FEDERAL COURT OF AUSTRALIA Brown v Commissioner of Taxation [2001] FCA 596 TAXATION – assessable income – where Taxpayer failed to declare value of home unit and other benefits as part of income – where Taxpayer claimed benefits constituted a gift – where Commissioner claimed benefits were referable to services provided by Taxpayer – meaning of "income" for the purposes of s 25(1) Income Tax Assessment Act 1936 – meaning of "income from personal exertion" for the purposes of s 6 Income Tax Assessment Act 1936 – distinction between "product of an income producing activity" and "mere gift" TAXATION – discretionary power of Commissioner – where Commissioner found "deliberate evasion" – whether Commissioner's discretion should be re-exercised – whether Commissioner misconstrued facts – whether Commissioner took irrelevant considerations into account – whether Commissioner's decision capricious or arbitrary EVIDENCE – where Taxation Office investigated Taxpayer's claims – where Taxpayer's accounting and legal representatives initiated meeting with members of the Taxation Office – whether meeting and associated communications inadmissible under Evidence Act s131(1)(a) – whether operation of s131(1)(a) excluded by s131(2)(b) or (g) – whether evidence relevant Taxation Administration Act 1953 (Cth) Part IVC Income Tax Assessment Act 1936 (Cth) ss 6, 25(1) Evidence Act 1995 (Cth) s131 Federal Commissioner of Taxation v Dixon 86 CLR 540 cited Hayes v the Federal Commissioner of Taxation (1956) 96 CLR 47 followed Scott v FCT (1996) 117 CLR 514 cited Squatting Investment Co. Ltd v Federal Commissioner of Taxation (1953) 86 CLR 570 cited Avon Downs Pty Ltd v Federal Commissioner of Taxation (1949) 78 CLR 353 cited Dalgety Downs Pastoral Co. Pty Ltd v Federal Commissioner of Taxation (1952) 86 CLR 335 cited Duggan v Federal Commissioner of Taxation (1972) 129 CLR 365 cited Denver Chemical Manufacturing Co. v Commissioner of Taxation (NSW) (1949) 79 CLR 296 cited Rush & Thompkins v GLC [1989] 1 AC 1280 cited Unilever PLC v Proctor & Gamble Co [1999] 1 WLR 1630 cited Pitts v Adney (1961) 78 WN (NSW) 886 cited JOHN JOSEPH BROWN v COMMISSIONER OF TAXATION N 1480 OF 1999 EMMETT J 29 MAY 2001 SYDNEY IN THE FEDERAL COURT OF AUSTRALIA NEW SOUTH WALES DISTRICT REGISTRY N 1480 OF 1999 BETWEEN: JOHN JOSEPH BROWN APPLICANT AND: COMMISSIONER OF TAXATION RESPONDENT JUDGE: EMMETT J DATE OF ORDER: 29 MAY 2001 WHERE MADE: SYDNEY THE COURT ORDERS THAT: 1. The application be dismissed. 2. The applicant pay the respondent's costs. 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 N 1480 OF 1999 BETWEEN: JOHN JOSEPH BROWN APPLICANT AND: COMMISSIONER OF TAXATION RESPONDENT JUDGE: EMMETT J DATE: 29 MAY 2001 PLACE: SYDNEY REASONS FOR JUDGMENT 1 The applicant, John Joseph Brown ("the Taxpayer"), was a member of Federal Parliament from 1977 to 1990. From 1983 to 1987, he was a Minister in various portfolios, including Tourism. He was a Cabinet Minister in 1987. 2 On 12 July 1990, Ray Development Corporation Pty Ltd ("RDC") transferred to the Taxpayer an apartment at Mermaids Beach, Queensland, described as Unit 4, 79 Albatross Avenue, Mermaid Beach, Queensland, being Lot 4 in Building Units Plan number 10077, Certificate of Title volume 7538 Folio 20 ("the Unit"). RDC also paid stamp duty of $34,725 in respect of the transfer and provided an allowance to the Taxpayer for furniture in the sum of $30,000. 3 On 28 March 1996, the respondent, the Commissioner of Taxation ("the Commissioner"), issued a notice of amended assessment to the Taxpayer in the sum of $819,106.05. The difference between that assessment and the Taxpayer's previous assessment resulted from the Commissioner treating the following amounts as income of the Taxpayer: · value of the Unit as at 12 July 1990 - $920,000 · stamp duty - $34,725 · value of furniture allowance - $30,000 · TOTAL: $984,725 The amount of tax properly payable under the amended notice of assessment was $475,111.02. In addition, a penalty component was included in the amended assessment, on the basis that the Taxpayer had made a statement that was false and misleading which resulted in the avoidance of tax. The penalty tax amounted to $343,696.15. 4 On 26 May 1999, the Taxpayer lodged notice of objection to the amended assessment and on 9 November 1999 the Commissioner issued a notice of decision on that objection, disallowing the objection. The decision on the objection is an appealable objection decision within the meaning of the Taxation Administration Act 1953 (Cth) ("the Administration Act"). Pursuant to Part IVC of the Administration Act, the Taxpayer has appealed to the Federal Court against the decision of the Commissioner on the objection and applies for that decision to be set aside. THE ISSUE 5 The Commissioner contends that the value of the Unit, the stamp duty paid by RDC and the furniture allowance given to the Taxpayer ("the Benefits") constituted assessable income of the Taxpayer derived in connection with the sale by Monacorp Pty Ltd ("Monacorp") to Narui Gold Coast Pty Limited ("the Purchaser") of several parcels of land situated at Kingscliffe in northern New South Wales and known as "Kings Forest" ("the Kings Forest land"). 6 In his reasons for his decision on the Taxpayer's objection, the Commissioner said that the Benefits were provided in lieu of the payment of commission for services said to have been rendered by the Taxpayer in connection with the negotiation and completion of the sale of the Kings Forest land to the Purchaser. Completion of the sale took place on 5 June 1990. 7 The Commissioner contends that the Benefits represented income in the hands of the Taxpayer pursuant to s 25(1) of the Income Tax Assessment Act 1936 (Cth) ("the Assessment Act") as explained by s 6 of the Assessment Act or, alternatively, s 26(e) of the Assessment Act. Those provisions relevantly provide as follows: "25 (1) The assessable income of a taxpayer shall include– (a) where the taxpayer is a resident– the gross income derived directly or indirectly from all sources whether in or out of Australia; … ……………………… 6 (1) In this Act, unless the contrary intention appears: ……………………… "income from personal exertion" or "income derived from personal exertion" means income consisting of earnings… commissions, fees, bonuses… allowances and gratuities received… in relation to any services rendered… 26. …the Assessable income of a taxpayer shall include– ……………………… (e) the value to the taxpayer of all allowances, gratuities, compensations, benefits, bonuses and premiums allowed, given or granted to him in respect of, or for or in relation directly or indirectly to,… services rendered by him, whether so allowed, given or granted in money, goods, land, meals, sustenance, the use of premises or quarters or otherwise…" 8 The definition in s 6(1) is not a definition of income generally. It is a definition of "income from personal exertion" or "income derived from personal exertion". Assessability under s 25 does not depend upon whether or not income is derived from personal exertion. If a receipt is not income according to ordinary concepts, it will not be deemed to be income by the operation of the definitions in s 6(1). 9 As a matter of logic, income derived from personal exertion must first be income. Therefore, the definition in s 6(1) can be a guide as to what receipts might constitute income. The definition assumes that earnings, commissions, fees, bonuses, allowances and gratuities can be income, although the language of the definition is also consistent with such receipts not necessarily being income. The definition is concerned chiefly with the difference, for the purposes of the rates of tax, between income from property and income from personal exertion. However, where any of the expressions contained in the definition are relevant, it is logical enough to use them as an indication that a given receipt is income – Federal Commissioner of Taxation v Dixon 86 CLR 540 at 555. 10 The Taxpayer did not include the value of any part of the Benefits in his return for the year ended 30 June 1991. The Taxpayer contends that, while the receipt of the Benefits was prompted by appreciation for the role that he played in connection with the sale of the Kings Forest land, it should fairly be treated as a mere gift and not as income or remuneration for services rendered. He contends that the Benefits constituted a simple gift of property and nothing more – see Hayes v the Federal Commissioner of Taxation (1956) 96 CLR 47 at 53 ("Hayes"). 11 Further, the Taxpayer contends that, even if the receipt of the Benefits should be treated as assessable income, the Commissioner erred in relation to the question of penalties. At the relevant time, s 223 of the Assessment Act provided that, where a taxpayer makes a false or misleading statement, the taxpayer is liable to pay by way of penalty additional tax equal to double the amount of the tax avoided. However, under s 227(3) the Commissioner may, in his discretion, remit the whole or any part of the additional tax payable. 12 The Commissioner concluded that the Taxpayer's behaviour amounted, in the circumstances, to deliberate evasion. Accordingly, a culpability component of penalty was calculated, such that a penalty was imposed at a rate of 45 per cent of the avoided tax. In addition, a per annum component of penalty was imposed for the period of avoidance of tax. That component was calculated from 23 July 1992, being 30 days after the issue of the Taxpayer's assessment in 1991, to 9 October 1995, the date of a meeting at which the Commissioner considered that the Taxpayer "agreed to the adjustment". The statutory rate of penalty was remitted to the extent necessary to impose those penalties. 13 The Taxpayer contends that the Commissioner erred in the exercise of his discretion in so far as the exercise of the discretion was based on the conclusion that the Taxpayer was guilty of deliberate evasion. The Taxpayer asserts that, assuming he is otherwise unsuccessful in this proceeding, the question of penalty should be remitted to the Commissioner for reconsideration. EVIDENCE 14 During the hearing of the proceeding, questions arose concerning the extent to which the Commissioner should be permitted to adduce evidence of statements made at a meeting that took place between the Taxpayer and his advisers on the one hand and officers of the Australian Taxation Office ("ATO") on the other hand on 9 October 1995 ("the October meeting"). In the course of the hearing, I made several rulings on the admissibility of material that related to the October meeting (see [2001] FCA 240). The material was subsequently re-tendered and I received the material on the voir dire, reserving my decision on its admissibility until after final addresses. THE WITNESSES 15 Three witnesses gave evidence on behalf of the Taxpayer. They were the Taxpayer himself, his son, Christopher Paul Andrew Brown ("Christopher Brown"), and Brian Ray ("Mr Ray"), the principal of RDC. I did not form the impression that any of those witnesses was not endeavouring to tell the truth when giving evidence before me. However, having regard to the time that has elapsed since the events in respect of which evidence was given, recollections were obviously hazy and, in a number of instances, were shown to be faulty. While I accept that each of the witnesses was endeavouring to be truthful, I consider that their respective recollections were unreliable. In making the findings that appear below, I have relied very much on contemporaneous materials and inferences drawn from those materials rather than any assessment of the witnesses in the witness box. THE FACTS 16 It is convenient to consider the facts under separate headings, although there is an inter-relationship between the material under each of the headings that I have chosen. I propose to deal with the facts under the following headings: · Introduction of the Purchaser to Monacorp - paragraphs [17] to [31]; · The negotiations for the sale of the Kings Forest Land - paragraphs [32] to [55]; · The role of The Tourism Task Force Limited and the Taxpayer - paragraphs [56] to [72]; · The arrangements concerning provision of the Benefits - paragraphs [73] to [93]; · The relationship between Monacorp and RDC - paragraphs [94] to [101]. INTRODUCTION OF THE PURCHASER TO MONACORP 17 The Kings Forest land comprises approximately 2,000 acres. The effect of the Tweed Shire Council Local Environmental Plan was generally that the Kings Forest land could be developed for residential tourist purposes. Monacorp acquired the Kings Forest land in about 1988 with the intention of developing it as a golf course and tourist resort. However, by the end of 1989 Monacorp had decided to attempt to sell the Kings Forest land in globo. 18 At the relevant time, the participants in the venture relating to the Kings Forest land were Mr Ray and Messrs Robert Ell and Christopher Buist. Mr Ray, or entities associated with him, owned 50 per cent of the share capital of Monacorp and each of Messrs Ell and Buist, or entities associated with them, owned 25 per cent. Messrs Ray, Ell and Buist were the directors of Monacorp. 19 Mr Buist is an old colleague of Mr Ray's and had been involved in property development for some time. He first discovered the opportunity that the Kings Forest land offered. Mr Ell and Mr Ray had also engaged in a number of transactions together and Mr Ell was invited to participate in the venture. 20 Mr Ray first met the Taxpayer in approximately 1988 when the Taxpayer was a Cabinet Minister. The Taxpayer came to Queensland with a business associate of Mr Ray to look at a property that Mr Ray and his associate were developing at Kirra. After that first encounter, the Taxpayer and Mr Ray became friends and saw each other on a number of occasions, but infrequently. On more than one of those occasions, the Taxpayer assisted Mr Ray with various charity matters in which Mr Ray was involved. 21 In late 1989 and early 1990 Mr Michael Hambley was the Regional Director of the Australian Tourism Commission in Tokyo. Mr Hambley and the Taxpayer had been friends for some time. At that time, the Taxpayer's wife was a public relations consultant with JMA Public Relations Pty Limited ("JMA"). Christopher Brown was also employed by JMA. 22 Christopher Brown had met Mr Hambley in Japan during 1989, and had given him some information about a property called Goodnight Island situated in the Shoalhaven district on the South Coast of New South Wales. The owner of Goodnight Island was a client of JMA. In late 1989 Christopher Brown was contacted by Mr Hambley by telephone. Mr Hambley told him that representatives of Narui Norin Co. Ltd ("Narui Norin"), who were friends of Mr Hambley's father-in-law, were coming to Australia. Mr Hambley asked Christopher Brown to look after the Japanese visitors and said that it "might also be in your interests to run one of the brochures for that island by them". 23 When the representatives of Narui Norin visited Australia in January or February 1990, the Taxpayer's wife and Christopher Brown, together with the Taxpayer, the owner of Goodnight Island and the representatives of Narui Norin, went by helicopter to Goodnight Island. There Christopher Brown handed each of the Japanese visitors a brochure prepared by JMA in relation to Goodnight Island. 24 While the representatives of Narui Norin were still in New South Wales, the Taxpayer telephoned Mr Ray at the latter's office on the Gold Coast in Queensland. The Taxpayer told Mr Ray that he had been contacted by an associate of his in Tokyo who had some Japanese friends wishing to invest in Australian property. The Taxpayer asked Mr Ray if he could be of assistance to the Japanese visitors. He told Mr Ray that the Japanese visitors were loggers who owned forest land and that they knocked down the trees, used the timber to construct log cabins and then built golf courses on the land. He told Mr Ray that the Japanese visitors were looking for similar opportunities in Australia. 25 The Taxpayer said that in a subsequent telephone conversation he informed Mr Ray of the dates when the representatives of Narui Norin would be visiting the Gold Coast. Mr Ray, on the other hand, said that the Taxpayer informed him during the initial telephone call that the Japanese visitors would be arriving on the Gold Coast during the course of that same week and that if Mr Ray was interested, he should make himself available to them. 26 The Taxpayer said that, after he had informed Mr Ray of the dates when the representatives of Narui Norin would be visiting the Gold Coast, he had no further involvement in introducing them to Mr Ray. Mr Ray, on the other hand, said that the Taxpayer rang him again on the morning that he was supposed to make contact with the Japanese visitors. He said that during that telephone call, the Taxpayer informed him that the Japanese visitors were staying at the Mirage Resort Hotel on the Gold Coast, and that they had been shown around the Gold Coast and were not favourably disposed to it. According to Mr Ray, the Taxpayer told Mr Ray that the Japanese visitors had indicated to him that they would soon be leaving for Cairns. 27 Christopher Brown said that a few days after the representatives of Narui Norin had left New South Wales, he received a telephone call from Michael Hambley who asked him to go to visit the Japanese on the Gold Coast, since they were interested to know more about Goodnight Island. He said that he subsequently travelled to the Gold Coast with the intention of giving a presentation to the Japanese visitors concerning Goodnight Island. 