FEDERAL COURT OF AUSTRALIA Howland-Rose v Commissioner of Taxation [2002] FCA 246 INCOME TAX – prospectus issued for prescribed interests – whole of funds subscribed for prescribed interests lent to participants by promoters – "round-robin" effected by bills of exchange negotiated between related promoter companies (involving lender and researcher) without bank account entries – part of loans (25%) repayable by participants over two years with interest – thereafter balance unpaid of loans (75%) and interest non-recourse, except to extent of profitable returns derived by participants – immediate purpose of funds subscribed for research and development in Australia and overseas to be undertaken over ensuing two years – thereafter financial returns forecast by prospectus from sale and distribution of manufactured products in Australia and overseas arising from that research and development – research and development in fact never finalised at least to stage of regulatory product approval and commencement of manufacture – whether 100% of funds subscribed and interest thereon for initial two yearly period deductible pursuant to subs 51(1) of Income Tax Assessment Act 1936 (as amended) – alternatively whether deductibility to be derived pursuant to Pt IVA of the Act – alternatively whether deductibility subject to ten year provisions of s 82KZM of the Act – evidentiary issues as to operation of subs 51(1) of the Act in circumstances where prospects of derivation of assessable income remote or "extremely" remote from the outset – whether "round-robin" of bills of exchange effective. Taxation Administration Act 1953 (Cth) s 1422(a)(ii) Income Tax Assessment Act 1936 (Cth) subs 51(1), subs 67, s 82KZM and Part IVA, s 177A, s 177C, s 177D, s 221D Therapeutic Goods Administration Act 1989 (Cth) Parsons Income Taxation in Australia 1985 AAT Case V137 (1988)88 ATC 865 distinguished Brajkovich v Federal Commissioner of Taxation (1989) 89 ATC 5227 distinguished Makita (Australia) Pty Ltd v Sprowles [2001] NSWCA 305 considered Ocean Marine Mutual Insurance Association (Europe) OV v Jetopay Pty Ltd [2000] FCA 1463 considered Ferguson v Federal Commissioner of Taxation (1979) 37 FLR 310 considered Magna Alloys & Research Pty Ltd v Federal Commissioner of Taxation (1980) 33 ALR 213 referred to Federal Commissioner of Taxation v Radnor (1991) 91 ATC 4689 referred to Thomas v Commissioner of Taxation (1972) 46 ALJR 397 referred to Walker v Federal Commissioner of Taxation (1983) 70 FLR 354 considered Federal Commissioner of Taxation v Walker (1984) 2 FCR 283 considered Federal Commissioner of Taxation v Lau (1984) 6 FCR 202 considered Federal Commissioner of Taxation v Emmakell Pty Ltd (1988) 22 FCR 157 distinguished Federal Commissioner of Taxation v Brand (1995) 95 ATC 4633 distinguished Sun Newspapers Ltd & Associated Newspapers Ltd v Federal Commissioner of Taxation (1938) 61 CLR 337 cited Goodman Fielder Wattie Ltd v Federal Commissioner of Taxation (1991) 29 FCR 376 followed Federal Commissioner of Taxation v Osborne (1990) 26 FCR 63 referred to Griffin Coal Mining Co Ltd v Federal Commissioner of Taxation (1990) 90 ATC 4870 referred to Federal Commissioner of Taxation v Riverside Road Lodge Pty Ltd (in liq) (1990) 23 FCR 305 considered J & R O'Cain v Inland Revenue Commissioners (1922) 12 TC 303 cited Hope v Bathurst City Council (1980) 144 CLR 1 cited John Fairfax & Sons Pty Ltd v Federal Commissioner of Taxation (1959) 101 CLR 30 referred to Esso Australia Resources Ltd v Commissioner of Taxation (1998) 84 FCR 541 referred to Inglis v Federal Commissioner of Taxation (1979) 40 FLR 191 referred to Southern Estates Pty Ltd v Federal Commissioner of Taxation (1967) 117 CLR 481 referred to Federal Commissioner of Taxation v Myer Emporium Ltd (1987) 163 CLR 199 cited Fletcher v Federal Commissioner of Taxation (1991) 173 CLR 1 approved Australian Horticultural Finance Pty Ltd v Jekos Holdings Pty Ltd (MacPherson JA, Thomas and de Jersey JJ, 9 December 1999, unreported) Moreau v Federal Commissioner of Taxation (1926) 39 CLR 65 referred to Federal Commissioner of Taxation v Spotless Services Limited (1995) 62 FCR 244 considered Federal Commissioner of Taxation v Spotless Services Limited (1996) 186 CLR 404 followed Federal Commissioner of Taxation v Consolidated Press Holdings Limited (2001) 2001 ATC 4343 followed Hart v Commissioner of Taxation [2001] FCA 1547 followed Commissioner of Inland Revenue v BNZ Investments Limited (2001) 20 NZTC 17,103 distinguished Metal Manufactures Ltd v Federal Commissioner of Taxation (1999) 99 ATC 5229 referred to Federal Commissioner of Taxation v Metal Manufactures Ltd (2001) 108 FCR 150 considered FIONA HOWLAND-ROSE & ORS v COMMISSIONER OF TAXATION N101-104 OF 2000 CONTI 18 MARCH 2002 SYDNEY IN THE FEDERAL COURT OF AUSTRALIA NEW SOUTH WALES DISTRICT REGISTRY N 101-104 of 2000 BETWEEN: FIONA HOWLAND-ROSE, MICHAEL JOHN HARVEY, JEFFREY JOSEPH BRAYSICH & ANTHONY PETER DAVIDSON APPLICANTS AND: COMMISSIONER OF TAXATION RESPONDENT JUDGE: CONTI J DATE OF ORDER: 18 MARCH 2002 WHERE MADE: SYDNEY THE COURT ORDERS THAT: 1. The assessments of the Commissioner in relation to each of the Applicants be upheld, and that the Applications therefore be dismissed. 2. No order as to the costs of the proceedings be made. 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 101-104 OF 2000 BETWEEN: FIONA HOWLAND-ROSE, MICHAEL JOHN HARVEY, JEFFREY JOSEPH BRAYSICH & ANTHONY PETER DAVIDSON APPLICANTS AND: COMMISSIONER OF TAXATION RESPONDENT JUDGE: CONTI J DATE: 18 MARCH 2002 PLACE: SYDNEY REASONS FOR JUDGMENT Preliminary observations 1 The Applicants comprise four of the 2371 members of the "Budplan Personal Syndicate" ("BPS") who each subscribed for a prescribed interest (as defined in Part 1.2 of Division 1 of the Corporations Law) pursuant to a Prospectus dated 5 December 1995 issued by the following corporations: Business and Research Management Limited ("BARM") Project & General Finance Pty Limited ("PGF") The Australian Tea Tree Oil Research Institute Limited ("ATTORI") The Applicants fulfilled informally the role of representative members of the BPS for the purpose of the present proceedings. The subject applications to the Court have been made pursuant to s 14ZZ(a)(ii) of the Taxation Administration Act 1953 (Cth) ("the Act"). In each case, the Applicants' disputed tax objections related to amended assessments. The prescribed interest acquired by each Applicant was referred to in the Prospectus as a "syndicate participation". The context to the proceedings was the familiar process of raising funds from members of the public for the purpose of producing products having an agricultural base, in this instance tea tree oil ("TTO"). 2 The issues falling for ultimate resolution in the proceedings are first, whether the Applicants are entitled to deductibility for income tax purposes in respect of the major proportion of the funds which they subscribed for their respective so-called syndicate participations, pursuant to subs 51(1) of the Income Tax Assessment Act 1936 (Cth) (as amended) ("ITAA"), and if so, whether such entitlement should be nevertheless denied by reason of the operation of Part IVA of the ITAA. The fiscal years of deductibility for three of the Applicants would have been 1995-6 and 1996-7, and in the case of the fourth Applicant 1996-7 and 1997-8. 3 The hearing of the proceedings extended over 19 days. All witnesses, expert and otherwise, provided affidavit evidence, in advance of cross-examination. Such affidavit evidence was detailed and lengthy, and accompanied by documentary exhibits, many of substantial length. I was provided with comprehensive submissions in writing both in chief and in reply, being submissions which were followed by lengthy oral addresses. The proceedings are in the nature of a test case, there being 2371 participants in the BPS, and a number of Budplan Syndicates apparently of similar structure, and the Respondent Commissioner agreed beforehand to meet the legal costs and expenses of the Applicants for that purpose. Hence the parties mutually agreed that no order for costs should be made in relation to the present proceedings at first instance, irrespective of the outcome. The assistance which I received from all legal representatives involved, both in address and in written submissions, was substantial and of a high order professionally. The work of counsel and solicitors engaged in this litigation was competently and thoroughly prepared and presented. 4 It has been a formidable task to endeavour on the one hand to keep these Reasons for Judgment within manageable limits, yet on the other hand to appropriately reflect the substantial body of testimony of witnesses, written and oral, the documentary exhibits, and the closing submissions of Counsel. The one documentary exhibit which must necessarily be reproduced or described in detail for ease of subsequent reference is the Prospectus. This 67 page document provides the most accurate picture of the nature and detail of the BPS scheme, and thus of the objective purposes of the participants. Genesis of the Prospectus 5 The chief architect of the BPS was Glendon Michael Stotter, the Chairman of Directors of BARM. From March 1992 to October 1995, Mr Stotter was involved in the establishment of the Main Camp Tea Tree Oil Projects Nos 1-4, which had raised funds from the public pursuant to registered prospectuses, for the purpose of establishing tea tree plantations on property at Main Camp near Casino in northern New South Wales. The development of that property was described by Mr Stotter as successful. 6 Early in 1995, Mr Stotter formed the opinion that the next phase of advancing the TTO industry in Australia, by creating markets for TTO products, required the development of value added products using TTO produced at Main Camp, in particular in the fields of therapeutics and cosmetics. Mr Stotter caused to be retained Alan Twomey, who holds a doctorate of philosophy in chemistry, and who had been Director of Marketing, and subsequently Chief Executive, of Parke Davis Pty Ltd over the period from 1974 to 1995. Mr Stotter appreciated that further research was required in order for such value added products to be the subject of regulatory approvals in Australia and in overseas countries representing the major potential markets, if financial success was to be achieved. Mr Stotter appraised the TTO produced by the Main Camp growing operations as ideally suited to the development of value added products because it was of a superior grade, a thesis for which he was supported by Donald Charles Priest, a graduate in Science (Biochemistry) from the University of New South Wales with over 25 years experience in the pharmaceutical, cosmetic and personal care industries. 7 Based on dialogue which he had conducted with major pharmaceutical companies, Mr Stotter concluded that the pharmaceutical industry was not interested in undertaking the research necessary to produce such value added projects. That view was shared by Harvey Craig Bell, who held a doctorate of philosophy from the University of Sydney, and who had been Senior Formulator-Laboratory Manager of ICI Pharmaceuticals, and subsequently Research and Development Manager of Reckitt and Colman Pharmaceuticals Australia. For its part, Main Camp Marketing Pty Ltd had undertaken some research and development work in relation to value added therapeutic products using TTO, but had insufficient funds available to do so adequately. 8 The foregoing considerations led Mr Stotter, in mid 1995, to undertake the establishment of financial vehicles to formulate TTO based products by way of so-called product packages, the venture to be funded by members of the public, as had occurred in relation to the Main Camp TTO growing projects. The result was the fund raising proposals contained in the subject Prospectus, and the contemporary Budplan Company Syndicate Prospectus, and later Budplan prospectuses, which are not the subject of these proceedings. Content of the Prospectus 9 As indicated above, subscribers to the Prospectus were to constitute the members of the BPS. The BPS was not established as a partnership, the Prospectus envisaging that each participant would conduct his or her own business, albeit in association with each other member of the BPS, who would conduct his or her own business. No issue has been raised as to whether under the general law, as distinct from ITAA definition, the members of the BPS constituted a partnership, with consequences as to illegality of association because of the large number of partners involved. The front cover of the Prospectus described participation in the BPS as "speculative", and stated that "independent financial advice should be sought" by prospective participants. In the events which happened, licensed dealers conducted educational programmes with the aid of the registered Prospectus. The opening "Business Overview" segment of the Prospectus contained the following information: "By applying for and being accepted into the Budplan Personal Syndicate an applicant becomes a business proprietor in a business of development for potential manufacture and sale of specified tea tree oil based products including all necessary research. The Syndicate holds an option over product formulae and product concepts in the product areas listed below. On commencement of the Syndicate this option will be exercised immediately and a business to commercialise and further develop these product formulae and concepts will begin. To further develop the formulations and concepts the Syndicate will undertake research and development into the uses of tea tree oil in the selected product categories set out below. The Budplan Personal Syndicate is one of two syndicates being formed concurrently with the view that these two syndicates will individually carry on business, part of which will comprise undertaking the development for potential manufacture and sale of specified products and markets with the business profits being returned to the Syndicates' Participants in proportion to their contributions. Both Syndicates will contract with The Australian Tea Tree Oil Research Institute Ltd to undertake the necessary scientific research including enhancing existing product formulae and product concepts and to develop new products. The Institute will develop "Product Packages" incorporating the formulae and concepts of the Syndicate using Main Camp Premium Pharmaceutical Grade Tea Tree Oil. These "Product Packages" will include product formulae, product samples, stability, safety information and efficacy data, labelling and packaging specifications to the highest international standards. Several "Packages" will be produced for each potential use in order to maximise resulting income. These "Product Packages" will be used to develop the Syndicates' private label products in bulk or in packaged form for sale with the resultant income, after payment of expenses, returned to the business proprietors comprising the Budplan Personal Syndicate and the Budplan Company Syndicate, in proportion to their business expenditure. Research and Development is generally regarded as the future lifeblood of the Australian economy. The Australian Government recognises this by the provision of taxation and other incentives. Australians are very innovative by nature and many world standard innovations are credited to Australian ingenuity. From our earliest history new ideas and techniques have assisted Australia to establish World's Best Practices in many fields from agriculture to high technology. Main Camp Premium Pharmaceutical Grade Tea Tree Oil is produced in Australia under ISO 9002 Quality Assurance standards using Australian developed technology. The Main Camp Tea Tree Oil Group owns the world's largest tea tree plantation and is considered the leader in its field. A number of potential uses for Main Camp Premium Pharmaceutical Grade Tea Tree Oil have been identified from past research and published literature. Three of these potential uses have been singled out for further research and development work with a view to enhancing existing work and commercialising the results of this work on world markets. These uses are:- · ACNE TREATMENT · HOSPITAL AND ANTISEPTIC PRODUCTS · ORAL HYGIENE Participation in this business is achieved by entering into the Principle Deed which has the effect of entry into two agreements. One is the Budplan Personal Syndicate Deed which appoints Business and Research Management Limited to manage your business and to undertake commercialisation of the products produced by your joint venture syndicate. The second agreement facilitates a loan to assist in financing your business if so desired. You will also need to complete the simple application form contained in this Prospectus. Further details are set out in this Prospectus and you are urged to read this document thoroughly and to seek the advice of your own advisers or your financial planner if you are unclear on any aspect." 