FEDERAL COURT OF AUSTRALIA TAXATION - Income tax - Film expenditure - Claim for deduction of expenditure under Division 10B of Income Tax Assessment Act - Moneys invested by taxpayer attracted 70% "subsidy" by film production company - Subsidy not disclosed to Commissioner of Taxation- False statement about film earning income - Whether there was a failure to make a full and true disclosure of all material facts necessary for the Commissioner's assessment - Whether money was expended on production of the film - Significance of production of pilot film for marketing purposes. Income Tax Assessment Act 1936 - ss 124K, 124L, 124M, 124R, 124S and 170 NG254 of 1995/NG256 of 1995 and NG257 of 1995 VICTOR PETER GROSS v COMMISSIONER OF TAXATION JUDGE: WILCOX J PLACE: SYDNEY DATE; 23 DECEMBER 1997 IN THE FEDERAL COURT OF AUSTRALIA NEW SOUTH WALES DISTRICT REGISTRY NG254 OF 1995 BETWEEN: VICTOR PETER GROSS Applicant AND: COMMISSIONER OF TAXATION Respondent JUDGE: WILCOX J DATE OF ORDER: 23 DECEMBER 1997 WHERE MADE: SYDNEY THE COURT ORDERS THAT: 1. The application be dismissed. 2. The applicant, Victor Peter Gross, pay to the respondent, the Commissioner of Taxation, his costs of the application; the said costs not to include the costs incurred by the Commissioner in connection with the preliminary point determined on 20 December 1996. Note: Settlement and entry of orders is dealt with in Order 36 of the Federal Court Rules. IN THE FEDERAL COURT OF AUSTRALIA NEW SOUTH WALES DISTRICT REGISTRY NG256 of 1995 BETWEEN: VICTOR PETER GROSS Applicant AND: COMMISSIONER OF TAXATION Respondent JUDGE: WILCOX J DATE OF ORDER: 23 DECEMBER 1997 WHERE MADE: SYDNEY THE COURT ORDERS THAT: 1. The application be dismissed. 2. The applicant, Victor Peter Gross, pay to the respondent, the Commissioner of Taxation, his costs of the application; the said costs not to include the costs incurred by the Commissioner in connection with the preliminary point determined on 20 December 1996. Note: Settlement and entry of orders is dealt with in Order 36 of the Federal Court Rules. IN THE FEDERAL COURT OF AUSTRALIA NEW SOUTH WALES DISTRICT REGISTRY NG257 OF 1995 BETWEEN: VICTOR PETER GROSS Applicant AND: COMMISSIONER OF TAXATION Respondent JUDGE: WILCOX J DATE OF ORDER: 23 DECEMBER 1997 WHERE MADE: SYDNEY THE COURT ORDERS THAT: 1. The application be dismissed. 2. The applicant, Victor Peter Gross, pay to the respondent, the Commissioner of Taxation, his costs of the application; the said costs not to include the costs incurred by the Commissioner in connection with the preliminary point determined on 20 December 1996. Note: Settlement and entry of orders is dealt with in Order 36 of the Federal Court Rules. IN THE FEDERAL COURT OF AUSTRALIA NEW SOUTH WALES DISTRICT REGISTRY NG254 OF 1995 NG256 OF 1995 NG257 OF 1995 BETWEEN: VICTOR PETER GROSS Applicant AND: COMMISSIONER OF TAXATION Respondent JUDGE: WILCOX J DATE: 23 DECEMBER 1997 PLACE: SYDNEY REASONS FOR JUDGMENT WILCOX J: There are before the Court three appeals by Victor Peter Gross against decisions by the Commissioner of Taxation disallowing objections to amended assessments of income tax in respect of the taxation years ending 30 June 1989, 1990 and 1991. The decisions concern claims by Mr Gross to deduct from his assessable income money said to have been expended on the production of certain films. On 20 December 1996 I delivered judgment on a preliminary point, argued by agreement: whether an election under s 124ZAE of the Income Tax Assessment Act 1936 is a condition precedent to Mr Gross being entitled to claim deductions in respect of the films under Division 10B of Part III of the Act. That issue arose because it was common ground that the conditions for deductibility under Division 10BA of Part III had not been satisfied in relation to the films and no s 124ZAE election had been made. I answered the question in a manner generally favourable to Mr Gross, opening the way for Mr Gross to claim deductions under Division 10B, if he could satisfy the requirements of that Division. Following that ruling, a further hearing was held, at which additional evidence was adduced and there was full argument upon the applicability of Division 10B. The material facts Mr Gross' claims relate to films produced, or to be produced, by companies controlled by one Robert MacLeod, a person whose present whereabouts are unknown to the parties. On 18 April 1988 Mr MacLeod obtained a provisional certificate, under s 124ZAB of the Income Tax Assessment Act, in respect of a three-part documentary film to be known as "Toddler Taming". Section 124ZAB is contained in Division 10BA of Part III of the Act. Mr MacLeod may have been thinking, at that time, of using Division 10BA as a source of deductibility of investments in the production of the film. If he was, he may have been influenced to switch his attention to Division 10B by the fact that the deduction available under Division 10BA was reduced in May 1988. Whatever his thinking, on 1 November 1988 he wrote to the Deputy Commissioner of Taxation in Sydney seeking a letter about deductibility under Division 10B. On 24 November 1998, the Deputy Commissioner responded in these terms: "Reference is made to your letter of 1 November 1988 in which you sought confirmation of the tax deductibility of a film investment of Division 10B of the Income Tax Assessment Act . You will appreciate that an expression of opinion as to the application of the Income Tax law given in advance of an assessment, cannot be binding on the Commissioner and when the time comes to make an assessment the law as it then exists must be applied to the