properly agisted and receive all necessary pasture, feeding and feed supplements and water supplies so as to maintain them in good health. (e) Provide or procure all veterinary services and assistance prescribed medication as is reasonably necessary for the care and good health of each of the Recipient Cows and Progeny; (f) Comply with the requirements, regulations and directions of all appropriate Authorities in relation to the Recipient Cows and Progeny; (g) Keep the Progeny insured as provided for herein; (h) Take all reasonable steps to safeguard the Recipient Cows and Progeny from sickness, disease, infection, injury, theft and other loss; (i) Register the Progeny with, and in accordance with the requirements of, the Australian Poll Hereford Association; (j) When requested by the Owner, make all necessary arrangements for the sale of any of the Progeny or Genetic Material therefrom. In consideration thereof, the manager shall be entitled to be renumerated at the rate of Ten Per Centum (10%) of the gross sales proceeds. The balance of the proceeds are to be paid to the Owner as provided herein." 23 The fees listed in the schedule, which were payable in advance for the two year term of the agreement were described as follows: "ITEM 5: The Fees ITEM FIRST YEAR FEES per animal contracted for: Lease of recipient cow 300.00 Embryo costs 2,400.00 Implantation charges 600.00 Veterinary costs of implantations 380.00 Labour 550.00 Transport 120.00 Insurance 145.00 Agistment 520.00 Special feeding costs 377.00 Selection expenses 135.00 Share of farm overheads 378.00 Management fees 375.00 Veterinary services 130.00 TOTAL $ 6,410.00 Note: The amount for Lease of recipient cow will be paid to Viking Investments Pty. Limited on behalf of the Owner. ITEM SECOND YEAR FEES per animal contracted for Lease of recipient cow 300.00 Embryo costs 1,800.00 Implantation charges 300.00 Veterinary costs of implantations 260.00 Labour 400.00 Transport 100.00 Insurance 110.00 Agistment 500.00 Special feeding costs 300.00 Selection expenses 107.00 Share of farm overheads 378.00 Management fees 290.00 Registration fees and royalties 375.00 Veterinary services 130.00 TOTAL $ 5,350.00 Note: The amount for Lease of recipient cow will be paid to Viking Investments Pty. Limited on behalf of the Owner." 24 The agreement then stated that fees for subsequent period were to be as agreed between the parties. The agreement provided in clause 8 that fees for subsequent periods were to be paid out of income from the sale of progeny and of genetic material therefrom. The agreement provided that if that income was insufficient to reimburse the Manager his agreed fees, the fees would be accrued until sufficient income had been derived. There was, however, no provision in the agreement giving the investor a right to renewal beyond the initial term or governing the fees which might be payable in any later period. 25 The Manager agreed to implant the recipient cows with full blood Poll Hereford embryos. The agreement contained a provision for the sale of progeny by the Manager if requested for a remuneration of 10% of the gross sales proceeds. Clause 4 of the agreement provided: "It is hereby agreed between the parties hereto that the number of progeny to be delivered as a result of the management activities and services hereby contracted for are as set out in Item 6 of the Schedule hereto. The owner acknowledges that delivery may take place at any time up to and including forty (40) weeks after the end of the relevant year during which the said management activities and services were carried out." 26 Clause 5, headed "Manager's Guarantee" provided as follows: "In consideration for the Owner entering into this Agreement, the Manager guarantees that the Owner shall receive, as a result of breeding activities carried out in the first twelve months of this Agreement, the number of full-blood Poll Hereford calves as is set out (sic) in Item 6 of the Schedule hereto and which are referred to therein as 'first year calves'." 27 Item 6, somewhat inconsistently provided that three live full-blood calves were to be delivered to the Owner within forty weeks of the end of the first twelve months and another three live full-blood Poll Hereford calves were to be delivered to the Owner within forty weeks of the end of the second twelve months of the agreement. 28 A little reflection will reveal that if, as would statistically be likely, three live calves were not born in either of the two twelve months period because, for example, the leased cow turned out to be infertile, or there was a miscarriage, or for some other reason the fertile egg did not produce a live calf, there would then arise a question whether the Manager was obliged to make up the difference. There is little doubt as to the proper interpretation in the context of the agreement, particularly when the recipient donee of a fertilised egg, being the leased cow is somewhat irrelevant to the operation. What was important to the parties, particularly the investor was that the investor obtain three live full-blood Poll Hereford calves by the end of each forty week period, irrespective of whether these calves were born as a result of the operation or not. As will be seen, this is a critical matter to the outcome of the present case. 29 There were provisions in the agreement for the Manager accounting to the Owner for sales revenue net of expenses, for the progeny to be insured, for the owner to be able to inspect the recipient cows and progeny at certain times or as agreed, for there to be reporting to the Owner of the results of operation etc and warranties that the cows and progeny will be agisted in property suitable for the purpose.