10 It may be observed that the "Business Overview" purported to merge into a single or unified concept the proposed research into and development of TTO "product and packages", and the manufacture and sale of TTO "private label products in bulk or in packaged form", being a theme of combined activities emphasised by the Applicants in the presentation of their case based upon subs 51(1) of the Act, and the second limb thereof in particular. Nevertheless the "Business Overview" segment extracted above focused implicitly on the activity of first undertaking the process of research and development, "[t]he Australian Government recognis[ing] this by the provision of taxation and other incentives". 11 The next segment of the Prospectus was headed "Summary of Participation", and contained the following: "To participate at the minimum level in the Budplan Personal Syndicate you will be required to make a once only payment of $200 to cover business establishment expenses including acquisition of various product formulae and product concepts and to make payments of $1,000 each payable monthly in advance (or $12,000 payable yearly in advance) comprising $900 for scientific research expenditure and $100 management fee. You may increase the amount of your participation by increments of $500 payable monthly in advance (or $6,000 payable yearly in advance) in the same ratios as above. No further payments beyond 24 months are required by you as all additional Management Fees will be deducted from the proceeds of product sales. Should you wish, you may borrow each of the first and second years expenditures of $12,000 for a total of $24,000, from the Lender-Project & General Finance Pty Limited (plus additional multiples of $6,000 if required), as set out later in this Prospectus. To borrow to finance your business you must commit to a once only loan application fee of $300 plus principal and interest payments of $400 monthly in advance per minimum participation (being $250 principal and $150 interest) for a period of the first 24 months and thereafter at a rate equal to not less than 50% of your net earnings from your business until the loan is extinguished." Thereafter followed "Important Notice to Subscribers", the first paragraph whereof reading as follows: "A Trust Deed relating to the interests to which this Prospectus refers dated 5 December 1995, has been lodged with the Australian Securities Commission. The parties to this Trust Deed are Business and Research Management Limited (the Manager), Australian Rural Group Limited (ARG) (the Trustee) and The Australian Tea Tree Oil Research Institute Ltd (the Institute). Each Participant by entering into the Budplan Personal Syndicate Deed becomes a party to the Trust Deed as a Participant. The Trustee has covenanted to protect the Participants' interests. Both the Manager and the Trustee are bound by covenants contained in the Trust Deed." The Budplan Personal Syndicate Deed is referred to in [28-32] below. 12 The following four pages of the Prospectus comprised a segment headed "Details of the Business". Some of it was repetitive of what has already been extracted above. The "purpose" of the Syndicate was stated in the following terms, again giving emphasis implicitly to the asserted business character of the BPS activity from the outset for income tax purposes: "1. Purpose of the Syndicate By participating in the Budplan Personal Syndicate you will engage in the business of development for potential manufacture and sale of specified tea tree oil based products including all necessary scientific research. It is intended that, subject to the inherent risks, your business will return profits from the sale of products manufactured as a result of the 'Product Packages' developed by the Syndicate. You will commence business by entering into the Budplan Personal Syndicate Deed and contributing $200 (or multiples thereof) to the Syndicate to cover business establishment expenses and purchase of the initial formulae and product concepts. Your efforts will be combined with others in the Syndicate to maximise returns and the scope of your business activities." The concepts of engaging and entering into business in the circumstances above stated are controversial. Thereafter potential investors were informed by this "Details of the Business" segment of the Prospectus of the following matters: (i) The intended function of ATTORI, which would be to research and construct the so-called Product Packages to facilitate the contract manufacture of bulk or private label product, and the marketing of those products by predominantly large and well known international companies; (ii) The intended function of BARM as "Manager of the Syndicate" to manage "this business process and to arrange manufacture and sale of products", and also to administer the affairs of ATTORI; (iii) The financial participation of applicants in the syndicate participations, which involved a minimum payment by each participant of $1000 per month for 24 months payable in advance, being $900 per month payable to ATTORI for scientific research and $100 per month payable to BARM for management services, or alternatively, two annual payments of $12,000 payable in advance, "comprising in each case" a contractual payment to [ATTORI] for scientific research of $900 per month and a management fee to [BARM] of $100 per month". In that context the following appeared: "No payments are required from you beyond 24 months as all costs from that time including Management and Administration Fees will be deducted from the revenue earned from product sales before declaring a net revenue earned by your Syndicate." (In addition, but not here mentioned, each participant was required to pay a Business Establishment Fee of $200 and a Loan Application Fee of $300, in the latter case if a loan was required, which was almost invariably the case). (iv) For the administration of the affairs of ATTORI, BARM was to be paid $1200 per "Syndicate Participant" in years 1 and 2 to manage ATTORI, which fee would thereafter reduce to $250 per annum for each "Syndicate Participant" plus annual C.P.I. increments; in addition BARM was to receive "25% of the gross revenue derived from the business of the Syndicate Participant" to pay for its services, which it was authorised to deduct from revenue in its hands; (v) The term of the BPS Syndicate was stipulated to be 15 years, whereafter all intellectual property, contracts and any other assets "of the Participant in the Syndicate" would be sold, and the sale proceeds distributed between Syndicate Participants and BARM in certain specified proportions; (vi) The minimum number of participations was to be 50 in number; the offer in the Prospectus was for 1000 Syndicate participations; any participant might take more than one Syndicate participation; there was provision for 1,500 oversubscriptions; however it was stated that BARM would only accept oversubscriptions in the event that the Budplan Company Syndicate fell short of its subscription allocation of the approximate equivalent of 1,500 BPS subscriptions. In the events which happened, the aggregate number of BPS subscribers was 2,371; (vii) The following so-called risk factors: "Money is typically invested in businesses as proposed including research and development because of the potentially high returns. Such high returns are possible under your participant in the [BPS] described in this Prospectus. However, the risk in the Business as proposed including research and development is also high and you should not begin your business unless you assess the risks. The initial formulae and product concepts and the areas of research selected are those which, in the opinion of the Manager, hold good prospects for success and every endeavour will be made to maximise the returns to your business. Success however can not be guaranteed." (viii) ATTORI had been formed specifically to undertake scientific research and was capable of performing the tasks required of it, and comprised "a body of eminent and experienced industry and business persons and academics which is retained by BPS to provide scientific research", including the following: "· Enhance existing product formulae and concepts and develop them into 'Product Packages'. · Research new products and 'Product Packages'. · Determine the likelihood of success of any particular piece of research to enhance or expand the product range. · Determine research requirements and protocols. · Source suitable researchers and research bodies to conduct the required research and development under the supervision of the Institute. · Assess the potential for successful commercialisation of any proposed piece of research or 'Product Package'." (ix) Five of the directors of ATTORI, namely the abovementioned Messrs Stotter and Priest, and also Dennis Charles Lear, Peter Charles Lucas and Alan James Gallagher, were also stated to be the directors of BARM, and of companies comprising the Main Camp Group which were suppliers of Main Camp Premium Pharmaceutical Grade Tea Tree Oil. Messrs Lear, Lucas and Gallagher were also stated to be directors of PGF, and Messrs Stotter, Gallagher and Lear were stated to be directors of Monpro Ltd, which acted as a security dealer to introduce participants on behalf of BARM. 13 The following additional material contained in the "Details of the Business" segment requires reproduction verbatim: "Marketing Risk Factors It is intended to sell the products developed on the world market under the best possible terms and conditions. It is not intended to retail brand products or enter into the business of retail marketing. Rather it is the intention of the Manager to arrange to contract manufacture bulk product for packaging and labelling by large international companies under their own brands. The Manager will commence marketing activities immediately upon the commencement of the Syndicate by contacting, or where contact has already been made, by re-contacting, the many large international companies who have already indicated an interest in tea tree oil products. This list will be increased by personal contact, trade shows, trade journals and advertising. Constant contact will be maintained with interested parties during the research period and additional interested parties will be sought on an ongoing basis. There is no guarantee that the revenue expected will be derived, however every effort will be made to meet and exceed the projections made in the attached report by Excel Consulting Group (Qld) Pty Ltd…" Again may be noted the reference to business activities commencing immediately, this time in the nature of marketing activities, notwithstanding that it was already indicated, for instance in the "Business Overview" segment set out in [9] above, and earlier in this "Details of the Business" segment reproduced in [12(vii) and (viii)] above, that research and development activity was required first to be undertaken in order to obtain marketable product packages. "More than one Product Package will be developed for each product type to enable the Manager to approach a broad market spectrum and to maximise returns. … Loan Option An intending participant may borrow 100% of the first and second years scientific research expenditure and management fee amounting to $12,000 in the first year and $12,000 in the second year for a total of $24,000. The loan is optional, however if you elect to borrow in this way to finance your participation you must comply with the conditions of the loan set out in the Loan Agreement. The Loan Agreement requires an application free of $300 and for you to personally make 24 monthly in advance payments of principal and interest amounting to $400 each ($250 principal plus $150 interest). You are not obliged to make any further payments personally after 24 payments have been made, however you must commit not less than 50% of your net Syndicate earnings to the repayment of the loan and interest until expiry of the loan. …" In the events which happened, apparently all but one of the abovementioned 2371 subscribers opted to borrow the two successive yearly sums of $12,000 (totalling of course $24,000). "Put Option If you have taken a loan to fund the cost of the Scientific Research expenditure and management fees then you have the benefit of a Put Option whereby you can require the Manager, at the expiry of the term of the Syndicate, to purchase that part of your Business including the assets of the Business and Research Results as shall be equal in amount to the unpaid balance of the loan at the expiry of the term of the Syndicate. If you elect to exercise this option, the Manager may then, at its option, elect to acquire any remaining balance of your Business including the assets of the Business and Research Results at a price determined by independent valuation." The term of the Syndicate, as already indicated, was to be 15 years, though the total payment of $24,000 (or multiples thereof), to be made by two successive amounts of $12,000 (or multiples thereof), were to be so made in advance at successive yearly intervals. 14 The next segment of the Prospectus was described as a "Marketing and Technical Consultant's Report". The author was Dr Twomey, who has been identified in [6] above, and who was a director of Excel Consulting Group (Qld) Pty Ltd (identified in the previous paragraph). His credentials and expertise in marketing, strategic planning and organisational development, and as a consultant to major multinationals, were not disputed. Dr Twomey's Report occupied five pages of the Prospectus, and was also said to have been included in the Budplan Company Syndicate Prospectus. His private company had provided consulting services to the Main Camp Group since 1989. Under the heading "The Opportunities", the following appears: "The Opportunities Natural health products are in the top growth areas of the pharmaceutical and cosmetic segments of world markets. It is a trend that is truly international. The growth rate of the markets in both the EU and USA ranged from 8 to 14% p.a. during the past five years. This trend started in 1980, levelled out in 1985-90 and has progressed steadily since. Our research has identified several important characteristics of the segments and a role for Tea Tree Oil to share in the growth. These are: - a trend for synthetics to be replaced by natural products - major manufacturers of cosmetics and pharmaceuticals seeking new materials from areas having supply capability - innovative products having special features and benefits having the fastest growth - over 50% of buyers are women aged 30 to 65 - over 50% of consumers want ecologically sustainable products - over 70% of consumers evaluate the ingredients of a product - Tea Tree Oil has the potential to meet many of the market requirements with its many features and benefits." 15 Under the next heading "The Market Size", Dr Twomey set out the then current retail market values for the "Cosmetic" products and "Pharmaceutical" products said to then prevail in the European Union, Japan and United States of America, with a degree of overlapping. Thereafter under the heading "Barriers to Capturing Opportunities", Dr Twomey explained that throughout the world, there was an increasing level of regulatory requirements for validation of efficacy and safety of materials used in pharmaceutical, and to a lesser extent, cosmetic products, and that in particular, the United States Food and Drug Administration ("FDA") produced monographs which listed substances approved for specific applications, and in the European Union, protocols had been developed for pharmaceutical products, although individual countries continued to have secondary requirements, and Australia stipulated its own requirements under the auspices of the Therapeutic Goods Administration Act 1989 (Cth). I will hereafter refer to the Australian Therapeutic Goods Administration referred to in such legislation as the "TGA". All such requirements were said to have similarities for verification of safety and efficacy of substances and products, but there were no internationally accepted registrations or protocols. In that context, Dr Twomey offered the following conclusion: "This is a relatively simple application of tea tree oil and the review highlights the necessity for definitive research and development. Having done this work there is no reason to suggest that the FDA Monograph won't be achieved." A monograph officially lists substances for specific human applications. 