established facts. Subject to this necessary reservation the following comments are made in response to your question. From the information provided, an investor who invests in a film under Division 10B of the Income Tax Assessment Act will be eligible for a concession which reflects the total amount of his or her interest in the film, even though part of the investment may have been made with the assistance of a subsidy, loan or a gift. The concession will be applicable where an investor acquires a share in the copyright (and equity) of the film and where the reason for investment is to acquire a beneficial interest in the proceeds and income derived from the film." Armed with this letter, Mr MacLeod set about marketing interests in "Toddler Taming". He published a brochure and summary of the project, which involved several well-known and reputable people. The summary said "(e)ach investor shall own an undivided legal and beneficial interest in and to copyright of the film" It said "(t)he film will be made in accordance with Division 10B of the Income Tax Act to take advantage of the income tax considerations described therein." Mr Gross is a chartered accountant. He carries on practice in partnership with his wife, Madeleine Anna Gross, at St Leonards. In May or June 1989 Mrs Gross attended a seminar on film investment during which Mr MacLeod spoke about "Toddler Taming". She took home some documents relating to the project which she showed her husband. One of these documents was a standard form letter addressed "Dear Investor". The letter included the following material: "FEATURES OF INVESTMENT 1. 100% TAX DEDUCTABLE. The Australian Taxation Office allows for a 100% tax concession on investments in an Australian Film Under Section 10(B) and 10(BA) of the Tax Act. Under 10(B) definition, the claim is to be spread over the life of the copyright or two years. To alleviate the need to spread the tax concession over two years, the producer has elected to state the life of the copyright over one year and ensuring a nominal distribution of income within the year so as to qualify your investment for a 100% tax concession in the one year. This approach in no way limits your entitlement to income for one year only and your on-going income entitlement will be stated in your film deed. 2. 50% PRO RATA ON ALL INCOME IN RELATION TO TODDLER TAMING. Investors will receive 50% pro rata income which will be distributed on a regular basis. Trainex, as the film production company, will receive the other 50%. 3. 70% SUBSIDY OR ADDITIONAL EQUITY ON YOUR INVESTMENT. The reason for the subsidy is to give you the investor a greater beneficial interest in the copyright and ownership of the film. As you would own a larger share of the film, it follows that you would make more from the sales or all income. This is not a loan and it does not have to be repaid. The subsidy is only available when approved by the Executive Producer and is applied under the Special Assistance Programme usually as an incentive for either-: (a) New Investors (as an incentive) or (b) Low income earners so as to encourage their involvement in the Australian Film Industry. The taxation concession will apply to the top figure stated on the film deed which is the measure of an investors ownership, equity, and interest in the film. This has been verified by the Australian Taxation Office and a copy is attached for your perusal. Investments can be made in any amount from $1,000.00 upwards (in multiples of $1,000.00). For an investment of $10,000.00, the benefits are outlined as follows: 10,000.00 Investment. 23,500.00 Equity/Subsidy provided by Trainex. 33,500.00 Total interest or ownership. 33,500.00 Taxation Concession (deduction) 16,833.00 Cash Tax Benefit (based on a 50.25% tax rate). 10,000.00 Estimated Minimum Income. 26,833.00 Estimated Benefit. ... I believe that your investment in Toddler Taming will prove extremely beneficial to you and pave the way for additional investments with Trainex in the future. An application form is attached for your use. Thanking you for your interest." Mr Gross decided to invest in the film. Relying on the promised "subsidy", he executed a deed, on 22 June 1989, whereby he undertook to pay the production company, Trainex Pty Limited, by 30 June, the sum of $17,000 in return for an undisclosed share in the investors' 50% interest in the copyright of the film. Although the deed did not say so, the figure of $17,000 was calculated after allowance of the 70% subsidy referred to in Mr MacLeod's letter. In fact Mr Gross paid $5,000. He did this before 30 June 1989. In his 1989 taxation return, he claimed a deduction of $17,000 in respect of the film. The claim was couched in these terms: "The taxpayer invested $17,000 with Trainex film productions (copy of investment contract attached) in an eligible Australian film - 'Toddler Taming' - A film certified by the Minister for the Arts. The investment made pursuant to Division 10B of the Income Tax Assessment Act is a 100% allowable deduction. The amount claimed is:- $17,000 Provisional certificate no: P2927 Amount of income derived: $36.95 Life of the copyright : 364 DAYS" The statement in the claim about receipt of income seems to have stemmed from a letter of 14 July 1989 from Mr MacLeod stating the film had become income-producing in the 1989 taxation year and Mr Gross' share of income was $36.95. Mr MacLeod did not explain how this could be so, given that he had only recently collected the investment moneys for the film and it had not yet been completed. It is not clear to me how much of the deed dated 22 June 1989 was submitted to the