28 Christopher Brown said that on his way to the Mirage Resort Hotel, he received a telephone call on his mobile telephone from Mr Ray, whom he knew as a friend of the Taxpayer. He said that, during the course of that conversation, Mr Ray told him that he had been speaking to the Taxpayer earlier in the week and that the Taxpayer had said "some Japanese are in town". Mr Ray told Christopher Brown that he had a property that he wanted to show the Japanese and asked if Christopher Brown would mind if Mr Ray came to the meeting. 29 Christopher Brown said that he met Mr Ray in the foyer of the Mirage Resort Hotel. He said that, when they entered the hotel room, he introduced Mr Ray to the representatives of Narui Norin and then made a brief presentation in respect of Goodnight Island. He said that Mr Ray then addressed the meeting and discussed two properties, one of which he referred to as "Kings Forest". He said that Mr Ray's presentation took approximately 30 minutes and that at the end he handed each of the Japanese visitors one of his business cards. 30 Mr Ray said that, after he had spoken to the Taxpayer, he decided to call on the Japanese visitors at their hotel. He said that, in the course of the conversation that he then had, he found that they were not interested in land on the Gold Coast and were looking particularly for property which was heavily treed and which would be reminiscent of the northern part of Japan, where Narui Norin had established a number of golf courses. Mr Ray said that it occurred to him that they may therefore be interested in the Kings Forest land and that, accordingly, he proposed that, on their way to Cairns, he would take them to the Kings Forest land to see if it was of interest. Mr Ray denied that Christopher Brown was present at his discussions with the Japanese at the Mirage Resort Hotel. 31 The conflict between Mr Ray on the one hand and the Taxpayer and Christopher Brown, on the other, is curious. As I have said, I do not consider that any of the witnesses was intending to be untruthful in the evidence given. While the versions are quite inconsistent in many respects, they are consistent to the extent that Mr Ray took the initiative. I do not consider that Christopher Brown's evidence concerning his attendance at the Mirage Resort Hotel is a fabrication. I consider that it is more likely that Mr Ray's recollection is faulty by reason of the time that has elapsed since the events in question. There is no reason for him to have remembered Christopher Brown's presence. I accept the Taxpayer's and Christopher Brown's version of the events, but only because they seem to me to be more probable. NEGOTIATION FOR THE SALE OF THE KINGS FOREST LAND 32 Mr Ray was successful in interesting the representatives of Narui Norin in the Kings Forest land. After showing it to them, he travelled with them to Port Douglas, in northern Queensland. On 7 March 1990, heads of agreement were signed by Mr Ray and by Takeo Narui, the President of Narui Norin, in Mr Narui's hotel room in Port Douglas. The heads of agreement relevantly provided as follows: "(1) The parties agree to work towards the purchase by the Narui Group of land known as Kings Forest… (2) The following conditions apply to this arrangement being completed: (a) the price will be $A22 million; (b) the Narui Group will have 45 days to complete its investigation of: (i) the land's suitability to their requirements; (ii) the FIRB agreement in principle to the acquisition by the Narui Group. ……………………… (c) the Narui Group requiring approximately 15 hectares of land on the beach in close proximity to the Kings Forest property. (3) If the conditions which are listed in (2) above are satisfied by Narui Group then a formal contract shall be entered into at the completion of the 45 day period requiring settlement by 20 July 1990." 33 On 12 March 1990, Mr Ray wrote to Mr Narui enclosing a typed copy of the heads of agreement. The letter also went on to say as follows: "I have spoken to our lawyers who had indicated that they would be delighted to act on your behalf as well if that is what you require and they are, together with my engineers, preparing an application on your behalf for the Foreign Investment Review Board which Mr. John Brown will take to the Australian Government Treasurer by Friday so as to get Government approval to the eventual acquisition of the land if you decide to go ahead. You will be pleased to know I am sure, that I have already conducted discussions with the owners of the beachfront land and they have indicated to me that they will be prepared to provide us with a portion of property on the beach and on Wednesday of this week, I expect to negotiate with them on price and terms. I know that you will find this to be very good news. ……………………… I am pleased to say that we have recently completed 5 townhouses right on the beach only 200 metres from my own home. It is my intention to keep one of these townhouses myself and John Brown has indicated that he also would like to acquire one. A third townhouse will be obtained by my partner who also built the project leaving two still without owners. ……………………… I am sending you through a brochure on these townhouses and I will say that, with the exception of the apartment that Mr. Brown has reserved, which is number 4, you may take your choice of the other four. The two on the top of the building are larger that [sic] the two on the bottom, being about 450m2 each in size whereas the ones on the bottom are only 290m2. However, the advantage of the bottom ones is that they are all on one level and open onto the beach and this may be an advantage to you. My suggestion is that if you decide to join with us in acquiring these apartments, we will just keep the building for ourselves and have an agreement amongst each other that in the event that one person wants to sell, he first offers it to the others so that we may be always sure that we are living amongst friends." I shall return later to the significance of the reference to the townhouses on the beach and the Taxpayer's proposed involvement with them. 34 On 19 March 1990, Mr Ray wrote again to Mr Narui, indicating that he had negotiated an agreement with the owner of some beachfront land directly to the east of the Kings Forest land. The agreement was for the purchase of 15 hectares for $A10 million. A deposit of five per cent was to be paid on the signing of a contract and the balance was to be payable 30 days after the local government authority had approved building plans for a hotel. 35 However, it appears that Mr Narui was not entirely satisfied with that arrangement. There was apparently a misunderstanding as to the currency in which the figure of 10 million was mentioned. On 20 March 1990, Mr Ray sent to the Taxpayer a copy of a letter that he was proposing to send to Mr Narui. The letter to Mr Narui referred to "some confusion on the price of the beachfront land" and outlined several reasons why he should proceed with the proposal. Mr Ray asked the Taxpayer to "give me a call when you have read through this to let me know what you think". 36 On 21 March 1990, Mr Ray also wrote to Mr Hambley saying relevantly as follows: "John Brown has asked me to forward you details on the Kings Forest project. I think by now he will also have spoken to you about the difficulty we are facing over a misunderstanding concerning the price of some additional beachfront land which I was asked by Mr Narui to acquire for his company. With respect to this misunderstanding, I understand you are intending to take the matter up with the Narui Group and I would be very pleased to hear your responses. ……………………… We will look forward to meeting you in the near future as, if the contract with Mr Narui goes ahead, I understand that they intend that it should be signed in Japan." 37 A copy of that letter was sent to the Taxpayer. In the circumstances, while neither the Taxpayer nor Mr Ray could recall any conversation on the subject, it is a fair inference that Mr Ray sent the letter to Mr Hambley at the suggestion of the Taxpayer and that the Taxpayer had been consulted by Mr Ray as to the best way to deal with the confusion that had arisen concerning the price for the beachfront land. Mr Ray did not know Mr Hambley and acknowledged that he would not have felt comfortable in writing to him without some introduction from the Taxpayer. 38 It appears that the confusion concerning the price of the beachfront land was overcome because, on 21 March 1990, Rapp Hickey & Morgan, the solicitors for Monacorp, wrote to the Foreign Investment Review Board ("FIRB") submitting notice under s 26A of the Foreign Acquisitions & Takeovers Act 1975 of the intention of Narui Norin to acquire an interest in the Kings Forest land. In so far as the notice was given on behalf of Narui Norin, it was given with express written authority sent by facsimile to the FIRB by Mr Narui on 22 March 1990. 39 On 26 March 1990, the Taxpayer also signed a letter addressed to the FIRB. The letter was written on the letterhead of The Tourism Task Force Limited ("TTF") and the Taxpayer signed it as "Chairman". The letter provided as follows: "Enclosed please find an application regarding a proposed purchase by a Japanese Company, Narui Norin Co., of tourism type land in the Tweed Heads area. As the Australian Minister for Tourism I led several delegations to Japan seeking the type of investment covered by this application. 'Kings Forest' has lain fallow for a number of years while the world, particularly Japan is desperately short of the type of golf course development here involved. This proposed development by Narui Norin Co. is the kind of magnet the Australian Tourism Industry needs to properly mature and sophisticate. I fully support the application from this first class and highly reputable Japanese organisation and look forward to a speedy resolution." 40 Mr Ray's recollection was that, having executed the heads of agreement on 7 March 1990, he contacted the Taxpayer in relation to the question of assisting in connection with the FIRB application. Mr Ray said that the Taxpayer's letter was written after he had asked the Taxpayer to see if he could "expedite the procedures" involving the FIRB. The Taxpayer acknowledged that he was probably given some particulars of the Kings Forest land by Mr Ray before the letter was written. 41 In the meantime, on 23 March 1990, Mr Ray wrote to the owner of the beachfront land confirming, in principle, the interest of Narui Norin in the purchase of 15 hectares for the price of $A10 million. That letter was written following a meeting between Mr Ray and a representative of the owners. The letter confirmed that, after a deposit of 5 per cent, settlement would take place after the local council had approved a development application, which was expected to be forthcoming within 12 months. 42 Steps were then put in train for the preparation of a formal contract for the sale of the Kings Forest land. On 28 March 1990, Rapp Hickey & Morgan sent to Monacorp a draft contract for sale, specifying the price of $A22 million. The contract was to be subject to an FIRB approval issuing within 60 days. Settlement was to take place on 20 July 1990 and time was to be of the essence of the contract. Rapp Hickey & Morgan also indicated that the purchaser required that the contract be further conditional upon entry into of an agreement for acquisition of the adjacent beachfront land. 43 By the end of April 1990, a decision had been taken that the Kings Forest land would be bought in the name of a new company to be formed at the behest of Narui Norin. By letter of 27 April 1990, Minter Ellison, the solicitors who acted on behalf of the Purchaser, proposed to Rapp Hickey & Morgan a clause dealing with a requirement for the receipt of FIRB approval on the beachfront land. The proposed clause provided for rescission of the contract in the event that the approval for the beachfront land was not obtained within 60 days of exchange of contracts. 44 On the same day, Rapp Hickey & Morgan wrote to the FIRB confirming that Narui Norin had negotiated for the purchase of the adjacent beachfront land, which was intended to be incorporated in the proposed development. The original application to the FIRB was withdrawn and the FIRB was requested to proceed immediately with the consideration of an approval of the proposal to purchase both the Kings Forest land and the adjacent beachfront land. The FIRB was also informed that Narui Norin intended to obtain a New South Wales company to act as purchaser in respect of the transactions. The major shareholder of the new company was to be Narui Norin. 45 At some stage, further negotiations were entered into between Monacorp and Narui Norin. The negotiations resulted in a variation in the original bargain. The price was to be reduced to $A21 million, in consideration for which settlement was to take place on 5 June 1990, subject to deferral if the conditions, including FIRB approval, were not satisfied by that date. On 8 May 1990, Rapp Hickey & Morgan wrote to Minter Ellison seeking to confirm that the Purchaser accepted the general principle of those matters. 46 At some stage a decision was made that exchange of contracts for the sale and purchase of the Kings Forest land would take place in Japan. On 15 May 1990, Rapp Hickey & Morgan sought Minter Ellison's "advice as to the procedure for exchange in Japan". On 17 May 1990, Rapp Hickey & Morgan wrote to Monacorp, enclosing one counter part of the contract for sale and setting out the procedure to be adopted to effect exchange. Also enclosed with the letter were forms of resolution for signature by Messrs Ray, Ell and Buist authorising Mr Ray to sign the contract on behalf of Monacorp. The resolutions were subsequently signed and dated 18 May 1990. 47 Mr Ray and the Taxpayer both travelled to Japan for the exchange of contracts. The Taxpayer paid his own fare for the trip. The Taxpayer's recollection of his visit to Japan was somewhat defective. Originally, in an affidavit sworn by him, he said that he travelled with Mr Ray to Japan in August 1990 and "attended a ceremony with the representatives of Narui Norin to formally mark the acquisition of the Kings Forest property". He subsequently agreed in cross-examination that he went to Japan with Mr Ray in May in connection with the exchange of contracts. Mr Ray's recollection was also defective in so far as he originally said that the contract for sale was entered into in February or March 1990. He finally acknowledged that that recollection related to the heads of agreement. 48 The evidence is unclear as to why the Taxpayer was involved in the exchange. However, an inference can be drawn that Mr Ray and the Taxpayer perceived some advantage would flow from his involvement in the exchange. The Taxpayer's presence at his own expense suggests that he had a real interest in the consummation of the proposed transaction. 49 In any event, the exchange of contracts occurred and was attended with considerable ceremony. The Taxpayer characterised the occasion as "very formal" and one that "it would be hard to forget". Mr Ray signed the contract on behalf of Monacorp. The Taxpayer witnessed Mr Ray's signature on the contract. The contract was executed under the common seal of the Purchaser. The contract for sale bears the date 28 May 1990. It is a reasonable inference that that is the day on which counterparts were exchanged in Japan. 50 On 30 May 1990, Rapp Hickey & Morgan wrote to the Taxpayer, care of TTF. The letter referred to the progress that was being made with the approval of FIRB and went on to say: "Mr Ray asks whether you could expedite the issuance of the report, Federal Environment Department and the formal approval of the matter by the Treasurer. It is imperative that the formal FIRB approval in respect of the project be obtained by the 5th June 1990 (next Tuesday)." 51 In cross-examination the Taxpayer had no recollection of receiving that letter and suggested that he may still have been in Japan on 30 Mary 1990. A telephone attendance memo, probably brought into existence by a solicitor at Rapp Hickey & Morgan, records the following on 30 May 1990: "Brian says Bob Ell having trouble contacting lady from National Parks. Can we call John Brown about it?" 52 It may be that that telephone call prompted the letter of 30 May 1990. A further telephone attendance memo dated 31 May 1990 appears to record an attempt to speak to the Taxpayer. The memo records the following: "Not in. She'll get him to ring in morning." 53 There is no direct evidence that the Taxpayer actually spoke to any government official in connection with FIRB approval at that stage. However, on 4 June 1990, a letter was written on behalf of RDC to Shimizu Corporation, which was acting as an adviser to Narui Norin. In the letter, Alan Davie, a project manager for RDC, advised Shimizu Corporation of the following: "The FIRB has been approved by the Department of Environment and is now awaiting the signature of the head of Treasury. We are trying to speed up the process and are still hoping to have the approval through in writing tomorrow. I will let you know as soon as we have it." 54 The deadline for completion fixed in the contract for sale was 5 June 1990. Mr Ray said that the Taxpayer was in contact with him in relation to expediting the approval of the FIRB's recommendation by the Treasurer. Mr Ray did not think that he was speaking to anybody other than the Taxpayer in relation to the recommendation and securing the approval of the Treasurer. It is probable, therefore, that the Taxpayer made some effort to expedite the approval. 