16 Under the next heading of Dr Twomey's Report "Pharmaceutical Research And Development – The Opportunities" the following appeared: "Pharmaceutical Research and Development The Opportunities High value markets exist within the pharmaceutical segment for natural products and formulations containing natural products. The limitations are the lack of controlled clinical efficacy trials with closely defined chemical composition oil. This creates an opportunity to develop a range of products containing tea tree oil, which may be sold to major manufacturers of products who specialise in one or more of the subsegments of the pharmaceutical segment. The three subsegments that appear to have the greatest opportunity in terms of competitive advantage and natural product differentiation are: · Acne · Hospital and Antiseptic · Oral Hygiene." Thereafter were set out detailed expositions by Dr Twomey on the subjects of "Acne, Hospital and Minor Wound Care, Oral Hygiene, Commercialising Research and Development", followed by his assessment of "the potential for commercialisation" of the products which might arise from the research and development needs identified in his report, based upon the following assumptions: "ASSUMPTIONS s verification of most of the anecdotal and clinical reports will be an outcome s a number of patented products and/or processes will result from the research and development s a number of unpatented but copyrighted products and/or processes will result from the research and development s the research and development will allow product registration for use as a pharmaceutical in the EU, USA, Japan and other countries s products will be made available for manufacture by companies who can penetrate specific target markets s revenue equal to an average of 5% of the manufactured price will be derived from the sale of bulk and private label products after deduction of all business expenses s the manufactured price is 35% of the retail value of products surveyed in the market research." Such "potential for commercialisation", which Dr Twomey equated with "The commercial returns on the proposed business" of BPS and the Budplan Company Syndicate, that is to say, for the two syndications in combination, assumed estimated market shares for each product worldwide of 10% for acne, 5% for antiseptic and hospital, and 50% for oral hygiene products, a manufacturing cost of 35% of retail value, an annual profit based on 5% of the two Syndicates' said market shares, and an exchange rate of the Australian dollar to US dollar of 0.75. The resulting potential annual profit for the two Syndicates was estimated to be AUD38.86 million. 17 The next segment of the Prospectus in sequence was headed "Taxation and Cashflow Aspects of years 1 and 2", and was based upon the so-called "minimum participation level" of "$1000 per month for 24 months or $12,000 per year for two years", plus a "Business Establishment Fee" of $200 and a "Loan Application Fee" of $300, and the assumption of a borrowing in advance of the full amount of such minimum participation level amounting to $24,000. The following table thereafter appeared: Your Funds Borrowed Funds Deductible over 2 years Business Establishment 200 - - Fee 300 - 120 Loan Application Fee 0 24,000 24,000 Scientific and Research 3,600 0 3,600 Expenditure and 6,000 0 0 Management Fee over 10,100 24,000 27,720 2 years Interest over 2 years Principal Reduction Over 2 years It was thereupon stated in this context that "Taxation savings are not guaranteed and are given for illustrative purposes only. Please read the Taxation reports contained in this Prospectus and seek your own advice to determine if you qualify for a taxation concession to the extent indicated". Those Reports were prepared by Mr Lear of Lear & Co, who has been identified in [12(ix)] above, and by Clayton Utz, Solicitors and Attorneys. In the case of the Clayton Utz report, it was explicitly stated as follows inter alia by way of introduction: "The following comments provide only a descriptive summary of the main taxation issues considered. They do not purport to be an exhaustive or definitive analysis of all potential tax issues relevant to participation in the business. The taxation consequences for an investor will depend upon the particular circumstances of each investor. Investors should not rely on this explanatory outline for taxation purposes, but should seek and reply on their own taxation advice." 18 Based upon the then current personal income tax rates (including Medicare Levy) of 35.5% for each dollar over $20,700, 44.5% for each dollar over $38,000 and 48.5% for each dollar over $50,000, the following three Tables as to cash flow positions were stated as follows: "TABLE 1 Monthly Cash Flow Position (excluding initial one off payment of $500) Marginal Tax Rate Your Funds Tax Savings Surplus 35.5% 400 410 10 44.5% 400 514 114 48.5% 400 560 160 TABLE 2 First Years Cash Flow Position (excluding initial one off payment of $500) Marginal Tax Rate Your Funds Tax Savings Surplus 35.5% 4,800 4,920 120 44.5% 4,800 6,168 1,368 48.5% 4,800 6,720 1,920 TABLE 3 Two Years Cash Flow Position (excluding initial one-off payment of $500) Marginal Tax Rate Your Funds Tax Savings Surplus 35.5% 9,600 9,840 240 44.5% 9,600 12,336 2,736 48.5% 9,600 13,440 3,840 ." 19 The next following segment of the Prospectus of potential significance was headed "Income & Expenditure Illustrations", and laid out the following assumptions for the purpose of the illustrations which followed: "Income Income calculations are based on the projected earnings illustrated in the independent Marketing Consultants Report contained in this Prospectus…(ie Dr Twomey's above report). These figures are based for illustration purposes only on the USA, Japanese and European markets for the designated product categories. It is intended however to market in other available world markets. It could take a few years to reach the potential income and a phase-in period commencing in Year 3 and lasting to Year 6 has been used as follows: 5%, 33%, 66% & 100%. A net revenue basis of 5% of ex-factory price has been assumed by the Independent Marketing Consultant as a profit on sales after all expenses. The net earnings from product sales will be shared with other Budplan Personal Syndicate participants and participants in the Budplan Company Syndicate in proportion to the Total Expenditure paid by each participant for scientific research and management costs. All the costs of running your business such as manufacturing costs, marketing expenses and overheads will be provided for and borne in the normal manner by the Syndicate from revenue earned, with the surplus being profits to your research business." Reference already appears in [9] above to the contemporaneous Budplan Company Syndicate fundraising. Then were described the varying finance participation levels to be assumed for the illustration to follow, based upon the three assumptions or options extracted below: "Loan repayment options If you elect to borrow to finance your participation, you have to personally make 24 monthly payments of principal and interest of $400 each per Participation, in addition to your Loan Application Fee of $300." "To repay the remaining debt you may choose to direct either 100% (Option 1) or 50% (Option 2) of your net business earnings to repay principal and interest until the loan is extinguished…. The illustrations below (ie Tables 1, 2 and 3 referred to in [20] below) assume the net earnings as set out in the independent Marketing Consultants Report (ie Dr Twomey's report, where he refers to a potential annual profit of AUD$38.86 million per annum for the BPS and the Budplan Company Syndicate together): The three tables differ as follows:- Table 1 The option of taking no loan OR Table 2 The option of directing 100% of your business earnings, after deduction of fees and costs, to repay your loan OR Table 3 The option of directing 50% of your business earnings after deduction of fees and costs to repay your loan. The remaining 50% would be directed to you as a cash payment." It appears that one person out of the 2371 subscribers to the BPS adopted the Table 1 "option" of participating entirely without borrowing. 20 The three Tables containing the "Income & Expenditure Illustrations", were each based on the assumed investment return described in Dr Twomey's report, namely: "The Return on Investment (ROI) calculation assumes a return on the Total Expenditure of $24,000 which is payable over 2 years. It is not a true ROI calculation in that it treats the Total Expenditure as an investment. The Total Expenditure is not an investment apart from the resultant business benefits arising from that expenditure to derive business profits. No account of any taxation implications are taken into account in illustrating the ROI." They related respectively to each of the three options set out in [19] above. The first illustration related to a minimum participation level of $1000 per month without any borrowing, which disclosed "Net earnings (5% of sales)" totalling $167,408 over 15 years, with a return on investment growing to an average of 46.5%, after nil returns for the first two years, a 3.2% return for the third year, a 21% return for the fourth year, a 42.1% for the fifth year, and thereafter a constant return of 63.1% per annum for the remaining ten years duration of the BPS. The second and third illustrations related respectively to the loan repayment options of 100% and 50% the subject of Tables 2 and 3 referred to in [19] above, geared to the same participation or subscription level, and assuming again Dr Twomey's estimate of annual profit of AUD$38.86 million per annum for the BPS and Budplan Company Syndicate in the aggregate, the differences being that in the case of Tables 2 and 3, interest and repayment factors were added to the equations of Table 1, producing in the case of Table 2 a total cash distribution of $144,378 over the 15 year period, and in the case of Table 3 a total cash distribution of $143,210. 21 Under the subsequent heading "Additional Information", reference was made first to the Trust Deed dated 5 December 1995 referred to in [11] above, with the following explanation: "Each Syndicate Participant, by entering into the Budplan Personal Syndicate Deed becomes a party to the Trust Deed. The Deed contains all of the covenants required by Section 1069 of the Corporations Law and Company Regulation 7.12.15…." The only other matter in this segment referred to, which should be reproduced, is as follows: "12. Nature of Your Business Your business is the development and sale of tea tree oil products to marketers or manufacturers of products in the target areas of research. These areas are: · Acne treatment · Hospital ad Antiseptic products · Oral hygiene In the event research is not proving to be successful or, in the opinion of the Manager, may not produce a satisfactory commercial return, then the Manager will request the Research Institute to substitute an alternative area of research which, in the Manager's opinion, will provide a better return to the Syndicate Participants. In the event this Prospectus is not fully subscribed the scope of the research may need to be curtailed. Subject to the minimum subscription level, if this occurs the Manager will request the Research Institute to proceed with a reduced programme deemed to be in the best interests of the Syndicate Participants." 22 The next segment of the Prospectus headed "Questions and Answers" contained a series of ten questions and answers. One related to the availability of TTO to meet the "market uptake" of the products predicted in the Marketing and Technical Consultant's Report, which "… in the fullness of time… will mean a requirement of 366 tonnes of oil annually". Such requirement of supply of TTO was said to be "covered by the anticipated production of Main Group Premium Pharmaceutical Grade Tea Tree Oil". Others were largely repetitive of what has been already referred to in [17] and [19] above. Three of the questions and answers warrant reproduction in full below, albeit that the same were largely repetitive of what has been reproduced already above: "Q. What is my Total Expenditure? A. The minimum Total Expenditure of $1,000 per month for 24 months plus a Business Establishment Fee of $200. You may increase above this minimum in multiples of $500 per month. These amounts are dissected between a management fee of $100 per month and scientific research expenditure of $900 per month. No payments beyond 24 months are required from you personally as further expenditure can only come from the proceeds of product sales. Q. How does the Loan Agreement work? A. You may borrow 100% of each of the first years and second years Total Expenditure – a total of $24,000 at the minimum level of participation. Following 24 monthly payments of $400 principal and interest, you can nominate to repay the balance of your loan by directing either 50% or 100% of your Syndicate earnings toward repaying the balance of your loan account. The Loan Application Fee is $300. Security for your loan is your Business interest and providing you comply strictly with the conditions of the loan, your personal liability for the balance of principal and interest after 24 monthly payments have been made on time, is to repay the principal and interest from the income of your Business. However, if a balance exists at the end of the period of 15 years from the loan being made to you, you may effect a put option to require the Manager to pay you a minimum price, as specified in the Budplan Personal Syndicate Deed, which must be used by you to enable the repayment of the outstanding principal and interest, if any. The Loan conditions set out in the Loan Agreement make particular reference to the prompt monthly payment of $400 principal and interest for the first 24 months. An additional benefit of complying promptly with all of your loan conditions is that from Year 2, your interest rate will be reduced from 15% to 8.57% p.a. (refer Loan Agreement for details). Failure to comply with the payments referred to above means that the Lender has recourse to you personally in addition to the earnings of your Business and will apply the penalty interest rate of 17% p.a. More importantly, on default, the Lender may at any time call in the balance of the loan and look at the borrower personally to satisfy the debt. Your attention is drawn to the Loan Agreement in this regard. Q. What is the maximum I can personally be called upon to pay? A. If you have met all the conditions of the Loan Agreement then you are personally responsible for 24 monthly payments of principal and interest of $400 each for a total of $9,600. The balance of your loan and interest and any management fees can come only from the earnings of your Syndicate Business providing you have adhered to the terms of the loan and is subject to your right to effect a put option in accordance with the Budplan Personal Syndicate Deed as referred to above. If you fail to meet the conditions of the Loan Agreement then you will be asked to repay the balance of your loan account including penalty interest and pay in full any as yet unpaid Management Fees. It is best therefore if you feel you are unable to meet your principal and interest payments of $400 per month for 24 months that you do not participate." The abovementioned sum of $9600 picks up again the aggregate of the figures of $3600 and $6000 referred to in the Table reproduced in [17] above. 