The Loan Agreement 30 This agreement was made between Ms Vincent described as "the Borrower" and TEI as "the Lender". It recited the existence of the Management Agreement and also that the amounts to be borrowed were for the purpose of partially funding the Borrower's contractual obligations under the Management Agreement. The Loan Agreement contained an agreement by the Lender to lend to the Borrower the total amount found by multiplying the amount described as the First Advance per Head in Item 4 of the Schedule, by the number of progeny to be delivered in the first twelve months of the Borrower's contract with the Manager. This amount (described as the "First Principal Sum") was to be paid by the Lender upon the execution of the Loan Agreement. The amount of the First Advance per Head was the sum of $4,600 per head of progeny in the first twelve months, a total of $13,800. The Second Advance per Head was the sum of $3,600 contracted for in the second twelve months of the Management Agreement, a total of $10,800. The Borrower agreed to pay interest on the First Principal Sum at the rate of 18 per cent reduced to 15 per cent per annum if paid yearly in advance. The interest rate on the Second Principal Sum was nil. The term of the loan was said to be for a period of 7 years. It was to be secured by a first charge over all the livestock bred by the Manager for and on behalf of the Borrower under the terms of the contract. The amounts of the two borrowings were to be remitted by the Lender direct to the Manager. The Borrower also was to authorise the Lender to accept and direct the Manager to remit to the Lender 50 per cent of all moneys due to the Borrower from time to time under the contract in partial discharge of the Borrower's obligations. The personal liability of the borrower for the balance of the principal and all interest was removed subject to certain conditions.

The Lease Agreement. 31 The final agreement executed the same day was between Ms Vincent as Lessee and Viking as Lessor. It recited that the Lessor was the owner of Recipient Cows identified in Item 3 of the Schedule described by the same ear tag numbers. The Lessor then agreed to lease the Recipient Cows as identified for the period of two years with an option to extend for up to two additional periods each of a further six months. The Schedule made clear that the Recipient Cows were for the purpose of the breeding activities to be carried out under the Management Agreement. Progeny born was to be the sole property of the Lessee. A leasing fee for the Recipient Cows as set out in the Schedule was $300 per head per annum and was due and payable yearly in advance. There was a fee of $150 payable for each six month extension. A clause of the agreement set out the obligations of the Lessee for the care of the leased animals in terms which substantially reflected the obligations of ACM as Manager under the Management Agreement.

The subsequent history of the arrangement. 32 Ms Vincent did receive a first report from ACM on 30 September 1995. It contained an implant schedule which indicated that recipient cows were to be implanted between December 1995 and January 1996. Shortly after the scheduled time Ms Vincent telephoned to enquire what was happening and was told that there was a time lag. 33 In May 1996 Ms Vincent was notified that two of the three cows had been implanted. A subsequent notice in June advised that the third had been. The form letter noted that there was a success rate of between fifty and sixty per cent depending upon conditions. 34 On 15 June, a day later than the June notice was dated, Ms Vincent was advised that the second year's payment of $5,250 was due. This was the net amount to be contributed to her after the loan funds amounting to $10,800 were paid. She was told that after payment there were no more funds payable by her unless she specifically requested additional services. Ms Vincent paid the amount claimed. She received no subsequent notifications concerning the success or otherwise of implantations. She made no enquiries concerning the second implantations contemplated. She said she was unwell. Her accountant, from whom she enquired, told her that things were progressing, although slower than anticipated. She received no specific information from ACM or Viking other than newsletters containing general information. She made no attempt to contact ACM or Viking about extending the lease in 1997. She was, she said, then going through a difficult time as her twelve month old child had contracted a serious illness. She said she assumed that things were progressing. 35 Ms Vincent was advised in October 1998 that Mr Jacobsen had died that month and that his 22 year old daughter was the sole remaining director of the various companies in the group. She did contact the daughter once. Later calls were not answered. On 23 October 1998 Mr Singleton had been appointed voluntary administrator of ACM, TEI and Viking. ACM entered into a Deed of Company Arrangement. Ms Vincent was shown as a creditor in the sum of $37,350. A final dividend was to be declared on 30 June 2000 and satisfied by way of issue of shares in a company pro rata for each $1 of debt. 36 It is unnecessary to consider in detail the actual results of the implant operations. Records were rather disorganised. According to a computer record one of her cows had been implanted three times, twice unsuccessfully and once successfully in September 1998. Another cow was culled without being implanted, apparently because it had not responded to the embryo transplant drugs. The third animal had been implanted four times. Twice the implant was successful. A calf was said to have been born from the first of the successful implants on 6 August 1997 and a second calf on 10 July 1999. It seemed that three calves in all had been born, although it was not clear whether these had actually been calves resulting from any particular implantation. 37 The documentary evidence was said to have been unreliable and manipulated. The records showed that 358 embryo progeny had been born in the period to 30 June 2000 as compared to the obligations which ACM had to investors which guaranteed 600 progeny. There was only record of one calf born which had been attributed to operations which involved the three animals which Ms Vincent had leased. It seems that some 427 individuals had entered into agreements with ACM. 38 Ultimately following reconstruction of the group all of the assets were sold, including cattle and presumably including the one calf which had been born to the animal leased to Ms Vincent. 39 There was evidence, described by the learned primary Judge in his judgment, and which his Honour accepted that the scheme was not commercially viable. A lack of operating capital was the primary cause of the project's failure. The agricultural consultant who gave evidence for the Commissioner saw the physical breeding program to be feasible, although he was critical of the material in the ACM brochure. He concluded that a reasonable production and financial outcome after the period of the Management Agreement had concluded was a deficit of $22,000 offset by the ownership of two heifer calves worth approximately $4,400 at the end of the period. The evidence presumably ignores the "guarantee" which ensured that there should at least be six live calves, and statistically at least three should be heifers. It was, in any event, accepted by his Honour.