55 In any event, the approval was apparently received. A letter of 5 June 1990 from Rapp Hickey & Morgan to Monacorp confirmed that settlement was effected in Brisbane on that day. Bank cheques totalling $18,945,177.68 were provided at settlement. The deposit of 10 per cent had apparently been paid on exchange of contracts. A settlement statement indicated how the cheques were calculated, after making adjustments for outgoings and interest on the deposit. THE ROLE OF THE TOURISM TASK FORCE LIMITeD AND THE TAXPAYER 56 TTF is a company limited by guarantee formed under the Companies (NSW) Code. The memorandum of association of TTF states that the objects for which it was established are: "(a) To raise the level of awareness and debate in the public domain of the benefits of tourism, through advertising, publicity and public affairs activities; (b) To collect, analyse and disseminate timely and accurate information on issues critical to the well-being of the tourism industry; (c) To work to achieve increased Federal and State Government Tourism Commission budgets; (d) To assist in educating the public, government and executive authorities and the business community as to the existing and potential future role of the tourism and hospitality industries within Australia, their needs and development strategies; (e) To assist in removing impediments to the development and efficient management and operation of necessary tourism and hospitality infrastructure, including airports; (f) To do any other act or thing authorised by law in furtherance of or conducive to any of the aforementioned objects." 57 Under the memorandum of association of TTF, its income, profits, assets and property must be applied solely towards the promotion of its objects. No portion of such income, profits, assets or property is permitted to be paid or transferred by way of dividend, bonus or otherwise to the members. However, that prohibition does not prevent the payment to any member or director of remuneration in return for services actually rendered to TTF in the ordinary and usual way of business by members or directors. 58 Under the articles of association of TTF, the members of TTF are the subscribers to the memorandum of association (who included the Taxpayer), the persons constituting the first advisory committee provided for in the articles of association and such other persons as the board of directors admit to membership. The entrance fee and annual subscription payable by members are such amounts as the Board of Directors from time to time prescribe. 59 The articles of association provide for a board of directors to be elected by the members and specify the persons who were to constitute the first board of directors. The first directors were to retire at the first annual general meeting but were to be eligible for re-election. The Taxpayer is named in the articles of association as president and as chairman of the first board of directors. 60 Under the articles of association, the business of TTF is to be managed by the board of directors who may exercise such of the powers of TTF as are not required to be exercised by TTF in general meeting. The articles of association also provide for an advisory committee. The advisory committee comprises 17 individuals including the Taxpayer. The advisory committee is to act only in an advisory capacity and the board of directors is not bound to act in accordance with any advice of the advisory committee. 61 TTF was formed in February 1990. From its incorporation, the Taxpayer acted as chairman of directors. He initially received an annual consultancy fee of $250,000 payable monthly, although the fee was subsequently reduced. He received payments in the sum of $20,833.33 monthly from March 1990 to June 1990. 62 It is not entirely clear precisely what services the Taxpayer provided to TTF for his consultancy fee. He described his services generally as lobbying government and acting in the interests of participants in the tourist industry. There is no evidence as to the entitlement, if any, that members of TTF had to require services to be provided by TTF on their behalf, although the Taxpayer said that, in his capacity as chairman of TTF, he regularly intervened and took steps on behalf of members. 63 Neither Monacorp nor Mr Ray was ever a member of TTF. However, RDC was a member of TTF for the financial year that commenced on 1 July 1990. By letter of 28 July 1992, RDC indicated that it was unable to renew its subscription for the following financial year. RDC was not a member of TTF before 1 July 1990. 64 The Taxpayer said that, in so far as services were provided to members by TTF, there was no charge made to the member. However, there was evidence that the Taxpayer himself received consulting fees from at least one member of TTF. The Taxpayer said that, in his capacity as chairman of TTF, he regularly wrote letters on behalf of non-members in furtherance of their tourism activities. There was no specific evidence of the services so rendered. The Taxpayer said that neither he nor TTF received payment for such services. 65 As I have said, the letter of 26 March 1990 addressed to the FIRB (referred to in [39] above) was written on the letterhead of TTF and was signed by the Taxpayer as "Chairman". However, there was no contemporaneous evidence to indicate that there was any retainer of TTF by Monacorp, RDC, Narui Norin or the Purchaser to intercede with the FIRB in connection with the proposed sale of the Kings Forest land. When asked in cross-examination, Mr Ray said that he assumed that he had had some discussion with the Taxpayer about his involvement in the application to the FIRB. Mr Ray asked the Taxpayer to see if he could expedite the procedures involving the FIRB. There was no suggestion by Mr Ray that the request to the Taxpayer was made to him in his capacity as chairman of TTF, although this question was not put to him. Indeed, there is no evidence that Mr Ray was aware of the existence of TTF as at March 1990, the company having been formed only a matter of weeks beforehand. 66 The Taxpayer had a continuing involvement with the Kings Forest land after its acquisition by the Purchaser, in which TTF appears to have played little part. On 9 July 1991, Tweed Shire Council wrote to RDC expressing "the strong concern" of the Council regarding the delays experienced in the commencement of "the project at Kings Forest". The letter referred to the Council's reluctant agreement to extending approval of the development until June 1992. The letter went on to say that if it were not intended to proceed to develop the land in accordance with the original plans, the Council would need to reassess its strategy plan with respect to utilities and services for the area. 67 On 10 July 1991, Mr Ray wrote to Narui Norin enclosing a copy of the letter from Tweed Shire Council. Mr Ray expressed concern that, if RDC made representations to Government on behalf of Narui Norin based on information supplied by Narui Norin, RDC might be in a position of some embarrassment caused by major changes that had not been briefed to RDC. 68 There was apparently some communication between Mr Ray and the Taxpayer at the same time. On 11 July 1991, the Taxpayer wrote to the First Assistant Secretary of the Finance and Investment Division of the Department of the Treasury saying as follows: "Apropos my recent conversation with you concerning my disappointment at the non activity of my client Narui Norin on the Kings Forest site, herewith copies of correspondence relevant to the situation. As I mentioned to you the Kings Forest site is central to a whole gamut of developments in the immediate area. The reluctance of Narui to commence work is of course a real worry to the Tweed Shire as their correspondence suggests. More importantly as I was responsible for the application by Narui for FIRB approval I am embarrassed by their apparent disregard for the conditions of approval which demanded a substantial commencement by June this year. I do hope that some attempt will be made by FIRB to acquaint my client of their responsibilities if they are to become part of our investment landscape. In doing so I would request no reference to my advice to you on this matter." The letterhead of that letter made no reference to TTF but referred to "John Brown Tourism Advisory Services Pty Ltd". There is no other reference to that company in evidence in the proceeding. 69 On 5 December 1991, Alan Davie wrote to the Taxpayer attaching documents requesting FIRB approval, inter alia, for an extension to the construction start for the Kings Forest land. It was addressed to the Taxpayer at TTF. However, the Taxpayer had no recollection of receiving the letter and there was no evidence as to what was done at that time by the Taxpayer or anyone else from TTF. 70 At some stage during 1990 there was a proposal for Mr Ray and the Taxpayer to enter into a profit sharing agreement, together with Mrs Hambley and Yasuo Kasuya, who the Taxpayer thought might be Mrs Hambley's father. Mr Ray and the Taxpayer each signed a copy of a document entitled "AGREEMENT ON PROFIT SHARING IN SALES AND PURCHASE OF LAND IN JAPAN AND AUSTRALIA". The Taxpayer could not recall precisely when the document was signed by himself and Mr Ray but said that it was late in 1990. 71 Mr Ray thought it was reasonable to describe the proposed agreement as an attempt to keep the same team together, preserving an arrangement which had been so successful. The Taxpayer agreed that his purpose in executing the document was to formalise an arrangement between himself and Mr Ray and others to obtain sales of real property and then share commission. There was no evidence as to whether any arrangement was ever entered into pursuant to the proposed agreement. Nor was there evidence as to whether the document had ever been signed by the other two parties, Mrs Hambley and Yasua Kasuya. 72 In the circumstances, I do not consider that anything that the Taxpayer did in connection with the FIRB, including the writing of the letter of 26 March 1990, was done pursuant to any arrangement or obligation between TTF on the one hand, and any of Monacorp, RDC, Mr Ray, Narui Norin or the Purchaser, on the other hand. Rather, to the extent that TTF was involved, it was at the behest of the Taxpayer and not at the behest of Monacorp. So far as Monacorp, Mr Ray, RDC or Narui Norin were concerned, the only involvement with the FIRB was that of the Taxpayer. the arrangements between rdc and the taxpayer 73 Either towards the end of 1989 or in early 1990 RDC had completed the development of a complex of five townhouses at Mermaid Beach. Mr Ray had a recollection that the Taxpayer was interested in acquiring a unit on the Gold Coast and probably told the Taxpayer about the units at Mermaid Beach. Mr Ray said that Mr Brown told him that he liked unit 4 and that he would like to acquire it. It is clear that there had been some discussion between the Taxpayer and Mr Ray by 12 March 1990, when Mr Ray wrote to Mr Narui referring to the development and saying that the Taxpayer had indicated that he would like to acquire one of the townhouses (see [33] above). While Mr Ray cannot recall any conversation with the Taxpayer, it seems clear that there was some discussion that justified his statement to Mr Narui that the Taxpayer "has reserved unit number 4". 74 That the Taxpayer was interested in the Unit in the first half of 1990 is supported by a statement that he made to a bank officer. A bank officer of the Commonwealth Bank recorded a telephone call from the Taxpayer on 6 May 1990, in which the Taxpayer said that on the previous day he had needed to issue a cheque for $150,000, which "will finalise purchase of unit in Gold Coast which he says is worth 1.2 m dollars". The Taxpayer, while he could not recall the conversation, agreed that the Unit is the only possible unit on the Gold Coast about which he would have been speaking to the bank officer. 75 The evidence concerning the first discussions between the Taxpayer and Mr Ray concerning the Unit is confused. The Taxpayer's statement of facts, issues and contentions filed in connection with the proceeding contains the following: "6. In late June or early July 1990 Mr Ray informed the applicant that 'to show you my appreciation' for introducing the delegation to Mr Ray, 'I want to give you a unit in a block of units at Mermaid Beach on the Gold Coast which one of my companies is developing'. 7. Mr Brown replied: 'That's very kind of you'." 76 The Taxpayer's affidavit read in the proceeding deals with the question in the following terms: "12. In early July 1990 over a month after settlement of the sale on 5 June 1990 I had a further telephone conversation with Ray in which words to the following effect were spoken: Ray: 'I want to thank you again for the introduction. The settlement went through in early June and it was a very profitable deal for my partners, Bob Ell, Chris Buist and I. To show you my appreciation I want to give to you a unit in a block of units at Mermaid Beach on the Gold Coast which one of my companies is developing.' Brown: 'That's very kind of you. As you know I have been interested in a Gold Coast unit for some time.' Ray: 'Would you be able to come and inspect the unit to see whether you like it?' Brown: 'Yes.' Ray: 'I would also like you to travel with me to Japan at my cost for the official handing over ceremony.' Brown: 'I would be more than happy to attend.' 13. This was the first that I: (a) became aware that Ray had partners in the Kings Forest property; and (b) was told that I would receive a gift by reason of the sale of Kings Forest. I subsequently travelled to Japan with Ray in August 1990 and attended a ceremony with the representatives of Narui Norin to formally mark the acquisition of the Kings Forest property." 14. I was very surprised by Ray's generosity in offering to [sic] gift me of the Unit as I had never expected to receive anything in return from introducing him to the Japanese Delegation. At no time during the conversation with Ray in the preceding paragraph, or at all, did I say to Ray that the Unit should be transferred to me either: (a) as commission for introducing the Japanese Delegation to him; or (b) in satisfaction of any legal obligation owed to me by him or any corporation owned or associated with him. 19. On or about 12 July 1990 I received a facsimile from Evan Dickson of RDC… That facsimile contained a number of letters as attachments… I did not prepare the attachments and had not seen them prior to receiving the facsimile. I signed the attachments urgently without particularly reading them and returned them to RDC by facsimile. In hindsight I should have paid much more attention to the reference in the letters to commission payable to me. This was the first time that I became aware of any suggestion that I was to be paid $1 million in commission in respect of my introduction of the purchasers for Kings Forest. I did not at that time or at any other time believe or expect that I was owed commission in respect of this sale. 20. I did not carefully read or scrutinise the contents of the attachments to the facsimile… I certainly did not focus on the word 'commission'. I did have an understanding that Ray claimed a portion of the cost of the Unit from his partners, although I cannot currently remember whether I knew this fact at the time of signing the attachments. In signing the attachments to the facsimile I did not change my understanding that the Unit was simply nothing more than a gift from Ray for what was a rather casual introduction." 77 The Taxpayer, in cross-examination, accepted that he was mistaken in what he said in paragraphs 12 and 13 in so far as he referred to a conversation in early July 1990, over a month after settlement of the sale on 5 June 1990. His final contention is that a conversation along the lines of paragraph 12 occurred between 7 and 12 March 1990 but without any reference to settlement in early June. Rather, so it is said, there was reference to the signing of heads of agreement. Clearly, the Taxpayer's evidence as to this conversation is unreliable. 78 In the course of cross-examination of Mr Ray, the following exchange occurred without objection: "You on behalf of Monacorp, did you contemplate paying a million dollars in commission? – Yes. Had you had some discussions with Mr Brown prior to April 1990 on the topic of commission? – I discussed with Mr Brown that he would be rewarded for the work he had done for us. ……………………… Are you able to indicate to us approximately when it was that you had that discussion? – I would have thought it would have been sometime in March. ……………………… And so far as the contemplation of Monacorp Pty Ltd was concerned as at April, 1990 that I had asked you about a little while ago, had you spoken to Mr Brown in relation to that contemplation that Monacorp had about paying $1 million for commission? – Yes, I would have. ……………………… Your conversation with Mr Brown, I take it, took place before 30 April? – Yes. From what you have said it would have been between 7 March, 1990 and April, 1990 is that right? – Yes, I would have thought it was in March. And what did you say to him and what did he say to you in reply? – I can't remember the details of those conversations. What was the substance of what you said to him in relation to the topic of commission payable? – Well, the general agreement we reached was that he would rather take the apartment then [sic] $1 million and so we would have talked about the arrangements that needed to be made to effect that, that transaction. Well those discussions that you've just referred to, they took place, did they, closer to June or July or were they in contemplation as early as March? – I think that to have rounded off the $1 million figure, they must have taken place earlier. So, prior to April of 1990 to your best recollection? – I suspect so because of $1 million being firmly established at 30 April. And $1 million established as at 30 April was that a matter that you communicated to Mr Brown? – I would have thought that we would have reached agreement on the transfer of the apartment by that date, yes. And can you remember in substance what you said to him about and why it was that you'd be transferring the apartment to him and ascribing of the value of $1 million? – Well, my recollection is that we had agreed as partners in Monacorp to make this reward available to him in the amount of $1 million and in discussions with Mr Brown, he agreed that that should be effected by way of a transfer of the title of the apartment and the additional appurtenances to that apartment, to give it to a value of $1 million." 