23 Then in sequence contained in the Prospectus were the two expert reports concerning the availability to participants of tax deductibility, which I have already identified, an Investigating Accountant's Report prepared by Greenwood Challoner, which disclosed inter alia that as at 27 November 1995, BARM's net assets stood at $25,000, as at 30 June 1995 PGF's total shareholders' equity stood at $298,596, and ATTORI had not traded as at 23 November 1995, followed by a pro forma of the so-called Principal Deed to be entered into between BARM of the first part, the participant of the second part, all other participants of the third part (who were not understandably actual signatories thereto), PGF of the fourth part and ATTORI of the fifth part, followed next by the Budplan Personal Syndicate Deed to be entered into between each participant of the first part, the existing participants of the second part, BARM of the third part and ATTORI of the fourth part, thereafter the Loan Agreement to be entered into between PGF as lender and each participant as borrower, and finally the Prospectus Application Form for syndicate participations and for notification of exercise of the borrowing option (if required). Each applicant was required to execute the Principal Deed, to which was annexed the Syndicate Deed, the Loan Agreement and the Prospectus Application Form as documents deemed to form part of the Principal Deed. Two copies of each of those documents were contained within the Prospectus – an executable copy which could be detached from the Prospectus by perforations, and a copy which could be retained by the participant. The Syndicate Deed was not in fact intended to be signed, but to comprise a schedule of terms deemed to form part of the Principal Deed. Thus Clause 1.1 of the Principal Deed provided as follows: "1.1 The parties agree that the documents attached hereto… shall be deemed to form part of this Deed and, where the Participant has requested a loan from the Lender under the Application Form, the document attached hereto as set out below as Annexure B (ie the Loan Agreement) shall be deemed to form part of this Deed…." In addition to the Principal Deed and Syndicate Deed was the Trust Deed to which reference appears at the conclusion of [11] above; it would appear that the Principal and Syndicate Deeds were intended to be in the nature of sub-trusts to the Trust Deed. 24 Certain aspects of the Syndicate Deed and the Loan Agreement require extraction. Addressing first for convenience the Loan Agreement, the Lender thereunder being PGF and the Borrower being a participant seeking to be financed in respect of his participation (which as earlier indicated comprised all but one participant), the following definitions were included: "1.1.2 "Business" has the same meaning as defined in the Budplan Personal Syndicate Deed. 1.1.3 "Gross Income" shall have the same meaning as Assessable Income as defined in Section 6(1) of the Income Tax Assessment Act. 1.1.4 "Initial Period" means the twelve (12) month period from the payment date of the Budplan Personal Syndicate. 1.1.7 "Net Amount" shall mean Gross Income of the Business reduced by all expenses of the Business and all management fees calculated in accordance with the Budplan Personal Syndicate Deed. 1.1.8 "Payment Date" means the first day of the calendar month following the date hereof or the date hereof if executed on the first day of a calender month. 1.1.10 "Principal Sum" means the sum or sums set out in sub-clauses 2.2.1 and 2.2.2 hereof. 1.1.11 "Reduced Principal Sum" means the Principal Sum less any payments of principal made pursuant to sub-clause 4.1 hereof and including any interest which may be capitalised or remaining (sic) unpaid." Thereafter by clause 2.2 of the Loan Agreement it was provided as follows: "2.2 The Principal Sum shall be advanced to the Borrower as follows: 2.2.1 On the Payment Date the sum set out in Annexure "C" to the Principal Deed, as required for payment for the Initial Period of the sum of Ten Thousand Eight Hundred Dollars ($10,800) to the Institute and One Thousand Two Hundred Dollars ($1,200) to the Manager together with if the Borrower so chooses further multiples of Five Thousand Four Hundred Dollars ($5,400) to the Institute and Six Hundred Dollars ($600) to the Manager. 2.2.2 On the day after the expiration of the Initial Period the Lender will advance to the Borrower a further sum equal to the amount advanced to the Borrower pursuant to sub-clause 2.2.1 hereof." Provision was made for payment of interest as follows: "3.1.1 On the Payment Date interest shall be calculated and charged in advance at the rate of 17% per annum on the Principal Sum. 3.1.2 In consideration of the Borrower paying interest and principal payments monthly on the Payment Date and on the first day of each month thereafter or within seven (7) days of such date the Lender hereby agrees to accept interest at the rate of 15% per annum. 3.1.3 On the execution hereof the Borrower shall pay to the Lender the sum of One Hundred and fifty dollars ($150) together with the amount of Seventy Five Dollars ($75) for each additional Six Thousand Dollars ($6,000) borrowed pursuant to sub-clause 2.2.1 hereof being the first instalment of interest as aforesaid which amount will be applied to payment of interest on the Payment Date as set out in sub-clauses 3.1.1 and 3.1.2 of this Clause. 3.1.4 Thereafter, instalments of interest payable as aforesaid shall be payable on the first day of each of the succeeding eleven (11) calendar months. 3.1.5 On the day after the expiration of the Initial Period and for the succeeding twelve (12) calendar months the rate of interest shall be further reduced to Eight point five seven per cent (8.57%) per annum subject to payment of interest and principal payments within seven (7) days of the due date as specified in sub-clause 3.1.6. 3.1.6 On payment of the second advance pursuant to sub-clause 2.2.2 the Borrower will pay interest instalments of One Hundred and Fifty dollars ($150) per month the first such payment on the date of receipt of the second advance as aforesaid and thereafter on the same day for each of the succeeding eleven (11) calendar months. 3.1.7 Thereafter the rate of interest shall be Seventeen per cent (17%) per annum reduced in Eight point five seven per cent (8.57%) calculated at yearly rests in advance on the anniversary of the Payment Date provided all payments of principal and interest as provided for herein have been made and such interest shall be met for the Borrower's Net Amount." (The twenty-four monthly interest payments of $150 payable pursuant to Clauses 3.1.3, 3.1.4 and 3.1.6 equal the interest sum of $3600 referred to in [17] above). Thereafter provision was made for repayment of principal as follows: "4. Principal 4.1 The Borrower shall make principal repayments of Two Hundred and Fifty Dollars ($250) plus One Hundred and Twenty Five Dollars ($125) for each additional multiple of Six Thousand Dollars ($6,000) borrowed pursuant to sub-clauses 2.2.1 and 2.2.2 hereof for twenty four months commencing on the Payment Date and thereafter on the first day of each calendar month within seven (7) days of such date in reduction of principal." (Such principal repayments thus amounted to the sum of $6000 referred to in [17] above). "4.2 The Reduced Principal Sum shall be repaid together with interest thereon in accordance with sub-clause 4.3 from the Net Amount after reduction of the Net Amount by interest as provided for in sub-clause 3.1.7. 4.3 Such payments of principal as are set out in sub-clause 4.2 above shall be made at the rate of Fifty per cent (50%) of the Net Amount after reduction of the Net Amount by interest as provided for in sub-clause 3.1.7 or such greater amount or percentage as the Borrower shall choose." 25 Under the heading "Limitation of Borrower's Liability", the following then appeared: "7.1 The Borrower shall have no other liability for payment of the Reduced Principal Sum or interest thereon other than out of Gross Income of the Business as provided for in sub-clause 3.1.7, 4.2 and 4.3 hereof provided that should the interest of the Borrower in the Net Amount be insufficient to pay the principal sum and interest by the expiration of the term then the term of this loan shall be extended until the principal sum and interest is paid from the Borrower's Gross Income of the Business or Net Amount as the case may be but in any event for no longer than fifteen (15) years from the date hereof at which time the Borrower shall repay any outstanding principal and interest, subject to the following: 7.1.1 Repayment by the Borrower of the principal repayments set forth in either sub-clause 4.1, 4.2 or 4.3 by the due date for each payment; and 7.1.2 Payment of interest for the term of the loan as set forth in sub-clauses 3.1.1 to 3.1.8 by the due dates; and 7.1.3 Due performance of the Borrower's obligation pursuant to the provisions of the Budplan Personal Syndicate Deed (in this agreement no act or omission by the Manager in the due performance of its obligations will be regarded as non performance by the Borrower under the aforesaid Deed)." I should conclude by reproducing Clause 8.5 of the Loan Agreement reading as follows: "8.5 The Borrower hereby authorises the Lender to remit the principal sum to the Manager to be applied by the Manager toward the obligation of the Borrower to make payment of management fees, research fees and expenses pursuant to the Budplan Personal Syndicate Deed and the Lender irrevocably agrees to remit such funds as aforesaid in satisfaction of the Borrower's obligations under the aforesaid Deed." 26 In the events which happened, at least the Applicants Ms Howland-Rose, Mr Harvey and Mr Davidson entered into a so-called Alternative Loan Agreement, instead of the Loan Agreement set out in the Prospectus; it is unclear whether the Applicant Mr Braysich entered into the Loan Agreement or the Alternative Loan Agreement. The Alternative Loan Agreement was almost identical to the Loan Agreement, the principal exception being the inclusion in the former of a new Clause 3.1.8 (which required the existing Clause 3.1.8 to the Loan Agreement to be renumbered 3.1.9) reading as follows: "3.1.8 The Borrower shall have the option of prepaying interest as follows: (i) As to the interest due pursuant to sub-clauses 3.1.3 and 3.1.5 on execution hereof and the day after the expiration of the Initial Period respectively the Lender shall accept such amount less a discount of Three Hundred Dollars ($300) in the case of a prepayment of One Thousand Eight Hundred Dollars ($1,800) and One Hundred and Fifty Dollars ($150) for each additional Nine Hundred Dollars ($900) prepaid; (ii) Alternatively the Borrower may prepay thirteen (13) months interest and be entitled to a discount of Three Hundred and Twenty Five Dollars ($325) for each interest payment of One Thousand Nine Hundred and Fifty Dollars ($1,950) and One Hundred and Sixty Two Dollars ($162) for each additional interest prepayment of Nine Hundred and Seventy Five Dollars ($975)." It appears that Ms Howland-Rose was the only one of the four Applicants who exercised the option contained in Clause 3.1.8 of the Alternative Loan Agreement, thereby reducing her interest liability by $300. 27 Each of the Applicants signed their respective application forms for so-called syndicate participations during May 1996, by drawing cheques for the following respective amounts comprising the first month's repayment of principal and interest under the (Alternative) Loan Agreement (amounting to $400), the business establishment fee and the loan application fee (amounting to $200 and $300 respectively): (i) Ms Howland-Rose as to $900 for one syndicate participation; (ii) Mr Harvey as to $2,700 for three syndicate participations; (iii) Mr Davidson as to $3,600 for four syndicate participations; and (iv) Mr Braysich as to $900 for one syndicate participation. Each thereby obtained a percentage interest in the so-called "Research Results" referred to below in my summary of the Syndicate Deed in [28] below, being a percentage calculable by reference to the total number of 2721 participants, and the respective sums the subject of their syndicate participations. 28 The Budplan Personal Syndicate Deed, to which I have been referring as the "Syndicate Deed" for brevity, should next be summarised in its aspects potentially relevant in the proceedings. The pro forma thereof set out in the Prospectus stipulated that the parties thereto were each individual participant of the first part, those other participants who concurrently with or prior to the execution of the Syndicate Deed had entered into an identical deed of the second part, BARM as Manager of the Syndicate of the third part and ATTORI of the fourth part. The Syndicate Deed testified as to the formation of the Syndicate (defined as "the joint venture formed pursuant to this Deed known as the Budplan Personal Syndicate") upon the terms and conditions of the Deed for the purpose of conducting the "Business", such term being defined by Clause 1.1.2 thereof as follows: "1.1.2 "Business" means such business actions undertaken to enable the derivation of income by the Participants from the following activities: (i) the production and sale of products and Research Results including Product Packages based on tea tree oil including (but not limited to) formulae, packaging and labelling; (ii) product development including the research and development of products; (iii) the purchasing of necessary technology for the purposes outlined in 1.1.2(i) and (ii) above; (iv) the sale of purchased or developed technology to enhance such business and its future prospects or, on the basis that a suitable return is obtained, by the sale at an earlier than envisaged time; (v) the holding of all appropriate technology developed whether developed or acquired or from purchased technology; (vi) derivation of income and profits from the above activities including where appropriate future royalty income; and (vii) derivation of income from creation of Research Results including Product Packages and Research and Development." The observation made in [10] above concerning the merger of elements of the so-called "business" into a unified concept may here be repeated. The expressions "Product Packages", "Research and Development" and "Research Results" were in turn respectively defined as follows: "1.1.12 "Product Packages" means formulae and concepts using Main Camp Pharmaceutical Grade Tea Tree Oil and includes product formulae, product samples, stability and safety information and efficacy data, scientific and technical labelling and packaging specifications. 1.1.13 "Research and Development" shall mean research into the properties and applications of tea tree oil and development of the processes and products specifically for use in acne treatment, hospital and antiseptic and oral hygiene applications and includes the establishment of research facilities, the engagement of suitably qualified personnel, and sourcing and compilation of various existing technology and research information and creation of databases, the establishment of research protocols, the establishment of projects based on existing uses, quantitative and qualitative analysis of extracted substances, laboratory and clinical trials and all works and processes that flow therefrom. 1.1.14 "Research Results" means all data, research papers, test results, experiments, processes, products, Product Packages and any intellectual property rights which arise out of or come into existence as a consequence of the Research and Development, and includes any commercially exploitable equipment or other items incorporating such intellectual property rights." I interpolate here to add that as foreshadowed in [27] above, by Clause 5.1 it was further provided that the Research Results would be the property of the participant, subject to conditions which need not be reproduced; since there were 2371 participants, Clause 5.1 referred to below would need to be read accordingly. 29 The term of the BPS was stated by Clause 3.1 to be 15 years from the date of entry of the last Participant into the Syndicate Deed, unless the same was to be sooner determined by dissolution in the circumstances set forth in Clause 8 of the Syndicate Deed. Clause 3.1 may be compared to Clause 6.3 to which reference is made below. Clauses 4.1 and 4.2 stipulated for the following payments to be made by a participant to BARM over the ensuing period of two years for research and management fees: "4. Research and Management Fees 4.1 On execution hereof the Participant will pay to the Manager as Agent for the Participant and Manager of the Syndicate an amount of Two Hundred Dollars ($200) or, where the Participant has elected to take a multiple as set out in sub-clause 4.2 hereof, a further sum of One Hundred ($100) for each additional multiple, which amount will be used by the Manager to commence the Business in the Syndicate with others PROVIDED THAT if the Business does not proceed such amount will be refunded. 4.2 Subject to the following provisions of this Clause on the Payment Date and thereafter on the first day of each succeeding month for twenty three (23) months the Participant will pay to the Manager as Agent for the Participant and Manager of the Syndicate the sum of One Thousand Dollars ($1,000) being a total of Twenty Four Thousand Dollars ($24,000) or additional multiples of Twelve Thousand Dollars ($12,000) by way of monthly payments of Five Hundred Dollars ($500) on the Payment Date and thereafter on the first day of each succeeding month and the Manager as Agent for the Participant and Manager of the Syndicate shall direct or disburse the aforesaid amounts as follows: 1. To the Institute monthly payments of Nine Hundred Dollars ($900) and where an additional multiple of Twelve Thousand Dollars ($12,000) has been elected a further sum of Four Hundred and Fifty Dollars ($450) per month for each such additional multiple for research fees in consideration of the Institute undertaking the Research and Development obligations set out in Clause 6 hereof. 