The history of the Part IVA determinations and assessments. 40 Ms Vincent returned a loss in the income tax year ending 30 June 1995 of $21,300 from the activity in which she had invested. She had income from other sources in this year of $38,893. Of the loss claimed $13,800 represented the amount that was supposed to have been advanced by TEI to ACM on her behalf. In the next year she disclosed business income of nil and total expenses of $16,050 from the activity, made up of the second year fees payable under the agreement. $10,800 of this reflected the amount that was supposed to have been advanced by TEI to ACM on her behalf. She returned income from other sources of $42,057. If the returns were accepted as filed her taxable income in 1995 was reduced to $17593 and in 1996 it was reduced to $26,007. The tax payable in 1995 was reduced from $9870.49 to $2534.90 and in 1996 from $10,254.29 to $4,708.90. In accordance with self assessment notices of assessment issued in accordance with the returns on 25 August 1995 and 30 July 1996 and Ms Vincent was sent refund cheques of $7,988.35 and $7,081.20 respectively. 41 It was not until 8 December 1999 that an officer of the Australian Taxation Office, a Mr Colin Shawcross signed determinations purporting to be made under s 177F of the Income Tax Assessment Act 1936 relating to the two years of income. The 1995 income year determination was in the following form: " DETERMINATION MADE BY THE COMMISSIONER PURSUANT TO SECTION 177F OF PART IVA OF THE INCOME TAX ASSESSMENT ACT, 1936 (THE ACT) THAT: I, Colin Shawcross Director of Small Business Executive Level 2, hereby determine pursuant of s 177F of the Income Tax Assessment Act 1936 (the Act) that: the amount of $21,300 (being the whole of the tax benefit that is referable to a deduction or part of a deduction that has been allowed in Stud Cattle Breeding Project to Julie K Vincent Tax File No [omitted] (the "taxpayer")) for the year of income ended 30 June 1995 shall not be allowable to the Taxpayer in the year of income ended 30 June 1995. Dated the 8 day of December 1999. ……………………….. Colin Shawcross DIRECTOR OF SMALL BUSINESS CANNINGTON POSITION NO 460017" 42 A like notice was issued in respect of the 1996 income year, save that the amount to be disallowed as a deduction was $16,050. Amended assessments were issued notifying sums payable of $11,140 and $18692.50 respectively. 43 Objections were duly lodged, disallowed and the objection decisions appealed to the Court pursuant to s 14ZZ(a) of the Taxation Administration Act 1953 (Cth). 44 Presumably the Commissioner had doubts about the validity of these determinations for new determinations were made in September 2001 and Ms Vincent was advised that she would be issued with new amended assessments "as a precaution". She was asked to sign a form of objection attached to the letter which asserted a wish to object to the new amended assessments when issued on the same grounds as she had objected to the initial amended assessments. The new determination was dated 14 September 2001; the new assessments were dated 17 September 2001. The new determinations were expressed to be signed by Neil Mann, Deputy Commissioner pp Marina Dolevski. However, the present appeal does not relate to the new amended assessments, only the initial amended assessments. 45 It seems that on 1 March 1999 the Commissioner of Taxation signed a general delegation under the Taxation Administration Act 1953 (Cth) delegating his powers and functions under the Act (including the power or function of making a determination under Part IVA of the Act to the person holding the office of Deputy Commissioner of Taxation - Small Business Program. Mr Chapman, who held that position in turn made an Instrument of Authorisation authorising several officers in the Small Business Program of the Australian Taxation Office to exercise the powers and functions delegated to him including the power to make determinations under Part IVA. Mr Colin Shawcross was an officer of the Small Business Program within the meaning of this Authorisation.

The Judgment appealed from. 46 After setting out the facts and the relevant statutory provisions the learned primary Judge first considered, with respect, logically, the question of deductibility under section 51(1) of the Act. It was not necessary for his Honour to consider this question so far as the 1995 year of income was concerned because it was common ground that the Commissioner was not empowered under the Act to amend the assessment for the 1995 year (other than as a result of a determination made under Part IVA of the Act), more than four year having elapsed since the making of the initial assessment for that year: see s 170(2)(v)(ii) of the Act. 47 A number of important findings made by his Honour and not the subject of contention now, should, however, here be noted. They are relevant both to the submissions concerning s 51(1) and those concerning Part IVA. They are as follows: · The scheme was marketed by Mr Jacobsen to accountants and financial advisers (para 30). · From Ms Vincent's perspective the project in which she invested provided a low risk opportunity to earn income and to fund her initial investment (including the loan from her father) out of the tax refund to be received (para 31). · Ms Vincent intended to be involved in the arrangement for a period coextensive with the projections in the brochure (ie 7 years). However she may not have averted to the question what was to happen at the end of the first two year period (para 31). · The obtaining of a tax deduction was not Ms Vincent's actual dominant purpose in entering into the arrangement (para 122). · Ms Vincent never carried on a business for the purpose of gaining or producing assessable income. This was because of her non-involvement in the project and the way which ACM managed the herd as an undifferentiated group of cattle without regard to the rights of particular investors (para 108). · The loan agreement was not a sham, although the loan itself was never made and in the result Ms Vincent never had any obligation under the loan agreement to make any repayment (para 105 and 107). 