Australian Taxation Office with Mr Gross' return. The answer does not seem to matter. Neither the deed, nor anything in the taxation return, revealed that Mr Gross had invested only $5,000 of his own money, and the balance of the claimed $17,000 had come from the Trainex "subsidy". It is common ground the submitted material did not include the Schedule setting out terms and conditions, referred to below. In due course the Commissioner issued a notice of assessment based on the return, in effect allowing the claim of $17,000. There the matter rested until 7 December 1994 when, after an investigation, the Deputy Commissioner wrote a letter to Mr Gross in which he referred to a forthcoming amended assessment disallowing the whole of the claimed $17,000, and deducting the $37 disclosed "film income". The Deputy Commissioner disallowed the whole of the claim (and not merely the difference between Mr Gross' actual contribution of $5,000 and the notional investment) because Division 10B deductions are available only in respect of a taxation year in which the relevant film is complete and used for the production of assessable income. "Toddler Taming" was not completed, or used for the production of assessable income, until the 1991 taxation year. Mr Gross concedes he was not entitled to a deduction in respect of "Toddler Taming" in 1989. The only question that arises in relation to that year is whether the Deputy Commissioner was entitled in 1994 to amend the original assessment of income tax. That issue turns on the application to the case of s 170(3) of the Income Tax Assessment Act . On 6 February 1995 Mr Gross objected to the amended assessment disallowing his claim for a $17,000 deduction. The objection was disallowed and Mr Gross appealed to this Court against the decision to disallow (NG254 of 1995). In the 1990 taxation year, Mr Gross made investments in two films. One was called "The Nymph", in which Mr Gross had a notional investment, according to the relevant deed, of $7,000. The other was "Health Promotion Series", in which he had a notional investment of $10,000. In each case, Mr Gross had the benefit of the 70% "subsidy", so his total outlay was $5,000 for his $17,000 "investment". Once again, in respect of each film, Mr MacLeod provided Mr Gross with a letter falsely stating the film had become income producing in the relevant year. In his 1990 tax return Mr Gross claimed a deduction from assessable income of $17,000 for "Film Industry Incentives". He provided no particulars. Nonetheless the claim was allowed and an assessment issued accordingly. On 7 December 1994 the Deputy Commissioner indicated the assessment would be amended to disallow the whole $17,000 (and deduct $660 "film income" conceded by Mr Gross) on the basis that neither "The Nymph" nor "Health Promotion Services" produced income in the relevant year. There is no issue about that; it is common ground that "Health Promotion Series" first produced income in the 1991 taxation year and "The Nymph" was never completed. Mr Gross objected to the amended assessment. The objection was disallowed and Mr Gross appealed to this Court (NG 256 of 1995). However, Dr H R Sorenson and Mr D K L Raphael, counsel for Mr Gross, concede the objection is insupportable and the appeal must be dismissed. In his 1991 taxation return, Mr Gross claimed $45,000 for "Film Industry Incentives". Once again, he supplied no particulars, but the claim was allowed and an assessment issued accordingly. In fact, in that year, Mr Gross invested only $13,500 out of his own money. He made a second investment, of $4,800, in "The Nymph" and invested $8,700 in a film called "The Paradise Kids". He received a "subsidy" of $11,200 for "The Nymph" and $20,300 for "The Paradise Kids", making his nominal investments $16,000 and $29,000 respectively. These films were to be produced by Starlight Film Studios Ltd. In a letter written on behalf of that company to Mr Gross, Mr MacLeod emphasised there was no suggestion of payment of the full "investment". Each letter was in identical terms. It is sufficient to quote the relevant portion of the letter, dated 13 August 1991, concerning "The Paradise Kids": "Thank you for investing in The Paradise Kids with Starlight Film Studios Ltd. Your support and interest is greatly appreciated. Your base investment is $8700.00 and I have subsidised you for a further $20300.00. This is not a loan and therefore you will not be required to repay the money. Your effective contribution to the film is for $29000.00. Your taxation concession is applicable on the amount shown on your deed, being $29000.00. This agreement also provides that you shall not be liable to provide further funds beyond your initial investment. You are completely indemnified against any action which may arise as a result of the production, and all relevant insurances will be duly undertaken by Starlight Film Studios Ltd." In his letter of 7 December 1994 notifying Mr Gross about the amended assessments, the Deputy Commissioner indicated no deduction was allowable in respect of "The Nymph" or "The Paradise Kids" because neither film had been completed or earned income. However, in the 1991 taxation year, both "Toddler Taming" and "Health Promotion Series" had been completed and earned income. So the Deputy Commissioner conceded Mr Gross was entitled to a deduction in respect of his contributions, in earlier financial years, to their cost of production. The Deputy Commissioner was not prepared to concede Mr Gross' full cash contributions. An Australian Taxation Office investigation had revealed that Trainex had obtained investments in each film that