2. To the Manager monthly payments of One Hundred Dollars ($100) and where an additional multiple of Twelve Thousand Dollars ($12,000) has been elected a further sum of Fifty Dollars ($50) per month for each such additional multiple for management fees in consideration of the Manager undertaking the duties and obligations set out in Clause 7 hereof and such amount shall be paid in such manner as the Manager shall direct." An alternative scheme for yearly payments by a participant to BARM over the same two year period for research and management fees was provided for in Clauses 4.3, 4.4 and 4.5, which need not be reproduced. Clauses 4.6 of the Syndicate Deed occasioned particular attention in the presentation of the Commissioner's case; it provided as follows: "4.6 In addition to the management fees set out above the Manager shall receive from the revenue of the Business an amount equal to Twenty Five percent (25%) of the Gross Income of the Business during the term of the Syndicate which amount shall be calculated and paid to the Manager on a monthly basis." As will later be seen, the Commissioner's financial expert, who gave evidence in the proceedings (Mr Lonergan), considered that the foregoing formula, in combination with what appears by Clause 5.3 reproduced below, produced the consequence that a participant would be denied any financial return. 30 The following further provisions of the Syndicate Deed may be highlighted in summary as follows. Clause 5.1 provided that the "Research Results" would be the property of the participant, subject to Clauses 5.3 and 5.4. Clause 5.2 provided that in the event that research and development produced research results of commercial value, BARM as agent for each participant and manager of the syndicate would investigate and pursue the commercialisation thereof for the production of income. Clause 5.3 stipulated that each participant would be entitled to 100% of the Research Results as specified in Clause 5.1 above, but the remainder of Clause 5.3, together with Cluse 5.4, went on to stipulate as set out below: "5.3 …PROVIDED, HOWEVER, that in the event of sale of any of the Research Results, Business and Research Management Limited will be entitled in its own right to the payment by the Participant of a lump sum royalty in consideration of Business and Research Management Limited forgoing all its rights and entitlements to any other royalties in respect of the Research Results, which in accordance with the generally accepted market expectations and usual business and commercial practice may have amounted to a quantum in the range of 15 per annum of the marketing income arising from commercialisation of the Research Results, such lump sum royalty to amount to Fifty Percent (50%) of the gross sale proceeds of the relevant Research Results and which shall be deducted directly from the sales proceeds due and payable to the Participant in full and final consideration of Business and Research Management Limited using its expertise in commercialisation of the Research Results and successfully negotiating the sale of them. 5.4 Each Participant's interest in the Business, Business Assets, Research Results, Gross Income of the Business and expenses of the Business shall be that proportion expressed as a percentage which the research fees paid by the Participant bears to the total research fees paid by all Participants in the Syndicate." Clause 6.3 of the Syndicate Deed required ATTORI to conduct research and development for the ensuing two years, and to provide BARM as agent for each participant with such follow-up support as might be required by BARM to obtain necessary licenses and registration for the research results, and product formulae, any stability and safety information, efficacy data, scientific and technical labelling and packaging specifications, and any other intellectual property rights arising out of or coming into existence as a consequence of the research and development activities. Clause 6.6 required ATTORI to undertake a number of specific responsibilities in relation to so-called "Research Results" and "Research and Development", including the development of appropriate processes, trial batches, production scale batches, and of conduct process validation trials on formulae using TTO, and of product specifications, and also the development of analytical methods and validation processes for products using TTO, and the conduct of safety studies and efficacy studies. 31 Other provisions of the Syndicate Deed were Clause 6.7, which provided for the appointment by ATTORI of BARM to carry out ATTORI's administrative and management functions, such as the sourcing of suitable premises, facilities and personnel for the conduct of research and development and the maintenance of books of account, registers and licenses necessary for ATTORI's administration and conduct of research. For those services, BARM was to be paid by ATTORI an administration fee of $1,200 for each participant (and an additional fee for each multiple interest of a participant) for apparently each of the first two years, reducing to $250 per annum thereafter (subject to indexation). Clause 7 provided for the appointment by each participant of the Manager to manage the BPS and the business thereof, and for various obligations and duties of management, including the following: "7.11 The Manager will act as Agent for the Participant in respect of the carrying on of the Business and use its best endeavours to commercialise the intellectual property and to continue to carry on the Business and will bring to bear all of its skill and expertise in promoting the Business and maximising the profit therefrom." 32 Further as to the Syndicate Deed, I would add reference to Clause 8.1 thereof, which provides for dissolution of the Syndicate by a majority vote of 75% of participants attending and voting at a meeting thereof, being a provision which the Commissioner asserted would have necessarily ensured in practical reality that the Syndicate would never be formally dissolved at the initiative of dissentient syndicate participants, and to Clause 9 thereof for the grant of a put option in favour of each participant stating as follows: "9. Put Option 9.1 If the Participant has requested a loan from the Lender and the Lender has agreed to lend the Principal Sum in accordance with the Loan Agreement comprising Annexure B to the Principal Deed then the Participant will be entitled to the Put Option which will require the Manager to purchase from the Participant the Business including the assets of the Business and the Research Results at the expiration of the period specified in sub-clause 3.1 for the Minimum Price. The Put Option shall be exercised by the Participant notifying the Manager in writing that sub-clause 9.1 is to apply." "Minimum Price" was defined earlier by Clause 1.1.7 as follows: "'The Minimum Price' means the amount equal to the amount of the outstanding principal and interest repayable to the Lender in accordance with sub-clause 7.1 of the Loan Agreement." Sub-clause 7.1 of the Loan Agreement has been already extracted in [25] above. Finally as to the Syndicate Deed, I would refer to Clause 11.2 thereof, which required a 50% vote or more of participants for the removal of BARM. The Applicants and their respective testimonies 33 Ms Howland-Rose is a qualified architect, though not engaged in practice on her own account. She had personally used TTO as an antiseptic. She was attracted to the development of what she thought to be a viable project involving a natural Australian product, which was environmentally sound, and which would earn substantial revenue for her in the future. She was further attracted by "the cash flow side" of the project as a person in receipt of a modest income, and because "It allowed lower income earners to all invest in such businesses, and not just wealthy people". A financial adviser introduced Ms Howland-Rose and her prospective husband to the project with the aid of a video and a spreadsheet showing projected income from the venture over 15 years. She observed the tax opinions set out in the Prospectus, and in particular that provided by Clayton Utz, whom she identified as a large and well respected law firm. Although Ms Howland-Rose read the disclaimer contained in that opinion, she "… felt these disclaimers would appear from anyone, irrespective of what opinion they were giving". Having subsequently received the Commissioner's issue of a so-called Section 221D variation made pursuant to her request to vary her provisional tax upon the footing of allowable deductibility in respect of her subscriptions to the BPS, she inferred that the Australian Tax Office must have approved her participation in the BPS. 34 Ms Howland-Rose claimed that she did not take up her single unit or syndicate participation in the BPS, primarily because of the prospective availability of tax deductions, since she realised from the outset that there was a risk that the Australian Tax Office might not allow tax deductibility. It was for that reason she said that she could not afford to take up additional units. She asserted elsewhere in her affidavit however that she thought the scheme was "a project that the government was supporting by allowing deductions as an indirect way of supporting Australian investment [in] research and development". Ms Howland-Rose espoused personal interest in natural products, and because she knew TTO already had "a tradition", she thought that the project was more likely to be a success, and make a substantial contribution to her source of income in later years. She also knew TTO to be a good disinfectant, and she had used it in conjunction with other home cleaning products to maintain her home. Ms Howland-Rose recalled that at the time she decided to participate in the BPS, she had calculated that after taking into account her prospective tax position, she would sustain an overall cash shortfall of $293 from her participation, given her gross annual salary of $34,000, the applicable tax rate of 35.5%, and her project outlays comprising application and establishment fees of $500, plus 24 monthly payments of $400 amounting to $9,600, less a total tax saving of $9,807. The explanation for that apparent shortfall in relation to Ms Howland-Rose is apparently given in [26] above. 35 The Second Applicant Mr Harvey was the General Manager of "The Land" newspaper published by Rural Press Limited, having 28 years experience as a rural journalist, and prior to that time 8 years experience in agriculture and in the pastoral industry. He was introduced to the BPS by his financial adviser. He had been previously aware of livestock based investment products, and had formed the view that "those projects… had a tax advantage, but [were] not much of a business". Mr Harvey was attracted to the project because he saw it as a good opportunity to invest in an agriculturally based project which would produce products which added value to a raw material produced in Australia, and would have a better chance of success than the sale merely of the raw material. He thought that the BPS prospectus, with its business plan and income projections, was impressive. He had recalled attending conferences on the subject of value adding raw materials, at which Dr Twomey was a key speaker, but he added that "Had he not had an agricultural science degree, I believe I would have questioned his prospectus report and his background. I had no reason to think that this was anything other than a proper report". 36 Nevertheless Mr Harvey was at least partly motivated in taking up three units or syndicate participations in the BPS (as to which see [27] above) by the represented availability of income tax incentives. Thus he said in his affidavit: "I recall when I looked at the spreadsheet provided to me by (his financial adviser) that there were a number of large figures for projected income. My view was that if I got my $2,700 back I was in front. I was impressed with the income projections that were put to me but I also felt that there was a good chance that I could only get back my $2,700. Repayments of principal and interest were initially covered by my $2,700 and the tax variation and by income from BPS. I would have been happy simply to break even… I recall that at the time I thought the projections contained in the prospectus were optimistic. Whilst I would have been very pleased if those projections came to fruition, I was happy to simply break even and get back my original investment." Mr Harvey further said in his affidavit: "If there had not been any opportunity to obtain section 221D variations I believe that I still would have taken some units in BPS. I believe that I would have taken up at least one unit. The tax deduction enabled me to take more units in BPS but my primary purpose was to generate income for retirement." And in the concluding passage of his affidavit, he added: "I was always impressed with the speed with which the section 221D variations came through… I took the speed with which the variations came through to mean that the ATO had enclosed the Budplans." 37 The Third Applicant Mr Braysich is the managing director of Saxby Bridge Pty Limited, a diversified financial services company, and of most of its subsidiaries, and is also a member of the Sydney Stock Exchange. He pursued a policy of investment diversification prior to his involvement with the BPS, one of which investments had related to the Bopple Macadamia Nut project. Although advisers employed by a related financial advisory firm recommended Budplan investment schemes to clients, he did not personally make any such recommendations. Altogether 575 clients of Saxby Bridge and its related company invested in the BPS, after their "product researchers" had visited ATTORI's Research Institute and the Main Camp Tea Tree Plantations. Mr Braysich took up only one unit or syndicate participation in the BPS, as appears in [27] above. He understood that "the funding was limited recourse to the project", but did not regard that circumstance to be particularly unusual. He was in receipt of a salary, with income tax deducted at the source, and he did not submit a s 221D variation because "I did not think about it…". He became aware that the Australian Tax Office had at one stage commenced the disallowance of s 221D variations in relation to participants in the BPS, and had subsequently reversed that course of action, a matter which gave him "a great deal of comfort", but such disallowances and subsequent reversals thereof occurred, as in the case of Ms Howland-Rose and Mr Harvey, after his subscriptions for a unit or syndicate participation had already been made in respect of the 1995-1996 fiscal year. 38 The following passage encapsulates Mr Braysich's stated purpose in taking up his single unit or syndicate participation: "I was not particularly interested in the tax, and it would not have made a significant difference in my position…. Whilst BPS was speculative, I felt that if it was successful, it was going to produce a significant level of income. I saw BPS as being no different from investments which don't have tax advantages… My purpose for investing in BPS was to continue my diversification of my speculative investments. I perceived that it was an opportunity and if I didn't take advantage of it I would miss out…." 