48 It would seem from his Honour's reasons that the main dispute between the parties lay in whether the amounts claimed for deduction in the 1996 year being the amounts claimed to have been paid (excluding the amounts that were to have been paid by TEI from the loan agreed to be made, but which wasn't in fact made) were allowable under s 51(1) because of what his Honour referred to as a disconformity between the terms of the Management and Lease Agreements on the one hand and the seven year timeframes of the cash flow projections and the loan agreement on the other. His Honour found that Ms Vincent contemplated continuing the activity beyond the two year period for which she leased the recipient cows and expected to be involved for the period contemplated by the projections. He found also that she had not considered the possibility that the project might fail, although she had, his Honour said "effectively an option to terminate her involvement after two years". This "option" might be better stated by saying that she hoped, at least, that she could renew the management agreement after the two year period, although having no right to do so and for the remainder of the seven years she could presumably either extend the cow lease agreement or obtain new cows for implantation by purchase or otherwise. 49 His Honour said that the process of characterisation which s 51(1) required did not depend upon an ex post facto assessment of commercial viability of the project. Nor was it a necessary condition of deductibility that she conduct what an expert would regard as all necessary enquiries to assess what return she would derive. Mere imprudence (not a failure to conduct any enquiries at all, where other issues might arise) would not require the conclusion that an amount otherwise deductible would not be. 50 His Honour, in a passage pointed to by senior counsel for Ms Vincent said at par 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." 51 His Honour rejected the submission of the Commissioner that the disproportion between her outgoings and the assessable income operated to defeat the characterisation of the outlays as incurred in gaining or producing assessable income within the first limb of 51(1). 52 His Honour then considered and rejected a submission of the Commissioner that the outgoings of Ms Vincent were of a capital nature. Emphasis was placed in this submission upon the passive nature of Ms Vincent's investment in the business of ACM and what may be said to be the behaviour of indifference she adopted to the investment. These matters did not, his Honour held, indicate that the outgoings were of a capital nature. 53 Finally there was a submission made on behalf of the Commissioner that because TEI had made no advance on Ms Vincent's behalf she was not only under no obligation to pay interest under that agreement, but also was not entitled to claim a deduction for the amount of money which was to have been paid on her behalf by TEI to ACM for fees payable under the management agreement. That argument, which was accepted, had the result that the sum of $10,800 which comprised part of the sum of $16,050 claimed in the 1996 income year was not allowable as a deduction, because it was not an amount "incurred" in the sense relevant to s 51(1). 54 His Honour then turned to consider Part IVA. 55 His Honour was of the opinion that the fact that the determination was signed by Mr Shawcross was, in the circumstances of no consequence, because he had power to make a determination under the delegation of the Commissioner and subsequent authority and in any case the determination was expressed to be a determination made by the Commissioner. 56 His Honour found that in each of the years of income there was a tax benefit being in the 1995 year of income in the sum of $21,300, the amount allowed as a deduction, even although only a lesser amount would have been allowable under s 51(1) as a result of the loan from TEI not having been made and the cash payment in consequence not having been made by TEI on Ms Vincent's behalf to ACM. The tax benefit in the 1996 year of income was the sum of $5,250, being the amount allowable, the amount claimed having been reduced by the amount of the management fee which was not paid by Ms Vincent because the loan to her from TEI had not, in fact, been made. 57 After a consideration of the eight factors in s 177D(b) his Honour found that it would be concluded by a reasonable person that Ms Vincent entered into or carried out the scheme for the dominant purpose of obtaining the tax benefit in connection with the scheme. As his Honour observed: "From an objective point of view there was little other benefit to be derived". In so doing his Honour made no reference to the fact that the deduction allowable the 1996 year of income had been reduced by the non allowance of the sum of $10,800 as a consequence of this amount not having been paid by TEI on Ms Vincent's behalf, although his Honour had held that the tax benefit in that year was the reduced amount of $5,250. 58 It was thus unnecessary for his Honour to consider whether this conclusion could be reached as regards any other person who had entered into or carried out the scheme. However, his Honour went on to consider whether the same conclusion would be reached by reference to the scheme's promoters. In this connection his Honour said at [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." 59 In consequence his Honour upheld the assessment, including penalties under Part IVA. It was from this decision that Ms Vincent appealed to this Court. The Commissioner filed a notice of contention in respect of so much of the decision as found that the amount of $5,250 was an allowable deduction in the 1996 year of income pursuant to s 51(1) of the Act.