greatly exceeded the film's cost of production. The Deputy Commissioner allowed a deduction of that proportion of the total cost of each film that corresponded with each investor's nominal investment in it. The relevant proportions were 6% for "Toddler Taming", which entitled Mr Gross to a deduction of $1,020, and 8.7% for "Health Promotion Series", $870. The 1991 amended assessment therefore reduced the allowed film deduction from $45,000 to $1,890. Income of $891, conceded in respect of 1991, was deducted from the amended assessment. Mr Gross objected to the amended assessment but the objection was disallowed and he appealed to this Court (NG 257 of 1995). The 1989 amended assessment (NG254 of 1995) As indicated, the only present issue in relation to the 1989 amended assessment is whether the Commissioner was entitled in 1994 to amend the original assessment. Section 170 of the Income Tax Assessment Act deals with amendment of assessments. It contains numerous provisions but it is necessary to set out only ss (1), (2) and (3): "170(1) The Commissioner may, subject to this section, at any time amend any assessment by making such alterations therein or additions thereto as he thinks necessary, notwithstanding that tax may have been paid in respect of the assessment. (2) Where a taxpayer has not made to the Commissioner a full and true disclosure of all the material facts necessary for his assessment, and there has been an avoidance of tax, the Commissioner may - (a) where he is of opinion that the avoidance of tax is due to fraud or evasion - at any time; and (b) in any other case - within 6 years from the date upon which the tax became due and payable under the assessment, amend the assessment by making such alterations therein or additions thereto as he thinks necessary to correct the assessment; (3) Where a taxpayer has made to the Commissioner a full and true disclosure of all the material facts necessary for his assessment, and an assessment is made after that disclosure, no amendment of the assessment increasing the liability of the taxpayer in any particular shall be made after the expiration of 3 years from the date upon which the tax became due and payable under that assessment." The contention of Dr Sorenson and Mr Raphael is that subs (3) applies to this case. They say that, in his 1989 taxation return, their client made to the Commissioner a full and true disclosure of all the material facts necessary for his assessment and an assessment was then made; so no amendment of the assessment increasing their client's liability was permissible after the expiration of three years from the date upon which the tax became due and payable under the assessment. Mr Gross received a refund of tax in 1989. His assessment issued on 18 October 1989. No doubt it is appropriate to calculate the three year period from that day. The amended assessment was issued more than five years later, on 14 December 1994. If it is correct to say that Mr Gross made a full and true disclosure in 1989, the amended assessment is invalid. The concept of full and true disclosure embodied in subss (2) and (3) of s 170 has been discussed in many cases. The taxpayer bears the onus of establishing the making of a full and true disclosure: see McAndrew v Federal Commissioner of Taxation (1956) 98 CLR 263. In the present case this is not a matter of great importance; the relevant facts are not in dispute. More significant are statements of principle in several cases. In The Scottish Australian Mining Co Ltd v Federal Commissioner of Taxation (1950) 81 CLR 188 at 197-198, Williams J said: "The expression 'a full and true disclosure of all the material facts necessary for the assessment' is a very wide one. It seems to impose on a taxpayer the duty of disclosing every fact which he knows or is capable of knowing material to a correct assessment'" [Emphasis added]. This duty does not apply to facts of which the Commissioner is already aware: see Foster v Federal Commissioner of Taxation (1951) 82 CLR 606, especially at 614-615. However, in relation to facts of which the Commissioner is unaware, even an inadvertent omission of a material fact may enable the Commissioner to maintain that the required full and true disclosure was not made: see Australasian Jam Company Pty Ltd v Federal Commissioner of Taxation (1953) 88 CLR 23 at 33. In a recent decision, MIM Holdings Ltd v Federal Commissioner of Taxation (1997) 97 ATC 4420 at 4431 a Full Court of this Court applied a test suggested by Menzies J in Austin Distributors Pty Ltd v Federal Commissioner of Taxation (1964) 13 ATD 429 at 432-433: "The matter can be tested in this way. If advice were to have been sought by the taxpayer whether or not the sum in question was a taxable premium, would the person from whom the advice was sought have required more information than this return disclosed to the Commissioner." The word "true", in this context, refers simply to the correctness of the material facts disclosed; it implies nothing about the taxpayer's knowledge of the erroneous nature of any incorrect fact: see Levy v Federal Commissioner of Taxation (1961) 106 CLR 448. In the present case it is common ground that the only information disclosed to the Commissioner in respect of Mr Gross' claim to deduct $17,000 from his 1989 income in respect of "Toddler Taming" was the statement in his return quoted above, and perhaps the terms of the deed, without the scheduled terms and conditions. The Commissioner was not informed that Mr Gross' cash contribution to the film was only $5,000 or that the claimed $17,000 included a $12,000 "subsidy" by Trainex. Counsel for