79 Mr Ray's reference to the sum of $1 million being firmly established at 30 April 1990 is based on an internal document of Monacorp, to which reference is made below (see [95]), consisting of a project forecast in relation to the Kings Forest land as at 30 April 1990. The document refers to a selling cost of "commission payable" in the sum of $1 million. 80 On 22 June 1990, Mr Evan Dickson, an accountant employed by RDC, sent a memorandum to Mr David Maunsell of Hopgood & Ganim, solicitors, who were acting for RDC. The memorandum was headed "79 Albatross Avenue, Lot 4 Transfer" and set out the following: "Purchaser: John Joseph Brown 94A Louisa Road Birchgrove NSW 2041 Purchaser's Solicitor: Peter Montgomery 5 Fernleigh Gardens Rose Bay NSW 2029 Ph: 02 371 9788 Fax: 02 371 9752 Purchase Price: $1,000,000 Deposit: $1 Consideration: Paid in lieu of commission on sale of Kings Forest Estate to Narui Narin Co. Limited" There is nothing to indicate that the Taxpayer saw the memorandum. 81 On the same day, Mr Ray wrote to the Taxpayer enclosing a copy of a valuation report prepared on Units 1, 2 and 4 at 79 Albatross Avenue, Mermaid Beach. The letter went on to say as follows: "You will note from this report, which is quite comprehensive and carried out by the most conservative and most used valuers on the Gold Coast, that Unit 4 is valued, for mortgage purposes, at $925,000. We would point out, however, that the additional expenses to be added to the acquisition by you, such as: - a furniture allowance of $30,000; - legal costs of approximately $40,000; - and re-marbelling of the bathrooms of approximately $30,000; take the value of the unit to well over $1,000,000. Equally important to recognise is that Unit Number 1 has been sold recently for $950,000 which is considerably above the valuation put in the report. We have been intending to sell Unit Number 3 to the Narui family but have just received indication from them that they do not want to proceed. We will therefore be offering that unit to another friendly party at $1,250,000. I hope this is sufficient for your meeting with the bank today and please let me know if I can assist you any further." 82 While there is evidence of a telephone conversation between the Taxpayer and an officer of the Commonwealth Bank, concerning a unit on the Gold Coast (referred to in [74] above), this conversation took place on 6 May 1990. There is no evidence of any other meeting to which Mr Ray's letter of 22 June 1990 could refer. No explanation was proffered by the Taxpayer as to why such a valuation would be furnished to him. One possible reason is that the Taxpayer wished to be satisfied that the value of the Unit, together with the other benefits, would be equal to the sum of $1 million. Such an explanation would assume that there was some understanding on the part of the Taxpayer that he would receive $1 million upon consummation of the sale of the Kings Forest land. The terms of the letter from Mr Ray indicate that his purpose in sending the valuation was to persuade the Taxpayer that he was receiving benefits of a capital value of not less than $1 million. 83 On 10 July 1990, Hopgood & Ganim sent to RDC a form of transfer in respect of the Unit. The transferor was RDC and the transferee was the Taxpayer. The consideration was stated to be $1 million. The transfer, as signed, bears the date 11 July 1990. 84 The letter from Hopgood & Ganim of 10 July 1990 went on to say as follows: "We note your advice that your Company is transferring the above Lot to Mr. Brown in consideration of Mr. Brown waiving any right to commission on the sale of property situated at Kings Forest Estate to Narui Narin Co. Ltd. In your memorandum to us of 22nd June 1990 you state the purchase price of the unit as $1 million. We assume therefore that the commission which Mr. Brown is foregoing is equal to that sum and we have therefore inserted that sum in the Transfer as the consideration for the transaction. We confirm your advice that you do not wish to have a Contract of Sale executed by Mr. Brown which notes the terms of the transaction in particular that Mr Brown accepts the property in lieu of commission. In our opinion it would be best for your Company and Mr. Brown to execute a Contract to in particular, from your Company's point of view, record the fact that Mr. Brown has waived his entitlement to commission and those terms which would normally appear in the Contract which are intended to protect your Company including terms which make the purchaser liable to pay stamp duty on the transaction, appoint your company as the attorney for the purchaser on the Body Corporate for 12 months, adjustments for rates, taxes and other outgoings and limiting your company's liability for defects in the building." There is nothing to indicate that the Taxpayer saw that letter. 85 In any event, the advice tendered by the letter was rejected. Mr Dickson subsequently spoke to Mr Maunsell at Hopgood & Ganim. A diary note dated 13 July 1990 records that Mr Dickson wanted Hopgood & Ganim to have the transfer lodged in the Titles Office on that day. Mr Maunsell said that he needed an authority from the Taxpayer before the transfer could be signed as correct. Mr Dickson confirmed that he did not want a contract executed and that he was not concerned about the problems raised in the letter to him from Hopgood & Ganim. While the diary note is dated 13 July 1990, given other contemporaneous evidence, it seems likely that the discussion actually took place on 12 July 1990. 86 On 12 July, Mr Dickson sent a facsimile communication to the Taxpayer headed "Unit 4, 79 Albatross Avenue" and saying as follows: "I advise that in order to settle the above unit we require certain undertakings from you in relation to signing of transfer documents and distribution of commission payable to you pursuant to the sale by Monacorp Pty Ltd of Kings Forest Estate which amounts to $1,000,000. Would you please sign the attached letters and return them to our office by facsimile as a matter of urgency. We envisage that settlement will take place on Friday 13 July 1990 and that the title deeds will issue in your name within a week from that date. The undertaking directed towards Ray Development Corporation is to authorise RDC to distribute commission to which you are otherwise entitled towards the purchase of Unit 4 at 79 Albatross Avenue. Please contact our office if there is any further information you require." 87 Included in the facsimile communication were two other documents. One was an authority for Mr Maunsell to sign a transfer as the Taxpayer's solicitor. A signed copy of that authority, dated 12 July 1990, is in evidence in the proceeding. 88 The second document, also dated 12 July 1990, was a letter addressed by the Taxpayer to RDC. While no signed copy of that document is in evidence, the Taxpayer accepted that he had signed the document. It was in the following terms: "Commission – Sale of Kings Forest Estate I refer to the sale of the Kings Forest Estate in northern New South Wales to Narui Gold Coast Pty Ltd for an amount of $21,000,000 in respect of which Monacorp Pty Ltd owes me $1,000,000 for commission payable for introduction of the purchasers. I hereby authorise Ray Development Corporation Pty Ltd to distribute the $1,000,000 towards the following. In respect of purchase of Unit 4, 79 Albatross Avenue $925,000 In respect of furniture allowance $ 30,000 In respect of acquisition costs $ 40,000 In respect of other costs $ 5,000 Total $ 1,000,000 In addition to the above Ray Development Corporation Pty Ltd is to cover the costs of remarbeling the bathrooms to an amount of $30,000. Would you please attend to the above as a matter of urgency." 89 On 13 July 1990, Hopgood & Ganim sent a facsimile transmission to RDC headed "Ray Development Corporation Pty Ltd Sale to Brown of Lot 4, Albatross Avenue". The facsimile confirmed that that transaction had settled on 12 July 1990, when Beneficial Finance Corporation Ltd, apparently a mortgagee of the Unit, was paid the sum of $925,000. Hopgood & Ganim also attended to payment of stamp duty on the transfer of $34,725. On the same day, RDC sent to the Taxpayer copies of the certificate of title and transfer in relation to the Unit and requested details of the Taxpayer's bank so that the title deed could be sent directly to the bank on its issue. 90 The letter to RDC of 12 July 1990 signed by the Taxpayer is of considerable significance. The Taxpayer said that he did not compose the document and that he did not recall receipt of it, notwithstanding that he accepted that he had signed it. He was unable to explain how he would come to sign a document that refers to the sale of the Kings Forest land "in respect of which Monacorp Pty Ltd owes me $1 million for commission payable for introduction of the purchasers". 91 I have already referred to paragraphs 19 and 20 of the Taxpayer's affidavit (see [76] above). Clearly enough, the Taxpayer's statement that receipt of the facsimile of 12 July 1990 was the first time that he became aware of any suggestion that he was to be paid $1 million commission in respect of his introduction of the purchasers for the Kings Forest land is wrong, if he intended to say that receipt of the facsimile was the first time that any suggestion was made to him that he would receive a benefit in respect of his introduction of the purchasers of the Kings Forest land. He now accepts, notwithstanding the terms of paragraph 12 of his affidavit, that a discussion about the provision of the Benefits took place in March 2000. 92 It was not directly suggested to the Taxpayer, in cross-examination, that his assertion that he signed the attachments without particularly reading them and did not carefully read or scrutinise their contents, was false. However, he agreed that he "must have read it roughly" and that he saw the reference to $1 million. He agreed that the reference could be interpreted as the language of debt rather than gift. He also agreed that there was nothing complicated or difficult or hard to understand, nor that he thought it misrepresented the true facts. 93 I am satisfied that the Taxpayer understood the document at the time that he signed it. He was prepared to sign it because it was not inconsistent with his understanding of the arrangements that were in place between Monacorp, RDC and Mr Ray on the one hand, and himself on the other. His signature of the document without comment indicates that he regarded himself, at that time, as having some entitlement to the Benefits. He may not have regarded the entitlement as legally binding. However, his acceptance of the terms of the document indicate that his discussions with Mr Ray in March led him to have an expectation that he would receive the Benefits. RELATIONSHIP BETWEEN MONACORP aND RDC 94 The seller of the Kings Forest land was Monacorp. On the other hand, it was RDC that directly provided the Benefits to the Taxpayer. The precise arrangement between Monacorp and RDC in that regard is not entirely clear from the evidence. However, the inference can be drawn that RDC was reimbursed or given credit by Monacorp in respect of the Benefits in the sum of $1,000,000. That reimbursement or credit was effected by accounting entries in the books of account of those entities. 95 A document entitled "Kings Forest Project - Final Project Forecast" was prepared on behalf of Monacorp, probably in the first half of May 1990. The document records costs to 30 April 1990 and estimated costs to complete the project. It contains a final profit estimate which relevantly includes the following: INCOME FINAL PROFIT ESTIMATE Gross Settlement Proceeds 21,000,000.00 Rent Received 3,964.00 Sand Royalty 27,564.00 Interest Received 10,145.12 21,041,673.12 LESS SELLING COSTS Commission Payable 1,000,000.00 Legal Fees 80,000.00 Release Fees 500.00 1,080,500.00 NET INCOME 19,951,173.12 96 Thus, by the time of the preparation of this document, it was contemplated that there would be a commission of $1 million payable in connection with the sale of the Kings Forest land. The gross settlement proceeds are shown as $21 million. That indicates that the document was prepared after the decision to reduce the price, which appears to have been made in early May 1990. 97 A ledger of Monacorp, prepared on some unspecified date, records a sale price for the Kings Forest land of $21,000,000 less commission payable of $1,000,000. Further, a journal entry of Monacorp also records commission payable on the sale of the Kings Forest land in the sum of $1,150,000. A further entry in the journal records commission "paid by RDC to J Brown" of $1,000,000. Unsigned financial statements of Monacorp Pty Ltd, brought into existence on or after 14 January 1991, also record "selling expenses" including "agents commission" of $1,150,000. 98 Thus, it is clear enough that, by some time in May 1990, it was proposed on behalf of Monacorp that a commission of $1 million would be payable in respect of the sale of Kings Forest land. In fact, the financial records of Monacorp record that commission of $1,150,000 was paid. That represented the sum of $150,000 paid to Mrs Hambley and the sum of $1 million treated as having been paid by RDC on behalf of Monacorp. RDC was in effect given credit in the books of Monacorp for a payment on its behalf of $1 million. 99 That sum of $1 million was said to be made up as follows: · Value of the Unit $925,000; · Furniture allowance $30,000; · Acquisition costs $40,000; · Other costs $5,000 · Total $1,000,000. The acquisition costs of $40,000 were made up of stamp duty and other incidental costs. It appears that, in addition, RDC carried out remarbelling work in the Unit. The net result was that by the letter of 12 July 1990 the Taxpayer acknowledged that the Benefits, received from RDC, represented satisfaction in kind of a debt of $1 million owing by Monacorp to the Taxpayer in respect of commission. 100 The effect of the accounting entries appears to be that Monacorp credited RDC with payment on its behalf of $1 million. It debited the Taxpayer with that amount, thus satisfying a provision for commission in respect of the sale of the Kings Forest land. It may be inferred that, in the accounts of RDC, there would have been a debit to Monacorp and a credit to the Taxpayer. The effect was that a notional liability of Monacorp to the Taxpayer in the sum of $1,000,000 was satisfied by RDC, on behalf of Monacorp, by RDC providing the Benefits to the Taxpayer. 101 There is nothing to indicate that the Taxpayer had any knowledge of any of the accounting records referred to above. However, he was aware of the treatment of the Benefits in so far as that treatment was disclosed by the letter of 12 July 1990. The authority "to distribute the $1 million" contained in the letter of 12 July 1990 may not have been strictly appropriate. Rather, the letter appears to have been intended, in effect, as a direction by the Taxpayer to Monacorp to apply the sum of $1 million owing to the Taxpayer in payment to RDC for the Benefits in the amounts set out in the letter totalling $1 million. Thus, in effect, Monacorp paid the Taxpayer $1,000,000, which it characterised as commission. The Taxpayer used that sum to pay RDC for the Benefits. RELEVANT LEGAL PRINCIPLES ON ASSESSABILITY 102 The receipt of property by way of a simple gift and nothing more is not a receipt of income. A voluntary payment of money or a transfer of property by A to B is prima facie not income in B's hands. If nothing more appears than that A gave to B some property, what B receives is capital and not income. On the other hand, further facts may appear which show that, although the payment or transfer was a "gift" in the sense that it was made without legal obligation, it was nevertheless so related to an employment of B by A, or to services rendered by B to A, or to a business carried on by B, that it is, in substance and in reality, not a mere gift but the product of an income earning activity on the part of B, and therefore to be regarded as income from B's personal exertion – Hayes at 54. 103 The motive of the donor in making a payment or transfer will seldom, if ever, be a decisive consideration. However, motive as such, is not irrelevant. A mixture of motives will be discernible in many cases. Personal goodwill may play a dominant part in motivating a voluntary payment and yet the payment may be so related to an employment or a business that it is income in the hands of the recipient. Another relevant consideration although, once again, not decisive, would be whether other gifts were made at the same time that were unrelated to the provision of services – Hayes at page 50 Scott v Federal Commissioner of Taxation (1996) 117 CLR 514 at 520. 104 Nevertheless, even if the element of personal goodwill is absent and the dominant motive is of the most purely selfish and commercial character, it may nevertheless be impossible to find any connection with anything that can make it income. The question is as to the character of the receipt in the hands of the recipient, determined objectively, not subjectively – Hayes at 55-56. If it is possible to relate the receipt by a taxpayer to some income producing activity, some employment or personal exertion of which the receipt in question can in some real sense be said to be an incident or which can fairly be said to have produced that receipt, the receipt will be assessable – Hayes at 56. 