Whether the sum of $5250 was an allowable deduction under s 51(1) of the Act. 60 For the purposes of the present argument we are content to restrict consideration of this issue to the one issue only, namely whether the management fees claimed were capital or of a capital nature. If they were, then the amount in question would not be deductible, even if incurred in gaining or producing the assessable income as held by the learned primary Judge. 61 The question whether a loss or outgoing is of capital or of a capital nature involves the characterisation of the loss or outgoing. Relevant will be the tests enunciated by Dixon J, as his Honour then was, in the seminal discussion of the subject in Sun Newspapers Ltd and Associated Newspapers Ltd v Federal Commissioner of Taxation (1938) 61 CLR 337 at 359-361. They are so well known that it is unnecessary to repeat them here. 62 It may be accepted that moneys outlaid for management services to be rendered on a recurrent basis will ordinarily be on revenue account, particularly, although not necessarily limited to the case, where the services are rendered for a business carried on by a taxpayer. The same may be said of recurrent chattel leasing expenditure. And this result will ordinarily not be affected (absent legislative provision) merely because some part of the consideration may be payable in advance, cf Federal Commissioner of Taxation v Lau (1984) 6 FCR 202 and Federal Commissioner of Taxation v Woolcombers (WA) Pty Ltd (1993) 47 FCR 561. However, it can not be extrapolated from cases such as those just cited that every time there is an agreement which nominates a consideration for services to be performed the payment will be on revenue account. Whether it is will depend upon all the circumstances and particularly an analysis of the agreement under which the payments are made. 63 An important example of what may be thought to be otherwise a self-evident proposition is to be found in Federal Commissioner of Taxation v Broken Hill Pty Co Ltd (2000) 179 ALR 593, a case with particular relevance to the present appeal. Special Leave to appeal that decision was sought and was granted by the High Court on 16 August 2001 although the special leave was linked to a different issue. In that case it was noted that interest will usually, perhaps almost invariably, be on revenue account (Steele v Deputy Commissioner of Taxation (1999) 197 CLR 459 at 469-470). However, an analysis of the contractual agreements between the parties in that case led to the conclusion that what was said to be interest in the agreements under consideration was, properly analysed really an additional part of the purchase price and thus on capital account. 64 In a judgment with which, on this point, Heerey and Merkel JJ agreed Hill J discussed the important matter of substance and form in the resolution of issues such as the proper characterisation of an outgoing. His Honour said at 606, [50]: "While, no doubt, questions such as whether a covenanted payment is an annuity will, having regard to historical matters, depend on some, perhaps a considerable extent on the form which the parties have adopted … it is not to be assumed that form must always prevail over substance. The law has moved somewhat from the rather rigid adherence to form to be found in cases such as Inland Revenue Commissioners v Duke of Westminster [1936] AC 1. This is not to say that legal rights are not important or even, in a case such as the present, determinative. It is merely to emphasise that the courts will always consider the substance of a transaction in characterising…the advantage which is sought to be obtained in determining whether an outgoing is on revenue account or whether, as here, on capital account and thus excluded from deductibility." 65 The first question which must be asked when determining whether an outgoing is on revenue or capital account (and it is an essential part of the process of characterisation) is what the outgoing is really for. As Hill J pointed out in the Broken Hill case at 600, [27] the significance of that question is in ascertaining the advantage which the taxpayer sought to obtain from the outlay. The question was first propounded in Colonial Mutual Life Assurance Society Ltd v Federal Commissioner of Taxation (1953) 89 CLR 428 at 454 where Fullagar J said: "The questions which commonly arise in this type of case are (1) What is the money really paid for? - and (2) Is what is really paid for, in truth and in substance, a capital asset?" 66 A slightly different analysis is to be found in the decision of Dixon J in Hallstroms Pty Ltd v Federal Commissioner of Taxation (1946) 72 CLR 634 at 648, where his Honour said: "What is an outgoing of capital and what is an outgoing on account of revenue depends on what the expenditure is calculated to effect from a practical and business point of view, rather than upon the juristic classification of the legal rights, if any, secured, employed or exhausted in the process." 67 There may be an issue which arises in a particular case as to whether the answer to the question what the outgoing is really for depends solely upon the contractual rights and obligations which the taxpayer acquires for the outlay under consideration or whether it is necessary to go outside the contractual rights and obligations acquired to find the true character of the outgoing: Federal Commissioner of Taxation v South Australian Battery Makers Pty Ltd (1978) 140 CLR 645 at 659 per Gibbs ACJ. This was not an issue in the Broken Hill case. Nor is it here, although it may be necessary in interpreting the Management and Lease agreement to consider the context in which it was entered into which context includes the promotional booklet. The question of what the payment made by Ms Vincent was for and the related question of what the advantage was which she sought to obtain can, in that context, be answered here by reference to the agreements which she entered into, and especially the Management Agreement. 68 Before considering the Management Agreement, however, it is useful to comment on a matter which has some relevance here. There is no suggestion, at least before us, that either the Management Agreement or the Lease Agreement was a sham in the legal sense of that word, cf Snook v London & West Riding Investments [1967] 1 All ER 518 and Sharrment Pty Ltd v Official Receiver in Bankruptcy (1988) 18 FCR 449. But there will be cases, of which the present appeal is an example, where one may be distracted from the process of characterisation by the labels which the parties employ. 