Mr Gross do not argue the Commissioner was bound by the letter of 24 November 1988, but they say this letter put the Commissioner on notice there might be a subsidy element in the investment claimed by Mr Gross in his 1989 taxation return. I do not agree with this. The exchange in November 1988 related to a hypothetical situation; Mr Gross was not mentioned. When he put in his 1989 return, he made no reference to the letter of 24 November 1988. The Commissioner was not alerted to any possible connection between the letter and the return. It seems unfortunate the letter of 24 November 1988 was ever written. Perhaps its terms can be defended on a narrow, literal reading. It may be possible to read the words "his or her interest in the film" as referring to the taxpayer's proportionate contribution to the film. On that reading, it would not matter if investors were subsidised, provided they were all subsidised equally. However, this interpretation would not be obvious to prospective investors, for whom the letter was potentially seriously misleading. The letter dealt in a hypothetical and undiscriminating way with a variety of situations, some only of which would result in the whole of the "investment" being tax deductible. The writer seems not to have realised there is an important distinction between an investment made out of a taxpayer's own funds (even funds that have come to the taxpayer by way of gift or loan) and funds found by someone else and contributed by way of subsidy. In the first case, the effect of the investment is to diminish the moneys available to the investor for other purposes. The moneys are invested at the taxpayer's risk. The taxpayer has "incurred expenditure". In the second case, if expenditure is incurred by anybody in relation to the subsidy (it was not in this case), that person will not be the taxpayer. In the present case, if particulars had been sought, the officer who wrote the letter would quickly have realised the "subsidy" was a charade. Trainex gave no subsidy at all; on the contrary, it took cash investments from investors that greatly exceeded the cost of producing those films that were made. The only point of the "subsidy" was to enable Trainex to put before investors an estimate of return that was substantially boosted by tax savings on "investments" they were not required to make. The officer who wrote the letter seems not to have perceived this possibility or to have appreciated that potential investors might understand the words "interest in the film" to refer to the nominal value of their investment; on which interpretation, it would be wrong to say, as a general proposition, that a taxpayer would be "eligible for a concession which reflects the total amount of his or her interest in the film ... made with the assistance of a subsidy". Investors were eligible only for concessions that reflected their actual expenditure. There is no evidence Mr Gross was misled; as he is a chartered accountant, this is inherently unlikely. In any event, his counsel concede the letter does not bind the Commission in these appeals. They do not put a case of estoppel; they simply contend their client made a full and true disclosure of the relevant facts. They justify that conclusion by arguing the amount of the alleged investment was not related to the issue of its deductibility; if it is possible for the Commissioner to make a decision about deductibility of a particular item of expenditure without being concerned with the amount of the claimed expenditure, a mis-statement regarding the amount is not a material non-disclosure. In support of these propositions counsel refer to three authorities: W Thomas Co Pty Limited v Federal Commissioner of Taxation (1965) 115 CLR 58; Stapleton v Federal Commissioner of Taxation (1989) 88 ALR 606 and Federal Commission of Taxation v Riverside Road Pty Ltd (1990) 23 FCR 305. I do not think any of these cases supports counsel's contention. Thomas related to the deductibility of the cost of repairs to the appellants' business premises. In its taxation return the taxpayer gave particulars of the expenditure, including a correct statement of its amount, but did not reveal the expenditure was necessary in order to get rid of smell and contamination resulting from the previous owner's activities. Windeyer J held the expenditure was of a capital nature but the Commissioner was precluded by s 170(3) from amending the original assessment allowing the expenditure. He held (at 75) that the information given to the Commissioner "would lead inevitably to the conclusion that prima facie this expenditure was of a capital nature". Stapleton was the reverse case; receipts of an income nature were wrongly characterised as capital. Sheppard J held s 170(3) applied and an amended assessment was invalid. At 619 his Honour stated the critical question: "Ultimately the question is whether the taxpayer in a given case has made full and true disclosure of such facts. In substance the purpose of the sub-section is to ensure that the Commissioner is given an adequate opportunity of considering whether a particular receipt is assessable income or a particular outgoing an allowable deduction. In the view of the matter which I have formed, the Commissioner needed no more information than he had to reach the conclusion that the amount was assessable as income. That is because the amount in question was received in respect of the applicant's entitlement to a share in work in progress. Whether it was work in progress in the conventional sense or not, it was income in the applicant's hands and, subject to the operation of s 170(3) of the