39 The Fourth Applicant Mr Davidson is the Chief Operating Officer of Inovax Limited, an entrepreneurial pharmaceutical company engaged in the development and commercialisation of pharmaceutical products in Australia and Indonesia. His employee role includes monitoring and advising upon development projects. In the context of having received from a previous employer a substantial redundancy payment, Mr Davidson consulted with a certain financial planning company, which, amongst its variety of recommendations, included the BPS. He was attracted to the project particularly because of his lengthy involvement in the pharmaceutical industry. As to the Prospectus projections, he gave the following evidence in his affidavit evidence: "The Australian market comprises 1% of the worldwide pharmaceutical industry. In comparing the figures in the Australian Hospital and Retail Sales Indexes to the figures contained in the BPS prospectus, I arrived at the same figures for the market size. I considered the penetration forecasts contained in the BPS prospectus were somewhat optimistic, however once I verified the market size and penetration, I was satisfied that the projections in the BPS prospectus were adequate. … Once I had verified the market size I was largely comforted by the prospectus. I questioned the penetration. However Dr Twomey's experience and credentials seemed adequate in my view." 40 Mr Davidson subscribed for his 4 units or syndicate participations in the BPS (see [27] above), because he liked the project, and considered that it was "especially good", being himself already engaged in the pharmaceutical industry, and the development of pharmaceutical products. He said he was attracted to the BPS because of the income projections outlined in the Prospectus, and although the income returns were "on the high side", he was aware from his involvement in the industry that if the products were successful, "exceptional results could be achieved". He believed that TTO had great potential in the areas described by the Prospectus. In relation to the income tax deductibility factor, Mr Davidson said as follows: "It was my perception that the section 221D variations allowed me to purchase more units in the BPS. There was a financial risk for me in the sense that I had to make repayments of the loan. However I was aware that I did not have [to] pay off the loan after two years, because the loan would be repaid out of any profits from the business. I did not consider that the section 221D variations amounted to a return. The tax refund did not form part of my calculations when deciding to enter the BPS, only how many units I might take." 41 One circumstance which distinguished Mr Davidson's commitment to the BPS from those of the First, Second and Third Applicants was that although he lodged his application for units or syndicate participations in about May 1996, he deferred the commencement of his involvement in the BPS until the financial year 1996/1997, and thus any entitlement to tax deductibility until that year. He explained his reasons for so doing as follows: "Firstly, I wanted to defer any commitment to repayments under the Budplan until such time as I knew I was going to be in full time employment. I started full time work with Inovax at the end of April. Secondly, the tax advantage, as I had finally commenced full time employment with Inovax after six months of waiting for the company to finalise a capital raising. Thirdly, we had lived off my redundancy payments for five months and our cash position was becoming lower than desirable, I wanted to build up a little larger cash buffer before committing to permanent payments." 42 The Commissioner submitted that the cross-examination of the Applicants demonstrated that at the time each of them subscribed for units or syndicate participations in the BPS, each was cognisant of the following factors: (i) the income projections in the Prospectus were based on a series of assumptions, and there was a risk that those assumptions would not be fulfilled; (ii) his or her personal financial (ie cash) commitment was limited to an amount of $9,600 per unit or syndicate participation payable over 2 years (aside of course from the business establishment fee of $200 and the loan application fee of $300 payable up front); (iii) he or she would obtain tax deductibility in excess of the amounts for which they contractually participated, that is to say, the total sum of $27,720 per unit or syndicate participation (inclusive of the cash outlay of $10,100) over two years (see again [17] above); and (iv) even if the BPS might be a commercial failure, he or she would gain a "surplus" sum of the order appearing on Tables 1, 2 or 3 (as the case may be) on page 13 of the Prospectus (see again [18] above), as a consequence of tax deductibility (such surplus being exclusive of the business establishment fee of $200 and the loan application fee of $300). I think that the submission is substantially correct, save as to the circumstances of Ms Howland-Rose, by reason of her reducing her interest liability by $300 (see again [26] and [34] above). The circumstances of the "round robins" 43 The Commissioner raised a threshold factual issue as to whether payment was in fact made by participants in the BPS, including of course the Applicants, for their respective units or syndicate participations. The Prospectus details extracted in [11-13], [17-18], [22], [24] and [29] demonstrate that apart from payment of the "Business Establishment Fee" of $200 and "Loan Application Fee" of $300 per unit or syndicate participation, each applicant was required to pay $24,000 by way of scientific research costs and management fees to BARM (in the case of scientific research costs as agent for ATTORI) by equal instalments over two years, and that such sum of $24,000 could be borrowed from PGF as to $12,000 at the commencement of the first yearly period of the loan arrangement, and as to the remaining $12,000 at the commencement of the second yearly period thereof, and that repayment of such principal sum of $24,000 would be effected by 24 monthly payments of $400 in reduction thereof including interest accruing, totalling $9600, and the balance by directing either 50% or 100% of the applicant's share of Syndicate profits towards such repayment of principal and payment of interest. 44 As earlier indicated, there were 2721 parcels of $24,000 purportedly borrowed by subscribers for units, with apparently only one exception which did not include any of the Applicants, and accordingly PGF as funder of the participants would have been required prima facie to provide $56.9 million by way of loan funds to the participants for the establishment of the BPS scheme. However PGF did not have the financial capacity to make available such amount of funding, its financial statements for the year ended 30 June 1995 set out on page 14 of the Prospectus disclosing net assets of only $298,596 (see [23] above). In the events which happened, so the Commissioner submitted, PGF resorted to so-called "round robins" of unpresented bills of exchange, with the consequence that the only source of cash available from participants for the purposes of the BPS was only ever going to be such interest payments and principal reductions as occurred over the two yearly tax "deductible" period described in [17] above, namely a maximum of $3600 and $6000 respectively for interest and principal payments per syndicate participation, apart from future profits, as to which see [47] below. Consequently, there would have been a shortfall between the sum of $24,000 and the aggregate of $3600 and $6000 if and when paid in full over two years, namely $14,400. In addition there would of course be the "Business Establishment Fee" of $200 and the "Loan Application Fee of $300 referred to in [17] above, which doubtless would have been consumed by initial expenses of administration. 45 Mr Lucas, one of the directors of BARM, ATTORI and PGF, explained, by reference to documentation the process which occurred in relation to the "round robin" transactions as follows: (i) Individual loan applications received from participants were grouped together and processed in batches; for each batch, the details of the loan of $12,000 payable for a participant's first year of participation were recorded on loan settlement schedules, typically of 40 to 50 units for each schedule. (ii) Bills of exchange were drawn in respect of the aggregate amount the subject of each batch, the drawer being PGF as purported lender to each participant, the payer being First Sydney Investments Pty Limited ("FSI") as purported financier, and the payees being ATTORI and BARM for scientific research and management services as to 90% and 10% respectively (see [11], [12(iii)] and [29] above). (iii) PGF gave to FSI notice of PGF's intention to operate each bill facility by way of an acceptance notice, in each case the tenor of the bill being specified as one day. (iv) Upon delivery of each bill of exchange by FSI to the payee (either ATTORI or BARM), the payee endorsed the bill back to PGF as purported lender; in so doing, each payee purportedly placed its entitlement as payee on deposit with PGF. (v) Following such endorsements, the bill of exchange was cancelled, typically one minute after the time of the drawing thereof. (vi) A bill facility register was maintained with details of the bills being drawn in respect of each batch of loans, the register recording the time and date of drawing of each bill, and of subsequent cancellation thereof; the bills were typically cancelled one minute after the time of drawing thereof. (vii) The process was repeated at the commencement of the second year term of each participant's borrowing of $12,000 by way of the second tranche of funding. 46 Prior to the bill facilities being so operated, ATTORI entered into a Deposit Agreement dated 3 April 1996 with PGF, which provided that if ATTORI received funds from PGF for research fees required to be paid on behalf of BPS members (representing of course 90% of such funds), then ATTORI would place the same back on deposit with PGF, and not draw upon the deposit, except to the extent that participants made loan repayments or interest payments to PGF. BARM appears to have entered into a similar arrangement with PGF in relation to management fees, (representing of course 10% of such funds), except that no written agreement was made until 1998 to such effect. BARM purportedly used the loan funds from PGF to subscribe for redeemable preference shares issued to a company related to PGF. In addition, PGF and FSI entered into a Bill Facility Agreement on 3 April 1996, under which FSI agreed to accept bills drawn by PGF up to a limit of $600,000 cash for the time being. Contemporaneously with the Deposit Agreement, PGF and FSI entered into a so-called Set-Off Agreement. 47 The Commissioner submitted that the effect of the arrangements summarised above was as follows: (i) no real cash changed hands, because no cash was available from any identifiable source (that was not wholly correct, since according to Mr Mathie, Group Administration Manager of the Main Camp group of companies from August 1995 to February 1997, and thereafter Chief Financial Officer and Special Profits Accountant of the related Main Star Holdings Pty Ltd from February 1997 to February 1999, PGF held on deposit with FSI at least $600,000 for the entire period from 1 July 1995 to 30 June 1997); (ii) the purported funding of $24,000 per syndicate participation was effected solely by way of bills of exchange; (iii) the bills were negotiated back to PGF as lender and cancelled, said by the Commissioner to be a classic "round robin"; (iv) there was no actual flow of funds at any level, that is to say, as between participants and PGF, or as between participants and ATTORI, or as between participants and BARM, or as between ATTORI and PGF or as between BARM and PGF; (v) therefore, the transactions produced no amount of cash available to ATTORI for use by it in performing its contractual research and development obligations, or to BARM for use by it in performing its contractual management obligations, the only cash available to ATTORI and BARM flowing from subsequent loan repayments and interest payments made by the participants over the two years loan period; in that regard, Exhibit R6 disclosed that of the sums of $9,600 payable by participants over the two year period for principal and interest (see again [17] above), an amount of only $6,639 became available to ATTORI. Of course, had the BPS subsequently derived profits from the manufacture and sale of products or product packages brought into existence pursuant to the research and development activities of the BPS, such profits would have been applied in reduction of what was owing by each participant, representing the difference between the abovementioned sum of $24,000 (together with interest accruing thereon after the initial two year period) and the abovementioned sum of $9600, then further reductions in the participants' principal indebtedness and interest accruing thereon after the two year initial loan period could have been made, but no such profits were ever generated (see again Clauses 1.1.7 and 3.1.7 of the Loan Agreement extracted in [24] above, and the Prospectus summaries appearing in [11], [12(iii)] and [13] above). 48 The Applicants did not put in issue the facts and circumstances outlined by the Commissioner in relation to the "round robin" transactions which were implemented, but responded that the same were not disclosed in the Prospectus or otherwise to the Applicants, who were accordingly unaware thereof (as each duly testified). There did appear in the Clayton Utz opinion the following expression of opinion: "…it is our opinion that the present transaction could not be seen to constitute a sham. Notwithstanding that there is in effect a 'round robin' of moneys, given the association between the Lender and Manager, it is our understanding that all the parties intend to create real obligations pursuant to the transaction structure." Moreover the Applicants pointed to Mr Lucas' testimony to the effect that the funding arrangements were not finally determined until March 1996, which was after the issue of the Prospectus, nor did the Prospectus put any participant on notice of the limitation on the ability of ATTORI and BARM to withdraw funds placed on deposit with PGF. The legal significance for present purposes of the "round robin" transactions will later be addressed. I should add that the Applicants accepted that ATTORI did not complete the research work, because it was placed in voluntary administration on 19 May 2000 and shortly thereafter wound-up. On the contrary, see Clause 8.5 of the Loan Agreement extracted in [25] above. The nature of the project foreshadowed and outlined by the Prospectus and the expert evidence raised at the hearing of the proceedings in relation thereto 49 It is next appropriate to consider the evidence adduced by the respective parties concerning the viability of the projects outlined in the Prospectus in terms of potential for ultimate return of profits to participants. Such evidence involved a substantial amount of testimony from the promoters and experts identified in the Prospectus, and from independent witnesses retained both by the Applicants and the Commissioner having expertise both in relation to the development of pharmaceutical products for world markets and in the financial and commercial implications involved in the transactions contemplated by the Prospectus, and in particular the projections of Dr Twomey summarised in [14-16] above. Because of the length of the transcript, I have adopted the course on occasions of providing page numbers when referring thereto, for ease of reference, but I have not provided any reference points in relation to the affidavit testimonies, which are more readily to be located. I should say at once that at least most of the evidentiary material which was adduced by both parties in relation to the above matters involved questionable relevance to the issues which I am required to resolve. Apparently it was the Commissioner who initiated the issue as to the absence of any prospect of project viability from the outset, relevantly to the subs 51(1) and Pt IVA issues arising. Presumably adopting the view that the statutory onus placed upon taxpayers translated into the need to displace the Commissioner's case for the absence of any such viability, the Applicants adduced the substantial body of evidence which I will first seek to summarise in this segment of the Reasons for Judgment. The Commissioner sought support for the contention of relevance by reference mainly to AAT Case V137 (1988) 88 ATC 865 and Brajkovich v Federal Commissioner of Taxation (1989) 89 ATC 5227 (Full Federal Court comprising Pincus, French and Gummow JJ). Both cases involved issues however as to whether a particular activity, in the former case that of horse breeding and racing, and in the latter case that of gambling, constituted the conduct by the respective taxpayers of business activity per se, in contrast to merely pastime or unsystematic activities, not because of the absence of potential for either activity to generate profitability, but because of the nature and incidents of the activity. Thus in Brajkovich, the Full Court observed at 5234 as follows: "We think it enough to say that gambling cases have always been treated on the basis that winnings are not assessable unless they are derived from a business or vocation." The manufacture and sale of products on a wide scale is distinguishable conceptually from activities of gambling, or of the breeding and racing of thoroughbreds, those activities having frequently failed, particularly in the former case, to qualify as possessing a business character, other than in exceptional circumstances of scale or other business significance. Nevertheless, it is appropriate, particularly having regard to the nature and very substantial extent of evidence which has been adduced on the issue of financial viability of the BPS, that I determine this issue as to whether there existed at any material time a realistic prospect of the BPS ever deriving profitable returns for the BPS members from the exploitation of the products the subject of the research and development outlined in the Prospectus, irrespective of the obviously large and systematic scale thereof. 