69 In form the Management Agreement sets out a number of services which the Manager is required to perform and details the fees which are to be paid for these services. Those are not unimportant matters. However, when one considers the agreement carefully it is clear that the ultimate obligation of the Manager is the supply of six calves to the owner within the time stipulated in the agreement. The agreement is not one where the owner merely obtains as an end advantage whatever number of calves may be born to the recipient cows identified in the agreement be that number more or less than six. It is no doubt possible that no calves at all might be produced from eggs transplanted to recipient cows and indeed quite likely that less than six calves would be produced. The evidence was that only approximately 60% of transplant operations on average could be expected to be successful. And we know that in the present case it would seem that at best only three calves were actually produced from eggs transferred to the cows leased by Ms Vincent and at worst, only one. 70 As a matter of interpretation of the agreement it is clear that whatever the explanation may be for what might be thought to be a very poor result, and, whether it arose because of a failure of the transplant operation, a failure of the transferred eggs to develop into calves or simply the infertility of the leased cows, the Manager was obliged under the agreement to hand over to or sell on behalf of the Owner six pure-bred Poll-Hereford calves. As is now known the Manager defaulted in its obligations. But that is not important. What the owner was contractually to receive for the payment she made to the Manager were six calves. And, so long as the calves satisfied the description of "full-blood Hereford calves", it would not matter that they were derived from operations on cows other than those leased by the Owner, or even purchased in for the purpose of handing them over to Ms Vincent where the number of live calves born as a result of the egg transplant operations, of which the leased cows were the recipients, was less than six. 71 Had the agreement been framed as an agreement to give title to six cows to be born, so far, as possible from ovum transplants on premises of the Manager and to be cared for by the Manager it would be obvious that the consideration payable was for the six cows, rather than the acts necessary to produce them. This is not to say that the Manager would not be in breach of such an agreement if it did not provide agistment, veterinary services etc. 72 It is difficult to see why the result should be different merely because the agreement entered into was expressed as being an agreement whereby the Manager was to perform nominated services but the agreement guaranteed that six full-blooded calves would be handed over at the stipulated times. In both cases, the substance of the agreement would be the same. In both cases the payments which the Owner contracted to make would ultimately really for the calves which are to be produced. 73 In any event, the character of the payments made for the services which the Manager contracted to perform, in the context of the underlying agreement to ensure ownership in Ms Vincent of six pure-bred calves, is clearly determined by reference to this underlying agreement. 74 That conclusion, on its own, would not necessarily preclude Ms Vincent from obtaining a deduction, if the calves themselves were on revenue account. However, there was a critical finding of fact made by the learned primary Judge that Ms Vincent was not carrying on a business. 75 Where a taxpayer carries on a business of breeding cattle and selling the progeny, it is obvious that the progeny would be trading stock and on revenue account. The commercial expression that an item of trading stock represents part of the circulating capital of a trader does not mean that trading stock is to be regarded as on capital account. There has never been a case in this country, or in the United Kingdom where trading stock has been suggested to be on capital account, even where the stock is the initial stock of the business. There is a suggestion in the judgment of Dixon CJ in John Fairfax & Sons Pty Ltd v Federal Commissioner of Taxation (1959) 101 CLR 30 at 35 that s 51(2) was enacted because it was thought necessary because trading stock represented or might represent the circulating capital of the business. However, his Honour makes it clear that this would not mean that that trading stock was on capital account and his Honour offers another explanation not relevant here. Indeed, the legislative history of s 51(2) suggests another explanation for the introduction of that subsection, namely that livestock, included by the 1936 legislation (which for the first time also introduced a section equivalent to s 51(2)) within the definition of "trading stock" would, where the livestock was, for example, a dairy cow be on capital account. Thus, absent s 51(2), the cost of acquisition of livestock such as dairy cows, or perhaps sheep acquired for producing wool, would be on capital account. Section 51(2) was enacted to ensure that the acquisition of such livestock would entitle the farmer to a deduction: see Walker v Federal Commissioner of Taxation (1983) 70 FLR 354. For present purposes, however, this question need not detain us. It is clear that where a person not carrying on a business acquires an asset for the purpose of sale other than sale in the course of a business, that asset could not be trading stock, although the sale of the asset might give rise to a profit being assessable income. Further the acquisition of that asset would be an acquisition on capital account. 76 Senior counsel for Ms Vincent referred to a number of cases in an attempt to persuade us that the present acquisition was on revenue account, even although the progeny to be delivered was not trading stock. None of the cases supports the submission. 77 The case which counsel relied upon most heavily was the decision of the full Court of this Court in Ferguson v Federal Commissioner of Taxation (1979) 37 FLR 310. At first instance Sheppard J held that the lease outgoings and the management fees for agistment breeding, caring for and managing five half-cross Charolais heifers for four years incurred by Commander Ferguson were not deductible. His Honour saw the outgoings as part of a proposal by the taxpayer to build up a herd. But it was critical to the decision of the full Court that it held, contrary to the primary Judge, that Commander Ferguson was carrying on a business, albeit a small business of breeding animals for ultimate sale of the progeny. Once it was found that the taxpayer was carrying on a business (albeit through an agent, the Manager) it followed that the costs of acquisition were on revenue account. 78 Another case to which reference was made was Commissioner of Taxation v Lau (supra) to which reference has already been made. That case involved a taxpayer who entered into a long-term venture involving the growing of pine trees with a view to the subsequent sale of timber. The question for decision was whether rental payable for a lease of the land on which the trees were to be planted and a management fee to look after them were deductible. The case was not one where either the lease or the management fee was paid for the acquisition of any asset. In the circumstances it was not surprising that it was found that the amounts in question were not capital. The facts of the case and particularly the nature of the outgoings differed from the outgoings considered by the High Court in Clowes v Commissioner of Taxation (1954) 91 CLR 209 and Milne v Commissioner of Taxation (1976) 133 CLR 526. The case was one where it could be said, as Beaumont J found, that the outgoings were "directed not to the profit-yielding subject of the taxpayer's business but to the process of operating it" (emphasis added). His Honour referred to Ferguson as authority for the proposition. 79 Federal Commissioner of Taxation v Walker (1984) 2 FCR 283 was a case involving an egg transplant operation. It is clear from the judgment of the full Court that the decision in that case that the fees in question were deductible turned upon the factual decision that the partnership of which Dr Walker was a member was carrying on a business. Indeed that was the real issue on the appeal. It may be noted that the agreements in that case did not amount to an agreement to provide a specified number of animals irrespective of success or failure as the present case did, although given the finding that a business was carried on this would not have affected the outcome. 80 In our view once the conclusion is reached that Ms Vincent did not carry on a business it followed that the costs that were necessarily incurred to produce the six calves promised was an outgoing of capital and simply not deductible.