105 In order to conclude that a gift represents a reward or recompense for advice or guidance, or the provision of services, it is necessary to demonstrate that a taxpayer, in giving such advice or guidance or providing such services, was engaging in an activity capable of producing income. Thus, if a taxpayer was employed to give advice or guidance or provide services or carried on a business for giving such advice or guidance or providing services, a gift by way of reward or recompense will be assessable. However, the gift must be the product of a revenue earning activity on the part of a taxpayer – Hayes at 56-58. 106 The question whether a receipt comes in as income must always depend for its answer upon a consideration of the whole of the circumstances. Even in respect of a "true gift" it is necessary to enquire how and why it came about that the gift was made. The use of the word "gift" is inconclusive of the question of whether the receipt is of an income nature – Squatting Investment Co. Ltd v Federal Commissioner of Taxation (1953) 86 CLR 570 ("Squatting Investment Co.") at 627-8. 107 Where a payer and recipient have known each other for some time prior to the payment and their relationship is a personal relationship rather than a business relationship, a payment may be characterised as a mere gift. However, the shorter time of and the less intimate the relationship the more likely is the payment to be income – see Hayes at 52. 108 A commission is a sum or percentage allowed to an agent or salesman for his services – Macquarie Dictionary. It might also be described as a payment to an agent proportional to an amount involved in a transaction or a percentage of the amount involved in a transaction – see Shorter Oxford English Dictionary. 109 Whether or not a particular receipt is income does not depend upon whether it was a payment or provision that the payer or provider was lawfully obliged to make – Hayes at 54. Gratuities regularly received as an incident of a particular employment are illustrations of such a principle. On the other hand, gifts of an exceptional kind, not such as are a common incident of a man's calling or occupation, do not ordinarily form part of his income. An unsolicited gift does not become part of the income of the recipient merely because generosity was inspired by goodwill and the goodwill can be traced to gratitude engendered by some service rendered – Scott v Federal Commissioner of Taxation (1996) 117 CLR 514 at 526-7. ASSESSABILITY OF THE BENEFITS 110 In so far as the Benefits, in effect, were provided by Monacorp, through the instrumentality of RDC, the motive of Monacorp is relevant. Monacorp was intending to reward the Taxpayer for his role in the introduction of Narui Norin. That introduction resulted in a sale of the Kings Forest land that was exceedingly beneficial to Monacorp. Further, there was no evidence that, at the time of providing the Benefits to the Taxpayer, Monacorp or RDC made gifts to other persons who had not performed any services. Rather, a payment of $150,000 characterised as "commission" was paid to Mrs Hambley in connection with the transaction. That appears to have been a recognition of her role in the introduction of Narui Norin to Monacorp, although her involvement is really a matter of speculation in the light of the evidence in the proceeding. 111 The Taxpayer was not remunerated in any other way for any services that he rendered to Monacorp or RDC. He certainly provided assistance to Monacorp in introducing Mr Ray to Mr Hambley, following the misunderstanding concerning the price for the adjacent beachfront land. In addition, he lent his name to the application to the FIRB. Not only was the Taxpayer not remunerated for any assistance he gave, he actually incurred an expense in excess $5,000 for his fare to Japan to attend the exchange of contracts. His attendance was apparently regarded as of significance, although there was no evidence of the discussions that led up to his making the trip. 112 The Taxpayer was not retained as an agent or salesman by Monacorp or RDC. He was not licensed to act as a real estate agent in New South Wales. On the other hand, while he may not have introduced Narui Norin to the Kings Forest land, he was certainly instrumental in introducing Narui Norin to Mr Ray and, thereby, to Monacorp. That introduction led to the transaction between Monacorp and the Purchaser. Further, the Benefits were characterised as "commission" in the letter of 12 July 1990. The Taxpayer did not quarrel with the Benefits being described as a distribution of $1 million for commission "owed" by Monacorp, which was payable for introduction of the Purchaser. 113 It may be difficult to characterise the relationship between Mr Ray and the Taxpayer at the start of 1990 as a business relationship. However, the relevant relationship is between Monacorp and the Taxpayer. The Benefits were conferred, albeit indirectly, by Monacorp. There was no prior relationship at all between Monacorp and the Taxpayer and there is no evidence to suggest that the Taxpayer had any personal relationship with Mr Buist or Mr Ell. The Benefits were provided, at the expense and cost of Monacorp, as a reward for the introduction of Narui Norin to Monacorp, an introduction that led to a very beneficial transaction for Monacorp. 114 There can be doubt that the provision of the Benefits was related directly to the introduction of Narui Norin to Monacorp. There is no evidence of any specific statement that it also related to any further services provided by the Taxpayer. However, the following evidence was adduced in cross-examination of Mr Ray: "Had you had some discussions with Mr Brown prior to April 1990 on the topic of commission? – I discussed with Mr Brown that he would be rewarded for the work he had done for us." … If the Naruis hadn't have exchanged and then finalised the purchase of Kings Forest and agreed to pay $21 million, there would have been no contemplation in Monacorp to transfer the Unit to Mr Brown, would there? No And whether he would receive the benefit equivalent to $1 million was hinged upon achieving a sale of Kings Forest, wasn't it? – Yes. It is an easy inference to draw that the Taxpayer gave the assistance that he did in connection with the transaction in order to ensure its consummation and, therefore, the receipt of the Benefits. 115 It could not be said that the giving of the Benefits, or the payment of $1 million by Monacorp, was a personal gift to the Taxpayer on personal grounds, irrespective of and without regard to the question of whether services had been rendered or not – see Squatting Investment Co. at 637-638. The Benefits came to be provided by reason of the introduction of Narui Norin to Monacorp. They would not have been provided if the transaction had not been consummated. The Taxpayer assisted in that consummation by his introduction of Mr Ray to Mr Hambley and his intervention in relation to the FIRB application. The actions of the Taxpayer were causative of the provision of the Benefits. Those actions consisted of the introduction of the representatives of Narui Norin to Mr Ray, the introduction of Mr Ray to Mr Hambley and the intervention with the FIRB. 116 The provision of the Benefits could not be characterised as a "gift out of the blue", as the Taxpayer contended. The evidence simply does not enable a finding to be made as to the terms of the original discussion with the Taxpayer about a reward or remuneration by reason of the introduction of the representatives of Narui Norin to Mr Ray. The Taxpayer's affidavit is wholly unreliable on that question. Mr Ray's evidence lacks specificity. The language of the letter of 12 July 1990 would suggest a contractual arrangement between the Taxpayer and Monacorp. If there were such a contractual arrangement, there would be no doubt that the receipt of the Benefits represented assessable income of the Taxpayer. However, even without finding that there was a contractual obligation, I am satisfied that the Benefits were provided at the cost of Monacorp, in lieu of a payment of the sum of $1 million, and therefore, not a mere gift. I am not persuaded that the amended assessment was excessive in so far as it was based on treating the receipt of the Benefits as assessable income. PENALTY 117 Section 223 of the Assessment Act relevantly provided as follows: "223(1) Where– (a) a taxpayer– (i) makes a statement to a taxation officer … for a purpose in connection with the operation of this Act or the Regulations that is false or misleading in a material particular… (b) the tax properly payable by the taxpayer exceeds the tax that would have been payable by the taxpayer if it were assessed on the basis that the statement were not false or misleading, as the case may be; the taxpayer is liable to pay, by way of penalty, additional tax equal to double the amount of the excess." 118 Section 227(3), however, provided as follows: 227(3) The Commissioner may, in the Commissioner's discretion, remit the whole or any part of the additional tax payable by a person under a provision of this Part, but, for the purposes of the application of subsection 33(1) of the Acts Interpretation Act 1901 to the power of remission conferred by this subsection, nothing in this Act shall be taken to preclude the exercise of the power at a time before an assessment is made under subsection (1) of the additional tax. 119 Thus the effect of s 223 of the Assessment Act is that additional tax, by way of penalty, is payable by a taxpayer unless it is waived by the Commissioner under s 227(3). The question that arises in the proceeding, therefore, is concerned with the exercise of the Commissioner's discretion to waive additional tax imposed by the Assessment Act. It is not concerned with any discretion to impose additional tax. 120 An attachment to the Notice of Amended Assessment of 28 March 1996 contains the following narrative: "This advice explains how the additional tax… has been calculated… Section 223 of the Income Tax Assessment Act provides for a penalty, as an additional tax, where a taxpayer makes a statement which is false or misleading which results in the avoidance of tax. ……………………… The maximum penalty that may be imposed has been set by Parliament at 200 per cent of the tax that has, or would have been avoided. This level of penalty would apply in extreme cases. The Commissioner of Taxation has the discretion to reduce the penalty to a level justified by the circumstances of the case. The Tax Office has published guidelines on the operation of the penalty provisions… The extent to which the additional tax may be reduced will depend in part on: (a) where a voluntary disclosure was made; (b) the seriousness of the errors detected; and (c) the presence of any factors which will excuse the errors to some degree. ……………………… In most cases, the Commissioner calculates the additional tax in two parts as follows: (1) 'Interest' This is an interest component on the tax which was not previously paid. It is calculated on the amount of tax avoided, from the date that the tax would have become due and payable, to the date on which all relevant information to raise the correct assessment is received. (2) 'Penalty' This part reflects the seriousness of the offence, and is a flat percentage of the tax avoided." 121 The attachment to the Notice of Amended Assessment also contains a calculation of the tax "properly payable" and the additional tax, as follows: Original Amended Variation $ $ $ Tax Properly Payable 298.88 475,409.90 475,111.02 Additional Tax – Culpability 213,799.93 213,799.93 Additional Tax – Per Annum 129,896.22 129,896.22 Additional Tax – Total 343,696.15 343,696.15 122 Under a heading "Calculation of Penalties" the attachment shows the following: Description Amount Type From To Flat % Add. Tax(pa) dd. Tax (culp) BUSINESS INCOME 920,000.00 + INC 23/7/92 09/10/95 45 121,358.32 199,747.09 BUSINESS INCOME 34,725.00 + INC 23/7/92 09/10/95 45 4,580.58 7,539.36 BUSINESS INCOME 30,000.00 + INC 23/7/92 09/10/95 45 3,957.32 6,513.48 The additional tax calculated "per annum" has been calculated from 23 July 1992 to 9 October 1995. The first day is 30 days after the date of the Taxpayer's assessment for the year ended 30 June 1991. That is the time when tax would have been payable had the Benefits been included in the Taxpayer's return. The second date is the date of the October meeting, by which time the Commissioner appears to have accepted that he had been fully informed of the Taxpayer's liabilities for the relevant financial year. 123 The attachment refers to taxation ruling "IT 2517" dated 15 February 1989. IT 2517 is in evidence. The purpose of IT 2517, as stated in it, is as follows: "7. In providing these guidelines, there is no intention of laying down any conditions to restrict Deputy Commissioners and authorised officers in the exercise of the discretion to remit additional tax. It is essential that Deputy Commissioners and authorised officers retain the flexibility necessary to deal with each particular case on its merits. What is being attempted in this ruling is to set out for the information of officers a guide as to the manner in which the discretion might generally be exercised." 124 The Commissioner's reasons for decision on the objection refer to the Taxpayer's accountants' request for inclusion of the value of the Unit as income. However, the reasons make no reference to any submission on behalf of the Taxpayer on the question of penalty. Rather, the reasons contain the following: "The decision to include the unit as income of the taxpayer was now confirmed and communicated to the taxpayer. The taxpayer, at this point in time agreed to the inclusion, but argued strongly against penalties. He was asked to make submissions in writing but failed to do so." 125 IT 2517 accepts that s 227(3) recognises that there are degrees of culpability. Paragraph 11 of IT 2517 is as follows: "11. Although subsec. 223(1) is clearly intended to penalise heavily taxpayers who seek to evade their correct liability to tax, it is equally obvious that this legislation is not to be administered so as to be seen as oppressive by those taxpayers who, although caught by subsec. 223(1), have made an honest attempt to fulfil their obligations under the income tax law. Subsection 227(3) recognises that, in the context of subsec. 223(1), there are degrees of culpability. Some situations will require substantial additional tax, others less substantial. Some, although these will be exceptional (refer para. 81), may not warrant any additional tax at all." 126 IT 2517 proposes that, as a starting point, the level of the "culpability" component for remission purposes should be nil. IT 2517 then outlines some of the factors to be taken into account in determining the appropriate level of the culpability component. It provides that the more common factors to be considered in determining whether a culpability component of a particular amount should be imposed are: · The taxpayer has been genuinely misled by actions of the ATO. · The taxpayer did not know and could not reasonably be expected to have known or suspected that the statement was false or misleading. · The taxpayer's statement has occurred through an inadvertent error or honest mistake and there was no intention to deceive, but the taxpayer did not exercise sufficient care. · The taxpayer has genuinely misunderstood the requirements or application of the Assessment Act. · The taxpayer's statement was plainly careless, but not reckless. Carelessness would include inattentiveness or thoughtlessness on the taxpayer's part producing a result which the taxpayer could reasonably be expected to recognise as incorrect or at least subject to considerable doubt. · The taxpayer's statement was reckless but short of deliberate evasion. Recklessness would include a statement or omission rashly made without any real basis of fact on which to base the statement or omission, or a statement or omission made without regard to the consequences. A finding of dishonesty would be unnecessary. · The taxpayer's statement was due to deliberate evasion. Deliberate evasion involves an intention to deceive the Commissioner with the object of evading tax, or the making of a false or misleading statement knowingly or without belief in its truth. · The ATO's adjustment is contentious. An item will be contentious where the relevant law is unsettled or where, although the principles of law are settled, there is a serious question about the application of those principles to the circumstances of the particular case. 127 IT 2517 then sets out a chart, which is intended to provide officers of the ATO with an indication of the extent to which additional tax might normally be remitted. It is stated that the chart is intended to be a guide only. When a range has been chosen as appropriate in a particular case, an officer will be required to determine an appropriate percentage within that range, namely, whether it be the lower end, the middle or the upper end of the range. The determination is to be made after reviewing all the relevant facts and circumstances that attract the application of s 223. 