50 ATTORI officially opened laboratory facilities on the campus of the Southern Cross University at Lismore on 15 October 1996, that is to say, about two months prior to the expiry of the Prospectus (which issued on 5 December 1995). This occurred primarily at the initiative of Mr Stotter (identified in [5] above), who had become involved in the production of TTO from about August 1984, and had subsequently become associated with Main Camp Tea Tree Oil Limited in 1990 or thereabouts, and thereafter involved in the initial public fund raising for Main Camp Tea Tree Oil Project No 1 in 1992. In the events which happened, and in the context of further fund raising by Main Camp Tea Tree Oil Projects Nos 2, 3 and 4, the Main Camp properties were successfully developed for the production of TTO as a raw product. With substantial volumes of TTO on line for production, Mr Stotter had identified the next phase of the TTO industry as the development of value added products using TTO, particularly of a therapeutic and cosmetic kind. By so doing, Mr Stotter envisaged the creation of additional markets for the TTO being produced by the Main Camp properties. During the years 1997 to 2000 when Dr Bell (whom I have identified in [7] above) was engaged as general manager of ATTORI, confidential research and development work, recorded in 6 lever arch folders tendered in evidence, was conducted by it and its subcontractors into tea tree oil based applications in the areas of acne treatment, oral hygiene, and hospital and antiseptic products. Dr Bell said, as part of that process, that it was necessary to formulate data showing proof of efficacy, stability, preservative stability and safety for all products to be developed, and the tests which were performed were based on industry standards used by TGA (ie the Australian Therapeutic Goods Administration earlier identified) and FDA (ie the US Food and Drugs Administration earlier identified), and standards acceptable to the British Pharmacopoeia and other overseas regulatory bodies. The need for that amount of research and testing was essentially because, as explained by Dr Bell in his first affidavit, the concentration of TTO in the formula required to pass TGA testing was not known, TTO having 178 compounds or "constituents", in contrast to most antiseptic agents being single compounds and thus not so difficult or unpredictable to work with (Tr 435 and 469). Such pre-existing usage of TTO as had occurred had been confined to that of an antiseptic to minor cuts and abrasions, being a usage not requiring TGA regulatory approval. The research work ceased after ATTORI was placed in voluntary liquidation on 19 May 2000, following the receipt on 5 May 2000 of an unfavourable private ruling from the Commissioner upon the issue of ATTORI's claimed entitlement to exemption from income tax under subs 23(e) of the ITAA as a scientific institution, being a ruling which was said to have led to the Commissioner issuing assessments for a total amount of approximately $147 million. The Commissioner has pointed out, incidentally, that the ruling was not sought until 13 August 1996. Up to the time of voluntary liquidation of ATTORI in the year 2000, according to Dr Bell's first affidavit, the following progress had been achieved by ATTORI: "(d) Comprehensive ranges of products in the categories of acne, antisepsis and oral hygiene have been developed (113 have proven stable). Product dossiers have been produced on all products developed. Product Group Formulations Acne treatment creams 8 Acne treatment lotions 8 Acne treatment gels 9 Acne washes 2 Acne foams 4 Acne soaps 2 Acne wipes 7 Antiseptic creams/gels 45 Antiseptic lotions 2 Antiseptic hand washes 3 Antiseptic mouthwash 4 Antiseptic lozenge 2 Antiseptic surface sprays 8 Toothpastes 8 Toothgels 1 (e) Product specifications and analytical methods and validation processes have been developed for representative products of the 113 products developed. (f) A major multicentre clinical trial was completed against acne. Other target group clinical trials were under way before ATTORI's closure. (g) Two clinical trials at Royal North Shore Hospital and Royal Brisbane Hospital were evaluated but abandoned because the efficacy of products in in-vitro trials (based on TTO alone) was not adequate. The cost of a suitable trial was too high and would have provided little protection from competitors. Investigations at the time indicated that the costs of the products excluded them from general ward use. (h) Clinical trials of mouthwash products were conducted against plaque and gingivitis. (i) Packaging has been established appropriate for product delivery systems e.g. tube, bottle, jar etc. to meet stability specifications required for marketing approvals. (j) All products have been placed on stability to collect data to substantiate a two year shelf life and to meet regulatory requirements. Preservative efficacy test performed on all therapeutic products. (k) A major study of irritation and sensitisation was conducted using neat TTO (100%) and lower concentration formulations to establish TTO was not a primary irritant." In broad summary, as stated by Dr Bell in his second affidavit, "[a] substantial number of products already have appropriate stability data". However Dr Bell pointed out that the registration process with TGA could have taken over seven months after the submission of data, and of course it is necessary to point out that registration would also have to be obtained in the USA (ie with the FDA), the EU countries and Japan, as indicated in the Prospectus (see the concluding paragraph of [16] above). 51 In relation to that research and development work undertaken by ATTORI, Professor K F Brown, who is highly qualified in the science of design, formulation, development and evaluation, in vitro and in vivo, of pharmaceutical dosage forms, being the science known as pharmaceutics, expressed the opinion in his first affidavit that such work "… exhibit[ed] a large number of features which were in accordance with standard practices for research and development in the pharmaceutical industry…", and had been directed to the development of products with supporting data packages which would meet the requirements of the TGA and the FDA. On the issue as to whether ATTORI's actual expenditure of $7.37 million on research work for BPS in the period July 1996 to April 2000 was sufficient to enable research and development work of the kind contemplated by the Prospectus to do done, Professor Brown said as follows (at Tr 923-924): "---Well, I think that I felt all along that I'd basically been asked the question, was $8 million enough, and to my mind it sets another problem, enough for what, and was $8 million enough to do as much as they were trying to do. My view always has been that if you have less money you can still do some things but you might have to do a little less and I think I mentioned earlier that even if you had $2 million you could probably do some reasonably good work so while we talked about that there was $8 million and was it enough to do something, yes, it was enough to do something. I think with less money it would still have been possible to do something but to do something less and make some products. By doing something I mean to perhaps produce some exploitable products and in my experience we did do that with less." Professor Brown's views were based not only on what he identified as summary data and reports, but also on further information obtained during his visit to ATTORI's office and laboratories in February 1998. As will later be indicated, Mr Collins, a member of the Research Advisory Board of ATTORI, supported that proposition in his second affidavit, as he confirmed under cross-examination (see Tr 480). I should add for completeness that earlier in his first affidavit, Professor Brown had expressed the view that "…in December 1995, it could have been expected that the expenditure by ATTORI of $12 million on research and development for the purpose of developing products in the areas of acne treatment, oral hygiene and antiseptics would be capable of producing some products capable of commercial exploitation"; moreover, in cross-examination at Tr 906, he agreed that it would have been clear in 1995 that if $8 million was to be spent over two years wholly on actual research and development, that was never going to be enough funds to conduct research and development into products, in the vicinity of 70 in number, to the stage of readiness for registration. However none of those two areas of his testimony contradicted his final word on the subject of the scope of financial capacity which I have cited at some length earlier in this paragraph. Whether $8 million was in fact outlaid by ATTORI wholly on research and development, and what expenditure was confined to research and development is unclear from my reading of the evidence. The Commission sought to distinguish between so-called "actual" research and development, and expenditure associated therewith, such as leasing of premises, accountancy fees, laboratory fit-out etc, but as Dr Brown explained at Tr 899, "I find it hard to make a realistic quantitative comparison of the amount of funds. In one case ATTORI was operating I think with 6 staff. In my case I was operating a department of 27 staff… My budget also included the cost of premises because that's the way all 3M companies work…". 52 There was evidence also provided by Mr Coupe, a person with previous significant business experience, for instance having been the managing director of Weston Holdings Australia from 1965 to 1980 (and a director of George Weston Foods Limited from 1974 to June 1980). He had been associated with Main Camp Holdings Limited as executive chairman from 1998 to June 1999, and with ATTORI as executive chairman over approximately the same later period, and he remained associated with ARG (identified in [11] above) as a consultant in relation to all matters affecting the intellectual property held by it as trustee for the various Personal and Company Budplans. He produced in the context of his first affidavit confidential documents relating to research and development work conducted by ATTORI, and in particular eleven product packages consisting of formulations utilising tea tree oil created during his chairmanship of ATTORI, being products of the following kinds, namely a glycerine soap bar, a foaming cleanser, a skin wash, a firming gel, an acne quick break foam, an acne gel, a cleansing pad, a treatment lotion, an acne foaming cleanser, an acne syndet bar and an acne cleansing pad. He spoke in his third affidavit of ongoing engagement with Professor Alain Li Wan Po of the Department of Pharmacotherapy, Birmingham University, concerning assessment of the value of the scientific data in the nature of descriptions of research work, including the 7 folders of confidential research produced under the auspices of the Budplan Syndicates, and of presenting a dossier of ongoing research into acne treatment to a range of selected pharmaceutical groups in Europe. He had indicated earlier in his second affidavit that the liquidator of ATTORI did not bring to an end the pursuit of the commercialisation of the research results, which comprised, and may well still comprise, intellectual property held by the participants (as referred to in the definition of "Business" in Clauses 1.1.2(v) of the Syndicate Deed extracted in [28] above), but that the liquidator of ATTORI had disclaimed the same, and active steps are still being taken to pursue the commercialisation of the research results for the benefit of the participants, with the assistance of $125,000 raised by ARG. No documentation in relation to such matters was produced (Tr 935 and 940), and in any event the post ATTORI liquidation events do not ultimately bear upon the issues I am required to resolve. 53 In the course of his historical tracing of the Main Camp projects commencing from 1992, Mr Coupe spoke of the insufficiency of funds of the Main Camp Group available to undertake the research and development required for value added therapeutic products having a TTO base, and of having encountered reluctance on the part of large pharmaceutical companies to spend moneys on research into TTO because it was not patentable material, and because they did not have sufficient control over sources of supply of TTO, and in any event were tied to other research and development priorities. Following consultations with Dr Twomey and Mr Priest, he commended to BARM what he saw as promising markets for value added TTO products in the fields of acne treatment, hospital and antiseptic products and oral hygiene, and hence the studies commissioned of Dr Twomey. 54 Mr Stotter as the chief instigator of the Main Camp and Budplan activities recorded in his affidavit the extent to which research was undertaken at depth in order to provide the technical information, projections and forecasts required for the Prospectus. Mr Priest's affidavits contained similar material, he having been also involved in Main Camp activities, as well as the launching of the Budplan Personal and Company prospectuses (see again [6] above). Mr Priest's biochemical and practical business training and experience had its origins in cosmetics as the research and development manager of the multinational Parke Davis Pty Ltd, an office which he held for 10 years. He spoke of the Main Camp Group having started to produce TTO by early 1994, and of travelling with Mr Stotter, first to the United States, and later that year to Europe, to market the product to large companies engaged in pharmaceutical and cosmetic products, and he became convinced of "the enormous potential for tea tree oil". But he found that TTO lacked credibility in the eyes of customers. He observed in his first affidavit as follows: "In Australia, tea tree oil had a certain amount of recognition, but there was little or no recognition of it as a therapeutic good elsewhere. The cost to open the pharmaceutical markets to tea tree oil, that is, the markets for antiseptics and acne treatments in each country, was very great. This was due to a number of factors including: (a) the compliance requirements imposed by Australian, US and European regulations; (b) the Main Camp Group estimated that a large number of products and variants would be required to fully address the consumer market; and (c) the likely failure rate of new products from concept to market, due to failure in formulation, packaging, clinical trials, market research and at launch." 55 Mr Priest also spoke of the fact that the Main Camp Group did not have the financial resources required to fund the research and development which it desired to conduct into TTO and tea tree oil-based products. Nor in his view was the Main Camp Group prepared to accept the full technical and commercial risk of the research and development needed to develop new products. Hence the decision to investigate and launch the Budplan fund raising ventures, including of course that relating to the BPS. After the BPS Prospectus was issued, and fund raising was in progress, Mr Priest became personally engaged in ATTORI's research and development program, including the appointment of consultants, the engagement of key staff, and the purchase and setting up of facilities. Product development briefs for acne, oral hygiene, and hospital and antiseptic products were prepared as essential steps in the research and development required to be undertaken. 