Part IVA. 81 Part IVA of the Act is the general anti-avoidance provision designed to protect the revenue from what may be called schemes which bear on their face and by reference to the circumstances in which they are entered into or carried out the predominant stamp of tax avoidance. 82 There are four elements which must be satisfied before an assessment relying upon Part IVA will be upheld. First, there must be a scheme as defined. Secondly, there must be a tax benefit as defined. Thirdly, it must be concluded having regard to eight listed matters that a person who entered into or carried out the scheme or a part of it did so for at least the dominant purpose of obtaining a tax benefit. Finally, there must be a determination, which can only be made once the first three elements are satisfied. 83 "Scheme" is widely defined. There is no dispute in the present case that there is a scheme and no dispute as to how the scheme is to be identified. It suffices to say that it includes Ms Vincent and the relevant companies under the control of Mr Jacobsen entering into the agreements they did and the subsequent acts taken pursuant to those agreements. 84 The first difficulty is the question of the identification of the tax benefit. Section 177C(A) defines the expression "the obtaining of a tax benefit in connection with a scheme" as a reference to: " (a)… (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 has not been entered into or carried out; or…" 85 In the 1995 year there was no loan made to Ms Vincent so that in fact no interest on any loan was allowable as a deduction. The management and other fees payable under the Management Agreement were, as we have held, capital and likewise not allowable deductions. It may be said that perhaps the small amount payable for the leasing of cows to Ms Vincent might stand in a different position from the management fees and be deductible. However, the case was argued on the basis that there was no distinction to be drawn between the lease fees and the management fees, so the lease fees can for this purpose be treated as likewise not allowable deductions. In the 1996 year of income the only amount which might have been deductible was the management fee, but this we have held to be capital and so was not an allowable deduction. If that were all there was to say on the matter, the issue of Part IVA could be dismissed with but a short sentence. Since there was no amount allowable as a deduction in either tax year there could be no tax benefit. However, the Commissioner argues that because he wrongly allowed a deduction in the 1995 tax year for both interest and management fees, which deduction he can no longer reverse, four years having passed since the date of the assessment, the whole of the deduction actually allowed in that year should be seen to be the tax benefit. In other words the definition of "tax benefit" should be read as if "allowable" included "allowed". 86 This argument appealed to the learned primary Judge. Without discussion his Honour held that the tax benefit which Ms Vincent obtained in the 1995 tax year was the deduction which she claimed and which was allowed to her. 87 The Commissioner submits that until the expiration of the amendment period in s 170, the allowability of an amount claimed as a deduction relies on a substantive provision of the Act, in this case, s 51(1). However, upon the expiration of the amendment period the substantive provision, namely s 170 operates to produce a result that an amount claimed cannot be challenged as an allowable deduction. In substance the amount allowed becomes the amount which is the allowable deduction. To hold otherwise, it is submitted, would frustrate several aspects of the application of Part IVA when matters come before the Administrative Appeals Tribunal or the Court, namely the application of s 177G and the limits on the jurisdiction of the Tribunal and the Court to review issues on appeal. His Honour's approach in relation to the 1995 year enables s 177G to give full effect to a determination under s 177F that the deduction claimed by a taxpayer was not allowable because a scheme was entered into with the dominant purpose of providing that deduction to the taxpayer. 88 Section 177G is the section which permits amendment of assessments to give effect to s 177F(1). It prevails over s 170 to permit the amendment of assessments at any time before the expiration of six years after the date on which tax becomes due and payable under the assessment. 89 Alternatively the Commissioner submits that s 177F(1) permits the Commissioner to cancel a tax benefit obtained in connection with a scheme. However, s 177C(1) defines "tax benefit" in terms both of a deduction that would not in fact have been allowable and in terms of a deduction which "might reasonably be expected not to have been allowable" but for the scheme. The whole of the deductions claimed by Ms Vincent are said to be deductions claimed by her which might reasonably be expected not to have been allowable to her in relation to each of the years of income in question if the scheme had not been entered into or carried out. This is said to be the case because Ms Vincent entered into the loan agreement which a reasonable person would conclude was intended to be given effect to. The claimed deduction for interest failed only because the Loan Agreement was not carried into effect. Hence, it was submitted the deduction for interest was a deduction which might reasonably be expected. 90 The second submission may be dismissed readily. The reference to the two classes of deduction, the one a deduction which is not allowable and the other a deduction which might reasonably be expected not to have been allowable but for the scheme has no relevance here. The two classes of deduction are both cases where, for whatever reason, there is a deduction allowable. The present is a case where because there was no loan there was no interest incurred, and thus no deduction allowable. 91 The first submission has more substance. However, in our view, it is not correct. First the Act in many places distinguishes between deductions which are allowed and deductions which are allowable. Reference may be made to ss 59, 82(2), 122(2), 160ZH(6B) and (8). There is an obvious difference between the two expressions. The former expression is concerned with what the Commissioner has actually done in the assessment process; the latter expression looks to the terms of the legislation to determine whether in calculating the taxable income there is an amount which is by the terms of the Act, allowable. The language employed might not be fatal to the submission if, reference both to the policy of the legislation and the context demonstrated that there had been a legislative slip. But that is not the case. It is clear from s 177F that the question which is raised for determination is the conclusion as to the dominant purpose of a person who entered into or carried out the scheme or part of it. It would be very unlikely that viewed objectively it would be concluded that the Commissioner would wrongly assess and then not amend the assessment for four years. Yet, for the Commissioner's argument to succeed it would be necessary to ask whether, in a case where a deduction was not allowable as a matter of law (for example, as here, because s 51(1) did not operate to give a deduction) it would be concluded that there was a party who entered into or carried out the scheme or a part of it with the dominant purpose of obtaining a benefit consisting of a deduction which was not allowable, but which was ultimately allowed and which, only as a result of inaction was not reversed within the four year limitation period. 