Act, part of the applicant's assessable income, as the Commissioner himself properly concluded on the information supplied to him by the applicant." Riverside Road was a Full Court decision. The case concerned deductibility of interest on a loan, the quantum of the interest being relevant. At 318 the Court observed: "(i)n most cases, where the question of full and true disclosure has arisen, the discussion of failure to disclose was in the context of a matter which went to the liability, as a matter of principle, to tax of an income item or the allowability, as a matter of principle, of an outgoing". The Court went on (at 318-319) to point out the case before it was not of that nature: "the process of assessment required not only that the Commissioner form a view as to the deductibility of interest in the abstract, in the case of a sale and lease-back of the motel, but also that he compute the amount of interest which was allowable (because related to the plant and fittings used in the motel business or working capital) and that which was not allowable (because related to the purchase of the site and construction of buildings). To determine the amount deductible, and so calculate the taxable income and ultimate tax payable thereon, it was necessary for the Commissioner to know how much of the overall borrowings related to the site and buildings and how much to the other matters. No amount of sophisticated analysis of the returns would permit that calculation to be made. The returns merely lead to speculation as to the quantum involved and invite requests for further information or a detailed analysis of the books of the respondent. Where further information of a material kind must be forthcoming before the quantum of tax can be assessed, it cannot be said that there is a full disclosure of the material facts necessary for the assessment." In the present case, in order to determine what attitude ought properly be taken to Mr Gross' claim to deduct $17,000 from his 1989 taxable income in respect of "Toddler Taming", it was necessary for the Commissioner to have information about two matters, at least. First, the Commissioner needed "in principle" information about the use of the film for the earning of assessable income. Mr Gross gave him information about this; relying no doubt on Mr MacLeod's letter to him of 14 July 1989. This information was wrong; the film was not completed until 1991 and could not have produced income in 1989. On this ground alone, it must be concluded the return did not make a true disclosure of all the material facts; it misstated a critical fact. Second, if the Commissioner was minded to allow a deduction, he needed to know the amount of Mr Gross' expenditure on the film. The amount of that expenditure was a material fact in determining the quantum of any deduction; therefore, it was material in relation to the assessment. It was misstated. Mr Gross did not reveal he had expended only $5,000; he stated he had "invested" $17,000. In the absence of any qualification or explanation, such a statement would naturally be understood as a statement that he had expended $17,000, a statement that was false. Whether or not Mr Gross consciously intended to deceive the Commissioner, it is apparent he did not make a full and true disclosure of all the material facts. In my opinion it was open to the Commissioner to amend the original assessment, notwithstanding the expiration of three years since it was made. Appeal NG254 of 1995 must be dismissed. The 1990 amended assessment (NG256 of 1995) As I have indicated, counsel for Mr Gross do not press the appeal against disallowance of their client's objection to the 1990 amended assessment. They do not contend the amended assessment was barred by s 170(3) of the Act; no doubt because the paucity of information offered by Mr Gross in his 1990 taxation return makes it impossible to argue there was a full and true disclosure of all facts material to the 1990 assessment. Appeal NG256 of 1995 must be dismissed. The 1991 amended assessment (NG257 of 1995) The primary dispute concerning the 1991 amended assessment arises out of the fact that the Commissioner allowed a deduction of only part of Mr Gross' investment in "Toddler Taming" and "Health Promotion Series". As will be recalled, the investigation conducted by the Australian Taxation Office estimated only 6% of the amount invested in accordance with the Investor's deeds in respect of "Toddler Taming" was used in the production of that film and only 8.7% in respect of "Health Promotion Series". These estimates may have been on the high side. On the basis of those estimates, if there had been a flat 70% "subsidy" throughout, the proportion of the total cash subscribed that was used for the films would have been about 20% in the case of "Toddler Taming" and 29% in the case of "Health Promotion Series". In fact it was less than that, at least in relation to "Toddler Taming". An affidavit by the producer of that film shows its total cost was $501,767, a figure equal to about 14% of the total amount invested by members of the public, excluding any "subsidy". Counsel for Mr Gross say all this is irrelevant; it was erroneous for the Commissioner to limit the permissible deduction by reference to "your share of the actual cost of producing the film", the Commissioner should have allowed deduction of the whole of the moneys actually paid by Mr Gross. In order to deal with this submission, it is necessary to refer to a number of provisions in Division 10B. First, s 124K(1) contains a definition of "unit of industrial property" that means "rights possessed by a person as [amongst other things] the owner of a copyright subsidy in Australia". It will be recalled the Investor's deed in relation to "Toddler Taming" gave each investor, including Mr Gross, an undisclosed share in 50% of the copyright in the film. This share was a "unit of industrial property" for the purposes of the Division. Section 124M(1) is the provision concerning deductibility relied on by Mr Gross. It reads: "124M(1) Where, at any time during the year of income, a taxpayer is the owner of a unit of industrial property to whom this Division applies, an amount equal to the residual value of the unit in relation to the taxpayer as at the end of the year of income divided by a number equal to the number of whole years in the effective life of the unit in relation to the taxpayer as at the commencement of the year as income shall, subject to this Act, be an allowable deduction in respect of the unit." Section 124S(1) deals with determination of residual value. It reads: "124S(1) Subject to this section, the residual value of a unit of industrial property at any time in relation to the owner of the unit shall, for the purposes of this Division, be ascertained by deducting from the cost of the unit to the owner the sum of - a) any deductions allowed or allowable under this Division in respect of the unit in assessments in respect of income of the owner of a year or years of income which ended prior to that time; and b) the consideration receivable by the owner in respect of any disposal by him of the unit in part prior to that time." In order to determine what is meant by "the cost of the unit", it is necessary to have regard to s 124R of the Act. That section makes a distinction between cases where the owner of the unit of industrial property has not dealt at arm's length with the supplier of relevant goods and services and cases where there is an arm's length relationship. In the first case, by s 124R(2), the "cost of the unit", for the purposes of Division 10B, is "the amount of the expenditure of a capital nature that, in the opinion of the Commissioner, would have been incurred by the owner if the owner and that person had dealt with each other at arm's length". In other cases, by s 124R(1)(a)(ii), the cost of the unit is relevantly taken to be the expenditure referred to in s 124L(1)(a), viz. "expenditure of a capital nature (incurred) directly in relation to ... producing the work ... in which the copyright subsists". So the critical question is: what expenditure did Mr Gross incur directly in relation to producing "Toddler Taming" and "Health Promotion Series"? Counsel for Mr Gross say the whole of his cash contributions was so incurred, it does not matter that the amount expended by him and others greatly exceeded the amount needed to produce the films. They argue the word "directly", in s 124L(1)(a), should be interpreted broadly. They refer to the decision of a Full Court of this Court in Commissioner of Taxation v Faywin Investments Pty Ltd (1990) 22 FCR 461. On the other hand, Mr K Connor, counsel for the Commissioner, refers to the terms of the deeds governing Mr Gross' investment in the films. The deed concerning "Toddler Taming" contained a schedule setting out terms and conditions. Clause 2.2 of that schedule required Trainex ("the Production Company") to deposit the moneys received from Mr Gross ("the Investor") in a trust account, the funds of which could be invested in an authorised trustee investment. Clauses 2.4 to 2.9 provided for the subsequent disposition of the moneys as follows: "2.4 The moneys received from the Investor shall not become the Investment of the Investor until the Subscription Conditions have been met PROVIDED THAT the Investor may by notice in writing to the Production Company agree to forego the above requirements and request the early release of its moneys from the Trust Account for the purposes of production and Marketing of the Film and if the Production Company so agrees then such moneys shall be released and shall thereafter become the Investment of the Investor. 2.5 On satisfaction of the Subscription Conditions the Production Company shall: (a) redeem any invested funds; (b) within fourteen (14) days of the date of redemption of invested funds account to the Investor for any interest earned on its funds less any Transactions Taxes in respect thereof; (c) before the Completion Date pay any funds to be used for Marketing into the Marketing account. 2.6 On satisfaction of the Subscription Conditions the moneys paid by the Investor shall become the Investment of the Investor and shall be deemed to be contributed towards the Budgeted Cost. 2.7 Any Investment received after satisfaction of the Subscription Conditions shall be deemed to be contributed towards the Budgeted Cost and forthwith paid into the Trust Account. 