128 The chart is as follows: ADDITIONAL TAX REASON FOR THE FALSE OR "Per annum" "Culpability" MISLEADING STATEMENT component component · Deliberate evasion (without aggravating factors) YES 45 · Recklessness (short of deliberate evasion) YES 30-40 · Carelessness YES 15-30 · Minor case of carelessness Yes 5-15 · Inadvertent error, honest mistake, dependent on the degree of care YES 0-5 · Contentious item YES 0-5 · Genuine misunderstanding of the requirements of the legislation (see para. 37(d)) YES NIL · Did not know, and could not be expected to know NO NIL · Genuinely mislead by actions of the ATO NO NIL 129 In his objection to the amended assessment the Taxpayer included the following ground: "5. In relation to the culpability component of the additional tax imposed on me, I respectfully submit that the amount imposed, calculated at the rate of 45%, is excessive when considered in the light of the remission guidelines contained in Income Tax Ruling IT 2517, given that: · Any understatement of income by me was not the result of deliberate evasion on my part. · The payment upon which the assessment of additional tax is based was, to the best of my knowledge, a voluntary give [sic] and was not income derived by me. · I had co-operated with the investigating officers of the Australian Taxation Office during the conduct of their audit into my taxation affairs. · The amount of income included in my income tax return for the relevant year of income as received and earned from personal exertion, was based upon information available to me at the time. I genuinely believed and continue to believe that such amount of income should not include the gift of the unit. If I am wrong in this regard – that is, if the value of the unit formed part of my assessable income notwithstanding that it was a gift – then I have committed an honest mistake and there has been a genuine misunderstanding, as I genuinely believed that a one-off gift did not form part of my assessable income. · I did not know and could not be expected to know that income was omitted. At all times, I acted in accordance with expert taxation advice." 130 The Commissioner, in making the amended assessment, concluded that the Taxpayer was guilty of deliberate evasion, although he apparently concluded that there were no aggravating factors. The Commissioner's reasons include reasons why the penalty tax should not be further reduced. Accordingly, the additional tax for "culpability" was fixed at 45 per cent of the tax that would have been avoided by the non-inclusion of the Benefits in the Taxpayer's return. The relevant part of the reasons is set out in Appendix 1. 131 The Taxpayer contends that: (i) The uncontradicted evidence of the Taxpayer is that he had been advised by his accountant in 1991 that it was not necessary to include the value of the Benefits as assessable income. (ii) The assessability of the Benefits has always been shrouded with some doubt and the question is therefore a contentious one, the Taxpayer's contention as to assessability being at least reasonably arguable. (iii) There was no deliberate evasion, even if there were recklessness or carelessness. (iv) The Commissioner took into account certain irrelevant considerations and inadmissible communications. The result, the Taxpayer contends, is that the question of penalties must be remitted to the Commissioner for fresh consideration of the level of penalties. (i) Advice from Taxpayer's accountant 132 The Taxpayer contends that he did not know, and could not be expected to know, that the Unit was assessable, because he acted at all times in accordance with expert taxation advice. However, the Commissioner's reasons for decision on the objection place emphasis on the fact that the Taxpayer was aware of the existence of the Unit and that "no mention was made to his accountants of the property". For that reason, the Commissioner concluded that the Taxpayer's behaviour amounted, in the circumstances, to deliberate evasion. 133 I have no evidence of any submissions or evidence provided to the Commissioner on this question. It was said on behalf of the Taxpayer that he had been advised by his accountant in 1991 that it was not necessary to include the value of the Benefits as assessable income. His affidavit included the following paragraph: "25. I did not include the value of the Unit in my assessable income in my tax returns for the 1990-1991 tax year as it was my understanding and belief that the value of the Unit was not assessable and did not represent commission or any other form of income. I had taken advice from my then tax accountant, John O'Donnell of KPMG, in relation to whether the value of the Unit was assessable income. I recall that I had a conversation with Mr O'Donnell in which words to the following effect were spoken: Brown: 'I was given a unit out of the blue. What do I do about it. Do I declare it?' O'Donnell: 'If it was given to you without any prior agreement it's a gift and is not assessable.' Had I received tax advice that the value of the Unit was assessable income, I would have included its value in my 1990/1991 tax return." 134 Assuming that the Taxpayer had such a conversation and that such a conversation was the basis for his alleged belief concerning assessability, that does not advance the matter very far from the Taxpayer's point of view. The accountant did not give evidence. The Taxpayer's statement that he was "given the Unit out of the blue" is hardly an adequate description of the circumstances relating to the receipt of the Benefits. There is no suggestion in paragraph 25 that the accountant was informed that the gift of the Unit was in any way connected with the sale of land to a buyer introduced by the Taxpayer to the seller of the land. So far as the Taxpayer's accountant was informed, the Unit had no connection whatsoever with any transaction in which RDC had any interest. A conversation as scanty as that deposed to by the Taxpayer was not a basis for forming a rational belief as to the assessability of the Benefits. 135 While the Commissioner's reasons are based on an assumption that no mention was made of the Benefits to the Taxpayer's accountants, the only evidence on which to base a different conclusion is the evidence of paragraph 25 of the Taxpayer's affidavit. Paragraphs 12 to 14 of the Taxpayer's affidavit have been demonstrated to be quite unreliable in so far as they suggest that the first that the Taxpayer was told that he would receive a gift by reason of the sale of Kings Forest was in July 1990. If the Taxpayer's recollection of his discussion with his accountant is no more reliable than his recollection of when he was told that he would "receive a gift", his evidence of his conversation with the accountant is quite unreliable. The Taxpayer's affidavit has been shown to be quite unreliable in significant respects. I am not persuaded that there was a conversation between the Taxpayer and his tax accountant that constituted a justification for forming a belief that the Benefits were not assessable in his hands. 136 There was no evidence that the Commissioner had been told, prior to making the amended assessment, that the Taxpayer had relied on the advice of his accountants in omitting any reference to the Benefits from his return. Indeed, the Commissioner's reasons on the objection decision had regard to the fact that by letter from the Taxpayer's accountants, the ATO was requested to include the value of the Benefits as income by way of remuneration for services performed. The Commissioner's reasons record that the Taxpayer had been asked to make submissions in writing in relation to penalties but failed to do so. 137 In the circumstances, on the material before the Commissioner at the time of the amended assessment, it was certainly open to him to conclude that penalties should not be reduced because the Taxpayer did not know, and could not be expected to know that the Benefits were assessable. (ii) Contentious item 138 The Taxpayer also contends that the assessability of the Benefits is, and always has been, contentious. The Taxpayer made such a claim in his notice of objection (see [129] above). No such claim was addressed in the Commissioner's reasons for decision. Rather, the Commissioner's reasons for decision suggest that such a claim was not pursued by the Taxpayer (see [124] above). The only question originally raised by the Taxpayer concerned the recipient of the income, not the assessability of the income. 139 The Taxpayer had claimed that the Benefits constituted income of a partnership. Correspondence with the Commonwealth Bank demonstrated that any contention that the Benefits were income of the partnership was quite untenable. The only question, therefore, was whether the circumstances constituted deliberate evasion on the part of the Taxpayer or whether it was appropriate to characterise the circumstances as recklessness, carelessness or inadvertent error. (iii) No deliberate evasion 140 In order to reduce further the penalty payable by the Taxpayer, the Commissioner needed to satisfy himself that the Taxpayer did not intend to deceive the Commissioner, or intentionally make a false or misleading statement. Having found that the Taxpayer's claim that the Benefits were partnership income was spurious, it was open to the Commissioner to find that the Taxpayer intended to make a false statement. 141 Moreover, the Commissioner's finding is supported by the Taxpayer's other contentions, namely, that the Taxpayer sought advice from his accountant on the benefits and that the Taxpayer always believed the Benefits were a gift. As I have said, I am not persuaded that the Taxpayer did, in fact, seek his accountant's advice. If he did, there is certainly no evidence that he fully informed his accountant of the circumstances in which he received the Benefits. However, in either case, such a claim cannot be reconciled with the Benefits being partnership income. (iv) Irrelevant considerations 142 The Taxpayer also contended that the exercise of the Commissioner's discretion in considering the remission of penalty miscarried because he took into account certain irrelevant considerations and also took into account communications made during the course of discussions that were engaged in with a view to settling a dispute. 143 The Commissioner's reasons for decision dealt with two questions which were stated as follows: · Should the value of an item of property and associated transfer costs be included in the assessable income of the Taxpayer for the relevant year? · Should the penalties imposed in the amended assessment be further reduced? In answering the first question, the reasons posed three subsidiary questions and the answers to those questions as follows: · Is commission income assessable? Yes. · Is the Unit commission income? Yes. · Is the Unit commission income of the Taxpayer or the Taxpayer in partnership? It is the income of the Taxpayer. 144 The Taxpayer contends that the Commissioner erred in answering the second of those subsidiary questions. The reasons go on to justify the answer to the second subsidiary question as follows: "The audit papers contain many references to the unit as commission. A brief, and not exhaustive summary is as follows: 1. Various references in faxes dated 12 July 1990 between the property developers and the taxpayer which makes reference to the amount of $1m being 'commission'. The taxpayer has also independently admitted it. 2. Letter dated 22 June 1990 to taxpayer's solicitor by the developers making reference to 'paid in lieu of commission'. 3. Reference by the taxpayer solicitor in letters which make a number of references to commission and it being represented by the value of the unit." 145 The Commissioner's reference to the "Taxpayer's solicitor" is erroneous. The reference is to correspondence from Hopgood and Ganim. Those solicitors were acting for RDC. While they attended to the formalities of the transfer of the Unit to the Taxpayer on his behalf, they could not be fairly characterised as the Taxpayer's solicitor. There is no evidence that the Taxpayer had solicitors at that time. 146 However, the Taxpayer's complaint is that the Commissioner improperly took into account various matters in reaching the conclusion that the value of the Unit should be treated as assessable income of the Taxpayer. That conclusion formed the basis for the decision not to reduce penalties further. The Taxpayer contended that the decision concerning penalties was vitiated by the Commissioner's taking into account irrelevant and other material. 147 First, the Taxpayer contended that the Commissioner should not have taken into account the Taxpayer's admission as to the assessability or character of the Benefits. In Hayes, Fullagar J observed that evidence given by the taxpayer in that case in cross-examination concerning legal advice that he had obtained was inadmissible and should have been objected to and disallowed – at 53. However, admissibility before a tribunal or court of an admission made by a taxpayer is quite different from the availability of such an admission to the Commissioner. The Commissioner is entitled, in making an assessment and in considering the exercise of discretion under s 227 to reduce penalty, to take into account admissions made by a Taxpayer, with a view to determine the level of culpability, rather than infringement of s 223. There is no substance in the Taxpayer's complaint in this regard. 148 The same complaint is made in relation to admissions made in statements made by Hopgood & Ganim. I do not consider that the correspondence referred to by the Commissioner in his reasons was irrelevant. The fact that RDC characterised the benefits as commission would be a relevant factor for the reasons outlined at [103] above. The reasons do not appear to have attached significance to the fact that that characterisation was made by the Taxpayer's solicitor as distinct from RDC's solicitor. I do not consider that this complaint has any substance. 149 Finally, the Taxpayer contends that the Commissioner was not entitled to take into account the communications that took place at the October meeting and subsequent correspondence between the Commissioner and the Taxpayer's accountants. The Taxpayer relied on the general law principle that, where parties are negotiating to compromise an action, evidence of the content of those negotiations will, as a general rule, not be admissible at the trial and cannot be used to establish an admission or partial admission – Rush & Thompkins v GLC [1989] 1 AC 1280 at 1299-1300. The public policy justification for such a rule rests on the desirability of preventing statements or offers made in the course of negotiations for settlement being brought before the court of trial as admissions on the question of liability. 150 However, I do not consider that such a principle has application in the present circumstances. The principle as annunciated in Rush & Thompkins v GLC applies to the reception of the evidence at trial. The principle cannot be intended to dictate the use of volunteered information inter partes. Even if the communications adverted to by the Commissioner in his reasons were privileged, I do not consider that that is a basis for concluding that the Commissioner was not entitled to have regard to them in making the decisions recorded in his reasons. 151 The question of penalty involves the exercise of a discretion by the Commissioner. Counsel for the Taxpayer accepted that, in so far as the proceeding before the Court relates to the question of penalty, the proceeding does not constitute a full merits review. However, it was contended that if it is shown that the discretion was founded on facts shown to the Court to have been incorrect, the exercise of discretion by the Commissioner should be set aside. 152 In cases in which the Commissioner has been required to exercise a judgment as to a matter that goes to assessability of receipts or deductibility of payments, the Commissioner is typically required to be satisfied as to a particular matter. For example, Avon Downs Pty Ltd v Federal Commissioner of Taxation (1949) 78 CLR 353 and Dalgety Downs Pastoral Co. Pty Ltd v Federal Commissioner of Taxation (1952) 86 CLR 335 were cases concerned with legislation that first allowed a general class of deduction and then excluded the right to the deduction in a particular case, where the Commissioner formed a specified opinion. If the discretion was erroneously exercised, so that it could not be considered to have been exercised at all, the consequence was that the Assessment Act acted operated to allow the deduction. 153 Thus, a taxpayer who succeeded in establishing that the discretion had miscarried had shown what his true taxable income was, except in those cases where some other question intervened, such as the existence of other sources of income. In Duggan v Federal Commissioner of Taxation (1972) 129 CLR 365 ("Duggan"), the rate of tax payable by the trustee in that case depended upon whether the Commissioner had exercised the discretion conferred upon him under s 99A(2) of the Act that it was not unreasonable that s 99A (which imposed the maximum rate of tax) should apply. 154 It is clear in such cases that it is not open to the Court to substitute its own judgment. It is also clear that, if the Commissioner's judgment is based upon a mistaken view of the relevant facts, his exercise of judgment will be vitiated. If the Commissioner selects factors on which he bases his opinion and in describing them makes it clear that he has misconceived the relevant facts, his opinion will be of no legal effect. It is as if he had failed to reach any opinion or had reached it upon the basis of irrelevant facts – see Duggan at 370. 155 If the exercise of discretion by the Commissioner were arbitrary or capricious, that would also be a basis of vitiation of the exercise of the discretion – see Denver Chemical Manufacturing Co. v Commissioner of Taxation (NSW) (1949) 79 CLR 296. However, it was not suggested on behalf of the Taxpayer that the Commissioner's discretion was exercised capriciously or arbitrarily. While there is no direct record of the reasoning adopted in making the amended assessment, the reasoning is recorded in the Commissioner's reasons on the objection decision. Those reasons do not suggest capriciousness or arbitrariness. 