92 The Commissioner's submission could, indeed, operate perversely in other cases too. If the word "allowable" was to be construed as meaning allowed, at least in the case where there had been an assessment which required amendment as a result of a determination under s 177F being made, and the amount allowed in the primary assessment was considerably less than the amount which, but for Part IVA would have been allowable, the Commissioner might not be able to succeed on Part IVA because of the low figure allowed when had the test been one of allowability, the conclusion required by Part IVA could be reached. Take a taxpayer who entered into the present scheme but was allowed by the Commissioner say $500 as a deduction under s 51(1) when correctly the sum allowable, but for Part IVA would have been $100,000. It would be simple to conclude that the taxpayer entered into the scheme to get a deduction of $100,000 but most unlikely that the same conclusion would be reached if the tax benefit was but $500. 93 The reason why Parliament employed the word "allowable" rather than the normal formula of allowable or allowed is because the question of dominant purpose will usually be determined by reference to the time when the scheme is entered into. We accept that there can be cases where purpose is tested which the scheme is still being carried out. But in all cases the question of dominant purpose arises before ever there has been an assessment and by reference to a date no later than the expiration of the year of income in which the scheme is either entered into or is being carried out. The question of tax benefit, therefore, is not, at least for the purpose of s 177F to be looked at at a time after an assessment has been made. 94 Further, we fail to see why this interpretation creates any great difficulty for appeals to the Tribunal or this Court having regard to s 177G. If the case is one where the relevant conclusion as to dominant purpose is reached the Commissioner is empowered to make a determination and give effect to it. The determination in a deduction case will be that a deduction otherwise allowable is not to be allowable. The making of a determination operates to change the legal operation of the Act in the particular case so that once the determination has been then there never was an occasion when the deduction was ever available. What action the Commissioner may then take to give effect to that determination will depend upon the circumstances. In a case such as the present where a deduction has been allowed, which should not have been allowed, the Commissioner is authorised to issue an amended assessment within the period of six years stipulated in s 177G. Section 177G for this purpose prevails over the four year limitation period in s 170. But the question here is not a difficulty for s 177G. The difficulty arises because of the need to test dominant purpose by reference to an allowable deduction. 95 Once it is clear that no amount was ever an allowable deduction it is clear that Part IVA could never operate on the facts of the present case. 96 Two other matters were argued on the appeal in the context of Part IVA. 97 The first matter argued concerned the validity of the determination, it having been signed by a person (Mr Shawcross) not being the Commissioner, although a person authorised to do so by an authorisation given to him by a person who had a delegation from the Commissioner but not it was submitted, in the name of the Commissioner. The argument was rejected by the learned primary Judge for two reasons. First his Honour held that Mr Shawcross had the relevant authority and there was no impediment of the delegate of the Commissioner authorising him to make the determination. Secondly his Honour held that because the determination was headed, inter alia, "DETERMINATION MADE BY THE COMMISSIONER" the determination was in effect a determination made in the name of the Commissioner. 98 It is not necessary for us to reach a final conclusion on this argument. However, we are inclined to agree with his Honour that the determination was effective. 99 A related matter was raised in the appeal, namely that the determination was invalid since it named an amount as the tax benefit which was incorrect. It is unnecessary to consider this related matter and undesirable since it was not argued before the learned primary Judge. 100 The second matter argued concerned the question whether his Honour erred in considering whether it would be concluded that the promoter had carried out the scheme for the dominant purpose of obtaining for Ms Vincent the tax benefit. It is clear both from the language of s 177D and the decision of the High Court in Federal Commissioner of Taxation v Consolidated Press Holdings Ltd (2001) 179 ALR 625 that a determination can be made if there is any person, be it the taxpayer, a promoter of a tax scheme or a legal or accounting adviser of whom it would be concluded that he, she or it entered into or carried out the scheme or any part of it for the dominant purpose of securing for the taxpayer a tax benefit. In considering the question of purpose by reference to the promoter his Honour did not err. We may doubt, however, whether we would reach the same conclusion as to the purpose of the promoter in this case. Indeed, we would be inclined to the view that the dominant purpose of the promoter here was to obtain the profits that clearly would have flowed to the various companies associated with him. However, it is not necessary to reach a concluded view on this question.

Conclusion 101 The result will be that the appeal is allowed in part. Accordingly the orders made by the learned primary Judge will be set aside. The objection decision will be allowed in whole in respect of the 1995 year of income and the assessment remitted to the Commissioner for reassessment in accordance with the reasons of the Court. In respect of the 1996 year the objection decision will be allowed to the extent of the penalties imposed as a result of the making of a determination under Part IVA. Again the matter is to be remitted to the Commissioner to reassess in accordance with the reasons of the Court. 102 We are of the tentative view that as both parties have been successful in part there should be no order as to costs, either in respect of the proceedings at first instance or on the appeal. However, as no argument has been addressed to us on the question of costs we would allow both parties to file written submissions within 7 days of this judgment being delivered to the extent that they wish to submit that some other order as to costs should be made. I certify that the preceding one hundred and two (102) numbered paragraphs are a true copy of the Reasons for Judgment herein of the Honourable Justices Hill, Tamberlin and Hely.

Associate: Dated: 16 September 2002 Counsel for the Appellant: JW de Wijn QC and SH Steward

Counsel for the Respondent: BJ Shaw QC, H Symon SC and L Price

Solicitor for the Respondent: Australian Government Solicitor