2.8 In the event that the Subscription Conditions have not been met by the time that the production of the Film is required to proceed or by the date set out in Item 7 of the Schedule (whichever is the earlier) the Production Company shall immediately return to the Investor the moneys advanced by the Investor (less any Transaction Taxes) and all rights responsibilities and powers of the parties under this Deed shall immediately be at an end. 2.9 Investments may be accepted by the Production Company until the Budgeted Cost is fully contributed." The term "Subscription Conditions" was defined in cl 1.1(w) of the deed as meaning the conditions set out in Item 6 of the Schedule to the deed. That item read: "The total of all moneys received by the Production Company towards the cost of producing and Marketing the Film at least equal to the Budgeted Cost OR Either:- (a) the total of all moneys received by the Production Company towards the cost of producing and Marketing the Film at least equal to the Budgeted Cost; or (b) the production Company has secured a binding written agreement whereby an underwriter has agreed to provide or procure the balance of the Budgeted Cost at such times as are necessary to meet the cash flow requirements of the production and Marketing of the Film." Mr Connor makes two submissions in relation to these provisions. First, he points out there is no evidence as to when the Subscription Conditions were met, and therefore no evidence when the moneys paid by Mr Gross became an investment in the film. He says this is important because the date set out in Item 7 of the Schedule was 30 June 1989. If the Subscription Conditions were not met by that date, Trainex was required by cl 2.8 immediately to return to Mr Gross the moneys advanced by him "and all rights, responsibilities and powers of the parties under this Deed shall immediately be at an end." Although Mr Connor did not spell out the consequence of this argument, it must be that, if Trainex retained Mr Gross' money despite an obligation to return it to him, any use of that money for the purposes of the film was not pursuant to Mr Gross' investment. Secondly, Mr Connor notes cl 2.5(c) contemplates money subscribed by investors, and held in trust until satisfaction of the Subscription Conditions, may be used for marketing. However, s 124L(1)(a) extends only to "expenditure of a capital nature directly in relation to ... producing the work". Marketing costs are not production costs. Mr Connor points out the entitlement to use investors' funds for marketing is consistent with a statement of Mr Gross' intention in recital B of the deed. It reads: "B. The investor wishes to invest the sum set out in Item 4 of the Schedule towards the costs of production and marketing of the Film on the basis that the Investor will be one of the first owners of the copyright of the Film and otherwise on the basis of the attached Terms and Conditions." I do not find it necessary to deal with Mr Connors's first point, about Subscription Conditions being met by 30 June 1989. It seems to me the second point is well taken, both in respect of "Toddler Taming" and "Health Promotion Series". The Taxation Office investigations established that a large proportion of the money subscribed in connection with these films was spent otherwise than on production. Possibly some of that proportion was expended on marketing, as was permissible under the relevant trust deeds. Other money may have been used for purposes falling outside the trust deed; in the absence of Mr MacLeod, it is impossible to know. The sad fact, from Mr Gross' point of view, is that he is quite unable to demonstrate what part of his subscription was expended on the production of the film; that is, what expenditure he incurred "directly in relation to producing the work ... in which copyright subsists.". The 1991 amended assessment, made in 1994, allowed him the proportion of his total contribution that corresponded with the proportion of the total public subscription that was used for the production of the films. It seems to me that was a fair approach, reflecting the objective of Division 10B in allowing the deduction of moneys expended on the production of the work the subject of the taxpayer's copyright, but only that expenditure. Counsel for Mr Gross submitted their client should have been allowed a deduction in respect of his 1991 investment in "The Paradise Kids". This argument was based on evidence of the production of a pilot film for "The Paradise Kids". According to an affidavit by the proposed producer of "The Paradise Kids", Ronald Rodger, the film was to be a television drama series consisting of 15 episodes each of 30 minutes duration. Mr Rodger and his business partner, David Jowsey, produced a marketing pilot of 7 minutes 20 seconds duration. This was done at a cost of $25,000 and involved a total of four days' shooting. Mr Rodger said in his affidavit that the pilot "was purely a marketing tool and was never envisaged by me that it would ever earn income". To his knowledge, he said, it never had earned income. For Mr Gross to be entitled to deduct his investment in "The Paradise Kids", it is necessary for him to show that, in a relevant year of income, he has used the unit of industrial property of which he is one of the first copyright owners "for the purpose of producing assessable income": see s 124L(1) of the Act. Assuming, in his favour, that he was one of the owners of copyright in the pilot for "The Paradise Kids", that film was never used for the purpose of producing assessable income. It was used only for the purpose of seeking pre-production sales. Appeal NG257 of 1995 must be dismissed. Orders The appropriate formal order, in each case, is that the application be dismissed with costs. However, I do not think the applicant should be required to pay the Commissioner's costs in respect of the argument on the preliminary point, upon which the Commissioner substantially failed. It would be fair to leave each party to bear his own costs of that point. I certify that this and the preceding thirteen (13) pages are a true copy of the Reasons for Judgment herein of the Honourable Justice Wilcox Associate: Dated: 23 December 1997 Counsel for the Applicant: H R Sorenson and D K Raphael Solicitor for the Applicant: Messrs D G Thomas Counsel for the Respondent: K Connor Solicitor for the Respondent: Australian Government Solicitor Date of Hearing: 1 October 1997