156 The Commissioner formed a view as to the Taxpayer's state of mind, namely, that he was deliberately evading tax by his failure to refer to the Benefits in his return. He based that view on the facts he outlined in his reasons, set out in Appendix 1. I am not persuaded, on the balance of probabilities, that the Commissioner made a decision, on the material before him, which was not open to him. Therefore, I do not consider that the Commissioner's exercise of discretion to waive additional tax miscarried. RULING ON EVIDENCE 157 In the course of the hearing, counsel for the Commissioner renewed the tender of material that was the subject of my earlier ruling (see [14] above). The material was again objected to by counsel for the Taxpayer. I deferred making a ruling on the tender, but received the evidence on the voir dire and permitted cross-examination on the voir dire against the possibility that the material would be admitted as evidence in the proceeding. 158 The material that is the subject of the tender comprises the following: · Paragraphs 8 to 18 inclusive of the affidavit of Donald Caldbeck, sworn 19 October 2000. · Notes made by Donald Caldbeck, on 10 October 1995, of the discussions at the October meeting, being MFI 11. · Affidavit of Graham Thomas Smith, sworn 31 July 2000. · Pages 50-53, 54-56, 89-90, 204-219, 294-337 and 456-475 of the transcript of evidence. · Correspondence between the Commissioner and the Taxpayer's accountants following the October Meeting. 159 All of the above material, to which I shall refer as "the objected material", relates to the October meeting and its aftermath. The October meeting was attended on one side by the Taxpayer, Mr Phillip Henry and Ms Jennifer Nairne from KPMG, the Taxpayer's tax accountants, Mr John. Stammers, a solicitor of Blake Dawson Waldron and Mr Achilles Constantinidis, a chartered accountant and business associate of the Taxpayer. On the other side were Messrs Caldbeck and Smith and Mr John Seberry, Deputy Commissioner of the Parramatta office of the ATO. 160 Following the October meeting, the Commissioner wrote to the Taxpayer's accountants on 19 December 1995, relevantly saying as follows: "During an interview in this office on 9 October 1995, your client agreed with a decision to include the value of his unit at Mermaid Beach in his 1991 personal assessable income. He was invited to make a submission in respect of any deductions he wished to claim against that income and any factors which he believed were related to the imposition of additional tax. Subsequent to the above meeting it was arranged with you that any submission be lodged by 11 December 1995 at the latest… As no submission has been received to date, it is proposed to proceed with the amendment to your client's 1991 assessment without any further delay. ………………………" 161 The accountants responded on 19 January 1996. Their letter contained the following: "… it is respectfully requested that in accordance with discussions and a meeting held at the Parramatta Taxation Office during October 1995, such meeting attended by Mr John J Brown, Mr Achilles Constantinidis and the professional representatives of Mr John J Brown, together with representatives of the Australian Taxation Office, that an amended income tax assessment be issued to Mr John J Brown for the year ended 30 June 1991 and that agreed leniency be availed with respect to the imposition of penalties and with respect to the timing of the payment of the primary tax necessarily attributable to the amended income tax assessment. In support of the above detailed request for leniency, it is noted that genuine confusion existed in the mind of Mr John J Brown regarding the acquisition of the Mermaid Beach unit, given that it was the belief of Mr John J Brown that such acquisition was attributable to partnership real estate activities which were conducted in conjunction with Mr Achilles Constantinidis and given that such unit was utilised as security for partnership finance facilities. It should be also noted that Mr John J Brown is currently restructuring his financial position in view of a pending property and family law settlement with his wife, Ms Jan Murray, in addition to a necessary disposal of assets to meet outstanding income tax obligations. Accordingly, the timing of the payment of the primary tax attributable to the amended 1991 income tax assessment of Mr John J Brown will be necessarily coordinated with the commercial disposal of such personal assets." 162 Counsel for the Taxpayer objected to the objected material on the basis of s 131 of the Evidence Act 1995 (Cth) ("the Evidence Act"). Section 131(1) provides as follows: "(1) Evidence is not to be adduced of: (a) a communication that is made between persons in dispute, or between one or more persons in dispute and a third party, in connection with an attempt to negotiate a settlement of the dispute; or (b) a document (whether delivered or not) that has been prepared in connection with an attempt to negotiate a settlement of a dispute." 163 Counsel for the Commissioner contended that the requirements of s 131(1) were not satisfied in relation to the objected material. Alternatively, reliance was placed on s 131(2)(b) and s 131(2)(g), which provide that s 131(1) does not apply if: (b) the substance of the evidence has been disclosed with the express or implied consent of all the persons in dispute; or ……………………… (g) evidence that has been adduced in the proceeding, or an inference from evidence that has been adduced in the proceeding, is likely to mislead the Court unless evidence of the communication or document is adduced to contradict or to qualify that evidence;" 164 The Commissioner contended that s 131(1) was not satisfied because: · the evidence does not establish that the Commissioner and the Taxpayer were in dispute at the time of the October meeting; · alternatively, if they were in dispute, the dispute was not one of a kind in respect of which relief may be given in an Australian or an overseas proceeding, as required by s 131(5)(a) of the Evidence Act; · the communications, of which the Commissioner seeks to adduce evidence, were not relevantly in connection with any attempt to negotiate a settlement of a dispute. 165 In order to deal with those contentions, it is necessary to state more specifically the alleged communications that are the subject of the evidence that the Commissioner seeks to adduce. The communications are as follows: (1) Statement by the Taxpayer at the October meeting as follows: "I originally became involved with the Naruis when they looked at Goodnight Island, an island of the Shoalhaven River, which I believed may have been suitable for a retirement village for the Japanese. They were more interested in land on the Gold Coast and were looking for land with plenty of trees. They come from a forest area and wanted land with plenty of trees. I remembered that a friend of mine, Brian Ray, had land at Tweed Heads, which was heavily forested and which he wanted to sell. In introduced the Naruis to Brian Ray and everything happened as a result." (2) The following exchange between the Taxpayer and Mr Caldbeck at the October meeting: "Taxpayer: I introduced the Naruis to Brian Ray and everything happened as a result. I did not expect to receive any commission. Caldbeck: But you signed the document stating that you were owed commission. Taxpayer: Yes I know." (3) The exchange referred to in (2) above, coupled with the fact that the Taxpayer did not qualify his answer "Yes I know". (4) The following exchange between the Taxpayer and Mr Smith at the October meeting: "Smith: Who prepared your income tax returns for the financial years ended 30 June 1990 and 1991? Taxpayer: KPMG, John O'Donnell from the Parramatta office. Smith: In the discussions with Mr O'Donnell regarding the preparation and lodgement of those returns did you advise him of the receipt of the commission income from Monacorp Pty Ltd? Taxpayer: No." 166 There are three matters in respect to which those communications are said to be relevant as follows: (a) the extent to which the Taxpayer was aware, as at the time of his first communication with Mr Ray, of the existence and nature of the Kings Forest land; (b) whether the letter dated 12 July 1990 relating to "commission payable" was signed knowingly by the Taxpayer; (c) whether the Taxpayer omitted reference to the Unit from his tax return as a result of advice given by his accountant. 167 It will be necessary to consider those matters in some detail when dealing with the application of s 131(2)(g). However, it is also necessary to have regard to those matters in considering the questions that arise under s 131(1). SECTION 131(1) 168 In my ruling on evidence of 13 March 2000 [2001] FCA 240, I gave my reasons for concluding that, as at the date of the October meeting, the Commissioner and the Taxpayer were in dispute. I have not been persuaded that I should depart from the conclusion that I then reached. However, further refinements have been added by the Commissioner to his contentions concerning the application of s 131(1). 169 First, it is contended that, even if there were communications at the October meeting undertaken in an attempt to negotiate a settlement of the dispute, communications concerning the three matters to which I have just referred were not communications in connection with any such attempt. The second refinement is associated with that first contention. The Commissioner now says that, because no assessment had been issued, there was, as at the date of the October meeting, no justiciable issue between the Taxpayer and the Commissioner that could be resolved in any proceeding. That is to say, any dispute that existed as at the date of the October meeting was not a dispute of a kind in respect to which relief could be given in an Australian or overseas proceeding at that time. That was because any dispute was whether or not the Commissioner could or should issue an amended assessment, including the extent to which penalties should be imposed. There was no appealable objection decision at that time. 170 The refinements call for a characterisation of the dispute that existed as at the date of the October meeting. The was certainly no intimation given at the October meeting that the Commissioner would accept any contentions advanced on behalf of the Taxpayer. That, of course, cannot be decisive. The object of s 131 is to exclude evidence of communications undertaken in an attempt to settle a dispute, whether or not those attempts are successful. Indeed, the assumption is that they have not been successful, otherwise there would be no proceeding with respect to which the question of admissibility would rise. 171 The question of whether the receipt of the Benefits represented assessable income of the Taxpayer may, of itself, not have been justiciable as at the date of the October meeting. Nevertheless, the question of whether the receipt of the Benefits is properly characterised as assessable income of the Taxpayer is a question that now arises in this proceeding. If the Taxpayer and the Commissioner were in dispute as at the date of the October meeting, the dispute was as to whether the receipt was properly to be treated as assessable income and, if so, whether and to what extent the Commissioner should waive additional tax. 172 While it might not have been open to the Taxpayer or the Commissioner to obtain any relief in respect of that dispute as at the date of the October meeting, when an assessment was issued and a decision made with respect to any objection against that assessment, the dispute as to the assessability of the Benefits would fall for resolution by relief in the form of an order of this Court. True it is that the issue before the Court in this proceeding is whether the amended assessment is excessive. However, that question can only be resolved by determining whether or not the receipt of the Benefits was assessable income. I consider that s 131(5)(a) was satisfied in relation to the present circumstances. 173 The resolution of that dispute involves an examination of each of the three matters to which I have referred above. That that is so, is confirmed by the Commissioner's desire to adduce evidence as to those matters. If communications in relation to those matters are relevant to the resolution of the dispute, it is difficult to avoid the conclusion that the communications were communications made between the Taxpayer and the Commissioner in an attempt to negotiate a settlement of that dispute. The words "in connection with" broaden the category of communications covered by the privilege. 174 I consider that each of communications (1) to (4) above was, in the circumstances, made in connection with the attempt being made at the October meeting and thereafter to settle a dispute between the Commissioner and the Taxpayer as to whether or not the receipt of the Benefits was assessable income of the Taxpayer and whether the Commissioner should remit additional tax under s 227(3). SECTION 131(2)(b) 175 The Taxpayer commenced proceedings in the Administrative Appeals Tribunal ("the Tribunal") for an extension of the time within which to lodge the objection to the amended assessment out of which this proceeding arises. In the course of the proceeding before the Tribunal, a statement by the Taxpayer was tendered and the Taxpayer was cross-examined. The Commissioner appealed from the decision of the Tribunal and then appealed to the Full Court from the decision at first instance in this Court. The Commissioner contended that in consequence s 131(2)(b) had been satisfied. 176 The Taxpayer's statement contained the following paragraph: "On 9 October 1995, I attended an interview with a number of ATO officers during which they informed me that they had obtained a copy of my signed letter to Ray Development Corporation recording the transfer of the Unit to me as commission. I was shocked at the time because I could not recall ever having signed this letter. The ATO officers informed me that the document had been produced following an audit of one of Ray's partners in the Property. At the time, I did not specifically recall signing the letter but in response to certain representations by the ATO officers volunteered at the meeting that the Property could be included in my assessable income for the year 1990/1991 for the following reasons: (a) I genuinely believed that the transfer of the Unit to me did not represent income but, I was mindful of my position in the community and my strong conviction that tax should be paid when income is earned. (b) I did not wish to be involved in a dispute with the ATO over the assessability of the Unit. I did not believe that this to be consistent with my reputation and history as a former Cabinet member in the Labour [sic] Government. (c) Without the benefit of considered legal advice, I could see how the ATO could come to the conclusion that the Unit represented commission in light of the signed letter from me and without having the benefit of all of the facts before them. (d) The ATO's officers assured me at this meeting that due consideration would be given to leniency in any assessment from the point of view of calculating any penalties and that I would be given time to pay any primary tax assessed. I gained the strong impression from that meeting that no penalties would be imposed provided that no objections were lodged to the assessment. This impression was shared by my tax advisers, Phillip Henry and Jenny Nairne from KPMG, who were also present at this meeting. (e) In light of all of these facts, I considered that I would be able to pay any amended assessment issued by the ATO for that year." 177 In the course of the proceeding before the Tribunal, the Taxpayer was cross-examined by the Commissioner's representative on the paragraph of his statement set out above. None of the communications that are the subject of the objected material appears in that paragraph. None of the communications was put to the Taxpayer in that cross-examination. In those circumstances, it is not possible to conclude that the substance of the evidence of the communications now sought to be adduced was disclosed in the course of the proceedings before the Tribunal. It is not necessary, therefore, to consider whether or not any disclosure occurred with the consent of all the parties in dispute, as is required by s 131(2)(b). I do not consider s 131(2)(b) has any application in the present case. section 131(1)(g) 178 The Commissioner contended that, unless he is permitted to adduce evidence of communications (1) to (4) above, certain evidence already adduced on behalf of the Taxpayer in this proceeding is likely to mislead the Court as follows: (A) In his affidavit read in the proceeding, the Taxpayer said as follows: "7. During early 1990 (to the best of my recollection about January or February 1990) I had a telephone conversation with Ray of a personal nature, in which, amongst other things, words to the following effect were spoken: Brown: 'My wife and son have been showing a delegation of Japanese businessmen who are representatives of Narui Norin a property in Shoalhaven called Goodnight Island but rejected it because it did not have enough trees on it.' Ray: 'Why the interest in trees?' Brown: 'In Japan they are loggers who own forests. They knock down the trees, use the timber to construct log cabins and then build a golf course upon the land.' Ray: 'Do you think that they would let me show them around the Gold Coast?' Brown: 'I know that they are on their way to Cairns but are holidaying on the Gold Coast before they return to Japan so there is every chance that they would be interested in having you show them the Gold Coast. I will let you know when they are in town.' ……………………… 8. Some time subsequent to this conversation I informed Ray of the dates when the Japanese Delegation would be visiting the Gold Coast. This was the totality of my involvement in introducing Ray to the Japanese Delegation. I was unaware at this time that Ray had an interest in a company which was interested in selling a substantial property in the Tweed Valley." The Commissioner contended that communication (1) above is inconsistent with the evidence in paragraphs 7 and 8 of the Taxpayer's affidavit. (B) The Commissioner contends that communication (2) above is inconsistent with the assertions made in paragraphs 12 to 14 of the Taxpayer's affidavit that there was no suggestion of any gift prior to early July 1990. (C) The Commissioner contends that communication (3) above is inconsistent with paragraph 19 of the Taxpayer's affidavit. (D) The Commissioner contends that communication (4) above is inconsistent with the assertions contained in paragraph 25 of the Taxpayer's affidavit. 179 The Commissioner says that s 131(1), in so far as it refers to communications made or documents prepared in connection with an attempt to negotiate a settlement of the dispute, entails a broadening of the common law privilege that would exclude evidence of communications undertaken without prejudice. Accordingly, a broad interpretation should be given to the exception to the exclusionary rule contained in s 131(2)(g). The Commissioner says, in effect, that the approach to be taken in applying s 131(2)(g) is to determine whether, assuming the evidence that has been adduced in the proceeding is accepted at face value, the evidence sought to be adduced, if accepted at face value, would contradict or qualify the evidence already adduced. 180 However, s 131(2)(g) must be considered in its context within the scheme of s 131 as a whole. The presence of s 131 in the Evidence Act is a recognition of the desirability of encouraging settlements – see ALRC 26 Vol 1 paragraph 891. Certainly, s 131 does not incorporate any judicial discretion to overcome the privilege in circumstances that do not fall within the list of exceptions. Nevertheless, the exceptions contained in s 131(2) are not intended to negative the basic intention of s 131 that settlement should not be discouraged by the possibility that communications made in connection with an attempt at settlement might be tendered against a party to those communications. 181 Paragraph (g) must be construed in the light of the other exceptions outlined in of s 131(2). Paragraphs (a), (b) and (c) of s 131(2) exclude a communication when the communication has been disclosed. Paragraph (d) excludes a communication where the communication is not confidential Paragraphs (e) and (f) are concerned with evidence relating to attempts to settle a dispute, for example, where there is a dispute as to whether or not settlement has been achieved. Paragraph (h) is concerned with the recognised exception for what is known as a Calderbank offer. Paragraph (i) allows an exception where communication or preparation of a document affects a person's right. Paragraphs (j) and (k) are concerned with communications and documents in furtherance of fraud or criminal offences and the abuse of power. 182 The construction advanced by the Commissioner affords little meaning to the concept of the likelihood of the adduced evidence misleading the Court. The Commissioner's construction is tantamount to allowing an exception to the exclusionary rule in s 131(1) in any case where the evidence sought to be adduced simply contradicts or qualifies the evidence already adduced. I do not consider that the paragraph should be given such a broad construction. 183 The sorts of exceptions to the general law exclusionary principle recognised under the general law (see Unilever PLC v Proctor & Gamble Co [1999] 1 WLR 1630 at 1640-1) are concerned with reprehensible behaviour and impropriety such as: · misrepresentation, · threats of insolvency or bankruptcy, · threats of blackmail, · threats of perjury, · suborning evidence, · flight from the jurisdiction. It is appropriate to consider the exceptions listed in s 131(2) in the light of the general law. 184 I consider that s 131(2)(g) is designed to deal with the sort of circumstances that arose in Pitts v Adney (1961) 78 WN (NSW) 886. Evidence of a "without prejudice" communication was admitted in that case in order to prove the fact of and the nature of the communication. It was not tendered in order to contradict evidence as to the matters in issue, or as an admission. 185 It is not appropriate to attempt an exhaustive exposition of the effect of s 131(2)(g). However, I consider that it will not be attracted simply because evidence to which s 131(1) applies contradicts or qualifies evidence that has already been adduced. Section 131(2)(g) will apply where the Court would be likely to be misled as to the existence or contents of an excluded communication or document, where those matters are in issue in the proceeding. The fact of, or the contents of, the communications, of which the Commissioner now seeks to adduce evidence are not directly relevant in the proceeding before me. I do not consider that s 131(2)(g) is applicable in relation to the objected material. EFFECT OF THE OBJECTED MATERIAL 186 The Taxpayer maintained that, when he introduced the representatives of Narui Norin to Mr Ray, he, the Taxpayer, had no knowledge of the Kings Forest land. On the other hand, if he had some knowledge of the Kings Forest land and of the wish of Monacorp to sell it, it may be easier to characterise his introduction of the representatives of Narui Norin to Mr Ray as equivalent to that of a real estate agent. According to Mr Caldbeck, the Taxpayer said at the October meeting that he remembered at the beginning of 1990 that Mr Ray had land at Tweed Heads that was heavily forested and which he wanted to sell. 187 Mr Caldbeck made handwritten notes of the meeting on the day following. The statement attributed to the Taxpayer, that he remembered that Brian Ray had land at Tweed Heads which was heavily forested and which he wanted to sell, is not contained in the notes. Mr Caldbeck said that the handwritten notes contained his freshest recollection of the events of the October meeting. Mr Caldbeck's affidavit was sworn on 19 October 2000, some 10 years after the events in question. Mr Caldbeck has had a continuing involvement with the affairs of the Taxpayer. No satisfactory explanation was given as to why the matter that is now perceived of such significance was not recorded in the contemporaneous notes. While I do not conclude that the passage of Mr Caldbeck's affidavit is a dishonest fabrication, I am not satisfied that the Taxpayer made the statement attributed to him. The relevant part of the objected material would therefore not advance the Commissioner's case. 188 In paragraphs 19 and 20 of his affidavit, the Taxpayer said that he signed the documents of 12 July 1990 urgently without particularly reading them and that he did not carefully read or scrutinise their contents. He also said that the receipt of those documents was the first that he became aware of any suggestion that he was to be paid $1 million in commission. He subsequently accepted, however, that there had been discussion on that question in March of 1990. The affidavit is to that extent wholly unreliable. 189 The Commissioner relies on the evidence of the October meeting in order to discredit those parts of the affidavit further. When, in the course of the meeting, the Taxpayer was confronted with the fact that he had signed a document in which he said that he was owed commission, he simply responded "Yes I know". He did not endeavour to explain the circumstances in which the documents were signed. Mr Caldbeck's contemporaneous note was in the following terms: "Mr Brown and his solicitor raised the question of whether the receipt of the Unit represented income. They queried whether it was actually a commission although Mr Brown agreed that he had signed a document to that effect". 190 The affidavit, however, contains no reference to any question being raised as to whether the receipt of the Unit represented income. The agreement that the Taxpayer "had signed a document" to the effect that the receipt of the Unit was actually a commission must be considered in the context of a query as to whether or not the receipt was income at all. I do not consider that this aspect of the objected material would advance the Commissioner's case. 191 Finally, the Commissioner relied on the failure by the Taxpayer and his advisers during the course of the October meeting to assert that the Benefits were not assessable income at all. While Mr Caldbeck's affidavit contains no such suggestion, the contemporaneous note records the fact that the Taxpayer and his solicitor raised the question of whether the receipt of the Unit represented income and queried whether it was actually a commission. The reason for the omission of that significant statement from the affidavit was not explained. Mr Caldbeck's contemporaneous note supports the Taxpayer's case. Its admission, therefore, would not advance the Commissioner's case. 192 For the reasons set out above, I have not considered any of theobjectedmaterial in reaching my decision on either the question of the assessability of the Benefits, or the question of penalties. conclusion 193 For the reasons I have given above, I do not consider that the Commissioner's amended notice of assessment is excessive. Nor do I find that the Commissioner misdirected his discretion not to reduce penalties further. The application must be dismissed with costs. I certify that the preceding one hundred and ninety-three (193) numbered paragraphs are a true copy of the Reasons for Judgment herein of the Honourable Justice Emmett. Associate: Dated: 29 May 2001 Counsel for the Applicant: Mr M Christie with Mr J Scarcella Solicitor for the Applicant: Blake Dawson Waldron Counsel for the Respondent: Mr D McGovern Solicitor for the Respondent: Australian Government Solicitor Dates of Hearing: March 12, 13, 14, 15, 16, 22, 26, 27, April 19, 20, May 9 2001 Date of Judgment: 29 May 2001 APPENDIX 1 (Extract from the Commissioner's Reasons on the Objection Decision) Should the penalties imposed in the amended assessment be further reduced? No. The auditor has considered all the provisions of the ITAA in imposing the various components of the penalty. Specifically, consideration was given to the penalty imposing provisions of section 223 of the ITAA. When giving attention to remission, in terms of section 227 of the ITAA, the provisions of Taxation Ruling IT 2517 were fully considered. In particular, the provisions of paragraphs 19, 36-40, 41 and 45 were considered in depth. No further remission is warranted. We considered these to be the relevant facts: The taxpayer was audited for the year of income ended 30 June 1991 as a result of information received from the auditors of a Gold Coast property development company. In the course of that audit it was ascertained that the taxpayer had received an item of property from that company and indications were that the receipt was in lieu of commissions [sic]. The principal of the Gold Coast development company had been successfully introduced by the taxpayer to the members of a Japanese family who were the principals of a large Japanese development company. A sale of a large tract of land at Kingscliff, in northern NSW, eventuated with a sale price of $21m (approx). The taxpayer advised that the unit was transferred in consideration of his efforts in the introduction of the principals. In the course of investigating the transaction substantial evidence was found that indicated the property was transferred in lieu of commission. This evidence indicated that the transfer of the property was done in a business like manner with the taxpayer having some jurisdiction over its manner and the nature of additional extras. The commission was payable as a result of the taxpayer's efforts in introducing a purchaser to the development corporation for a North Coast New South Wales development. An explanation as to the nature of the transaction was sought from the taxpayer. The taxpayer initially advised that the value of the unit was in lieu of commission payable, and that it was correctly assessable to a partnership between the taxpayer and one other for the year of income ended 30 June 1992 [sic]. Further investigation was carried out to substantiate the taxpayer's claims in this regard. It was found that the partnership in question had not lodged returns for the year in question. When the explanation was amended to encompass the 1991 year of income, it was also found that no partnership returns had been lodged in that year of income as well. The taxpayer's returns of income, lodged for the 1991 year, included a distribution from a partnership. This distribution, however, gives no indication that a commission of $1m (approx) have been returned as income. In January 1996, by letter from the taxpayer's accountants dated 19 January, the office was requested to include the value of the unit in income as remuneration for services performed. In light of all the other evidence available to the Commissioner … the value of the unit has been included in the income of the taxpayer. The amount assessable has been calculated as follows $ Value of Property as at 12 July 1990 920,000 Qld stamp duty paid by transferor 34,725 Furniture allowance paid by transferor 30,000 Total 984,725 In amending the relevant assessment, the provisions of the Income Tax Assessment Act ("ITAA") and Income Tax Rulings were considered. When dealing with these provisions the taxpayer was invited to put his case or make submissions. The limited submissions subsequently made were to the effect that the unit was commission for the partnership and not the taxpayer personally. This led to further investigations by this office. Those investigations led to the receipt of further documents which, in effect, disproved the taxpayer's contentious [sic] that the unit was partnership commission. They showed that · the unit was new and previously unoccupied; · the owner of the unit prior to the transfer to the taxpayer was a company associated with the Gold Coast development company; · the transfer was negotiated between the principal of the associated company and the taxpayer; · no contract of sale was entered into between the parties; · the taxpayer received the property in consideration of him waiving any right to commission on the sale of the Kingscliff property; · the sole transferee on the transfer is the taxpayer; · the Body Corporate documents show the taxpayer as the sole owner; · the Notification of Ownership (Queensland Foreign Ownership of Land Act 1988-89) document shows the taxpayer as sole owner; · at least one other person was also paid commission on the sale; · prior to the transfer to the taxpayer, the unit was encumbered to Beneficial Fiance Corporation Ltd. A release was signed by Beneficial on the day of settlement following the receipt of $925,000 from solicitors for the vendor. This sum was financed by the Gold Coast development company; · the property was received by the taxpayer unencumbered and the certificate of title was received by the taxpayer's bank on 9 August 1990; · the taxpayer subsequently mortgaged the property and used the funds to reduce his personal overdraft; · the taxpayer strongly resisted action by the bank to use the property for security in relation to his other guarantees. The decision to include the unit as income of the taxpayer was now confirmed and communicated to the taxpayer. The taxpayer, at this point in time agreed to the inclusion, but argued strongly against penalties. He was asked to make submissions in writing but failed to do so. The taxpayer, at the time of lodging his 1991 return of income, was definitely aware of the unit's existence. His actions, given the questionable nature of the transaction as income of himself or in partnership or otherwise, should have been sufficient to warrant mention of the transaction to his accountants. No mention was made to his accountants of the property. His actions to negate the property being held as security for other borrowing's [sic] clearly indicate his impression that the property was his. From the above facts it is clear that an omission of income in terms of sub-section 223(7) has occurred in that the taxpayer has omitted "from a return… any assessable income…, the person shall… be taken to have made a statement in the return… that the person… did not derive the assessable income during the period". Accordingly, the omission of assessable income derived was treated as a false statement in terms of the section. In terms of sub-section 223(1) the taxpayer is liable to pay, by way of penalty, additional tax equal to double the amount of excess payable as a result of a false or misleading statement. Consideration was given to the provisions of Taxation ruling IT2517 and a conclusion was reached that the taxpayers [sic] behaviour amounted to, in the circumstances, deliberate evasion. A culpability component of penalty was calculated and imposed at a rate of 45%. In addition, a per annum component penalty was imposed for the period of a voidance [sic] of tax from 23 July 1992 (30days after issue of the 1991 credit assessment) to 9 October 1995 being the date the taxpayer agreed to the adjustment. The statutory rate of penalty was therefore remitted to the extent necessary to impose these penalties.