56 Thereafter research and development protocols for both BPS and Company Budplan No. 1 operations were established by adopting research techniques commonly used in the pharmaceutical industry, being protocols designed to ensure that the research and development programs addressed and satisfied the requirements of the registration bodies, such as TGA and FDA, by furnishing sufficient acceptable evidence or proof of essential product characteristics, such as those of efficacy, safety and stability. In July 1996, so-called "Gantt" charts, likened to the process of creating a recipe, were made for each product formulation, based on the product briefs and research protocols, being charts which detailed the steps and proofs needed to be satisfactorily established before the product could be developed. Monthly reports concerning progress of the research and development undertaken under the protocols and pursuant to the Gantt charts were tendered in evidence. A Research Advisory Board (referred to in [51] above) was established for the purpose of providing advice to ATTORI upon its research and development program, its membership comprising three notably qualified professional academics, together with Mr Collins, formerly a managing director of Parke Davis Pty Limited, whose testimony in the proceedings will later be referred to. The BPS and Company Budplan No. 1 also jointly retained Mr John Middleton of Xanadu Consulting Pty Limited to review, on a quarterly and annual basis, the research and development which was to be undertaken by ATTORI for participants in both ventures. 57 As to fundraising, Mr Priest referred to the difficulty of knowing in advance how much funding ATTORI would need to undertake the research and development contemplated for the BPS, being difficulty caused by the following imponderables: (i) the length of time needed to achieve any level of success with the proposed research and development for the BPS; (ii) the amount of money and length of time needed to obtain registration of the proposed tea tree oil based products with the TGA and overseas organisations such as the FDA, which partly depended on whether clinical trials would have to be conducted in each country where future marketing might be undertaken; (iii) whether patents would be issued in relation to such products; and (iv) how many subscribers there would likely be to the BPS and Company Budplan No. 1 prospectuses. He expressed his understanding, based on his experience in budgeting as research and development manager inter alia for Parke Davis (ante), that approximately $12 million would need to have been available to ATTORI over 2 years for research purposes, and that a further amount of approximately $24 million would need to be held by ATTORI on deposit with PGF, and would be available to ATTORI for research over the remainder of the 15 year term of the BPS, if the initial research was successful in producing products capable of commercialisation. 58 In addition to the testimonies of Professor Brown and Dr Bell to which reference has already been made, the Applicants placed reliance upon the expert testimony of Mr Collins, who had the benefit of long experience in the pharmaceutical industry, particularly in relation to the development of pharmaceutical product packages, including as already foreshadowed 21 years in the employ of Parke Davis Pty Limited, initially as director of marketing, and subsequently as chief executive officer. In his first affidavit, he recorded that he had been instructed to review 7 folders of confidential research results expressed in highly technical terms, being research conducted by or on behalf of ATTORI prior to the issue of the Prospectus. In his second affidavit, he addressed the testimony of two experts retained by the Commissioner, namely Messrs Lonergan and Hopfner, both of whom had challenged as unrealistic and unattainable certain financial and technical opinions contained in the Prospectus from the perspectives of their differing qualifications. As to the second affidavit of Mr Collins, the appropriate course is to summarise the evidence of those two experts retained by the Commissioner (post), since his second affidavit purported to respond thereto. 59 Concerning therefore Mr Collins' first affidavit alone, the same explained in technical terms that the abovementioned 7 folders contained "Data Packages" for a total of 74 products in the respective areas of acne treatment (45 products), hospital and antiseptic applications (21 products), and oral hygiene (8 products), which together comprised some, but not all, of the elements in the definition of "Product Packages" appearing in the Syndicate Deed and which has been extracted in [28] above. Mr Collins further explained in his first affidavit that whilst the comparison between the "Data Packages" in the 7 folders and the requirements of such definition of "Product Packages" indicated that the former fell short of fulfilling all of the elements of the latter, there was a considerable amount of data in folders numbered 1 and 2 which, when added to some of the "Data Packages", would result in substantial compliance with the definition of "Product Packages" for those particular "Data Packages". Mr Collins' first affidavit expressed the following further opinions, together with his reasoning in support thereof, which may be summarised as follows: (i) It might be possible to create some "Product Packages" from the research results contained in the 7 folders; the products with which ATTORI was concerned required 12 months stability data, that is, data which showed that the products did not disintegrate in the packaging selected for sale. (ii) It would be possible to use product packages complying with all elements in the definition of "Product Packages" to generate income for participants in the BPS, through either the licensing or sale of the products. (iii) Any potential licensee or purchaser of a new product would require certain elements of a "Product Package" (as defined in the Syndicate Deed), irrespective of the market in which the product would compete, and of how the licensee planned to market the product, being the mandatory elements of product formula, product samples and stability information; if the licensee or purchaser planned to manufacture the product and in addition make product claims, efficacy and safety data would be required. (iv) With the exception of product samples, all of the above information for some products was already available in the 7 folders; however potential licensees and purchasers would normally wish to see the finished product before commitment; the type of company which could be targeted with this minimum data package would be a company that contracted the manufacturing of the product to a third party that would not make any specific product claims, and would most likely market the product on a lower price platform; in addition the product would not require regulatory approval or registration; companies of this type could be those supplying low priced products or product ranges to supermarkets or those engaged in direct or catalogue selling to customers; while some products in the 7 folders had efficacy and safety data, that amount of research may not have been sufficient for the larger multinational licensees, which usually required substantial efficacy and safety data. (v) It could have been expected in December 1995, based on the state of knowledge at that time regarding the therapeutic properties of tea tree oil, that the expenditure of $8 million said to have been actually undertaken by ATTORI on research and development would be capable of producing for commercialisation product packages or other research results in the areas of acne treatment, oral hygiene and antiseptics. In cross-examination at Tr 481, Mr Collins expressed the opinion that such sum would have been capable of producing "some three or four product packages that were ready for registration", and further that "…you could take on 100 products but you would develop them in a different speed and to different levels of completeness…". 60 Further affidavit evidence in chief tendered by the Applicants was provided by Dr Twomey, the author of the report in the Prospectus summarised in [14-16] above. His qualifications and expertise had been gained overseas over many years, including in the US, prior to becoming a consultant to the Australian Tea Tree Industry Association in 1989. His affidavit listed nine information reporting sources, some European and US, for the financial projections appearing in the Prospectus. He provided a number of reasons for the controversial market share estimates which he projected in the Prospectus for acne, antiseptic and hospital, and oral hygiene products, namely 10%, 5% and 50% respectively. His affidavit also explained at length the basis for determining ex-factory prices on which the potential returns to investors could be calculated, and his rationale for forecasting the return to participants of the estimated sum of A$38.86m referred to in [16] above, and the sources on which he drew for that purpose. 61 The Commissioner adduced testimony in reply from Mr Hopfner, who graduated as a chemical technologist in Germany in 1983. He explained that chemical technologists are typically involved in research and development in relation to new knowledge and new products, as well as in the testing of chemical compounds involved in products. He spoke of two broad and overlapping specialties in which chemical technologists work, namely pharmacy food and cosmetics on the one hand and oil technology on the other hand. On coming to Australia in 1985, Mr Hopfner was engaged as an employee in various fields, being cholesterol metabolism, oil, cosmetics and oils essential thereto (including TTO), until April 1996, when he established business as a manufacturer of cosmetics and toiletries, specialising in natural formulations. He had undertaken a small amount of manufacturing that involved TTO. 62 Mr Hopfner examined 11 Product Packages and the components thereof contained in an ATTORI folder, and offered commentary as to the extent of the incompleteness thereof (with one exception), namely that such Packages omitted at least one, and usually, several important components. Another package did not contain any component reporting on the testing of the TTO. He further observed that with two exceptions, stability testing had not been carried out for the industry standard of 12 months accelerated testing. Two of the packages he asserted to be identical. Mr Hopfner expressed the opinion that there was nothing unique about the ATTORI formulas, which were available in the market place, and were easily obtainable from a number of sources at "little or no cost". Mr Hopfner further said that "These formulas are of a type that [his organisation] would use in samples provided to clients free of charge", and also that "[t]he creation of such formulas, which would usually be done by way of adaptation and modification of existing formulas, would be unlikely to require any special or significant research and development, and would be unlikely to involve any significant expense, apart from time". He concluded that in Australia, there are a number of cosmetic manufacturers, at least 10 of which, in 1995-1996, would have possessed the knowledge and skills required to produce these formulas. 63 It became apparent from Mr Hopfner's responses in cross-examination that his qualification to speak on issues concerning TTO product research and product registration fell significantly short of that of the Applicants' expert witnesses. That is not intended to be any criticism of his integrity or competence in his particular field of expertise, which did not however sufficiently coincide with the specialist fields of the Applicants' experts, but rather to be my conclusion upon a comparison between his comparably limited knowledge and experience in relation to the development of TTO products, and those whom I have already identified and who furnished expert evidence on behalf of the Applicants. Indeed he agreed that he did not have "directly" any experience in the pharmaceutical industry, and had never been involved in the making of an application for the registration of a product with the TGA. Moreover he conceded that one could not get to the level of registration of a TTO product within the range of $2000 to $5000 of expenditure referred to in his affidavit. 64 Thus while not doubting that Mr Hopfner possessed experience and competence to the extent of the particular areas of his working activities, the same are not sensibly to be compared with that of Professor Brown, Dr Bell, Dr Twomey and Mr Collins, in relation to the product areas the subject of the Prospectus, and that is not to imply that Messrs Stotter and Priest did not also possess wide ranging knowledge and experience of relevance. As Mr Collins subsequently pointed out in reply, Mr Hopfner's observations on data packages were made from a cosmetic or toiletry viewpoint, and not in relation to the requirements for products with therapeutic claims, which requirements were far more rigorous and demanding, for instance, when the "redoing" of product with a therapeutic claim was to be undertaken. Mr Hopfner's opinion that the requisite testing could be done by a university for two or three hundred dollars indicated, in Mr Collins' view, a lack of understanding of the requirements of the Assay Method Valuation, and of the market for therapeutic goods in Australia and internationally. I am unable to give weight to Mr Hopfner's views, to the extent that the same were inconsistent with the respective testimonies, in particular, of Professor Brown, Mr Collins, Dr Bell and Dr Twomey, and on practical issues, Messrs Stotter and Priest as well. 65 More formidable were the views and conclusions on different matters advanced on behalf of the Commissioner by Mr Lonergan, a chartered accountant of 30 years experience, and a former partner of Coopers & Lybrand (now PricewaterhouseCoopers). Mr Lonergan has provided expert evidence in the courts in Australia on numerous occasions and for many years, with particular emphasis on valuation and consequential loss assessment. He has held a number of statutory appointments for the Australian Government, has undertaken numerous roles in the Australian and international securities industry and as a former member of the accounting profession, including the making of recommendations to government concerning prospectus reform. He has written probably the leading Australian textbook on share and business valuations, and has published over 60 technical papers. In order to gain an adequate picture of Mr Lonergan's thesis, and the Applicants' responses, it is necessary to reproduce certain salient features of his first affidavit, and thereafter his rejoinders to the responses to his first affidavit which I will later summarise. 66 Mr Lonergan's written report of 3 September 2001, incorporated within his first affidavit, addressed the following topics: (i) the financial commitment undertaken generally by participants; (ii) the financial structuring of the BPS; (iii) the financial operation of the loan transactions, pursuant to which participants under the Prospectus borrowed funds from PGF; (iv) the financial effect on participants of the availability of tax deductions on the basis suggested in the Prospectus; (v) the structure and effect of the financing arrangements contemplated by the Prospectus; (vi) the nature of what were presented by the Prospectus as constituting business activities carried on by the participants; and (vii) the investment merits, from the perspective of a prospective participant, of making an informed investment in the BPS pursuant to the Prospectus. Some of the foregoing subjects involved matters of construction or interpretation of the Prospectus, which are ultimately of course for the Court alone to determine. 67 Mr Lonergan summarised the conclusions of his first affidavit to the effect that upon the basis of a participant's borrowing of $24,000 per unit or syndicate participation, the predominant benefits which he or she received therefrom were potential taxation benefits taking the form of: · deductions for research fees, management fees and borrowing costs; and · the timing of the year of income in which such deductions were allowable. Such benefits were illustrated in the tables appearing in the Prospectus as extracted in [17-18] above, his reference to "borrowing costs" being to the $300 "loan application fee", to the extent that the fee was deductible pursuant to s 67 of the ITAA. Income tax benefits or savings were illustrated by the Tables extracted in [18] above to exceed the cash contributions required of participants, having regard to the marginal income tax rate payable by a participant. 68 By of way of illustration, the following tax savings were calculated by Mr Lonergan to have been achievable by the respective Applicants: "Tax Savings Year of income 1996 1997 Applicant $ $ Fiona Howland-Rose 5,043.57 5,343.78 Michael John Harvey 17,685.53 20,249.46 Jeffery John Braysich 5,685.86 6,749.82 Anthony Peter Davidson N/A 25,418.18 ." And the following net benefits were calculated by him to have been received by the respective Applicants (ie by way of income tax savings less actual cash outlays inclusive of the one-off payments for the business establishment fee and the loan applications fee totalling $500): "Net Benefits Year of income 1996 1997 Applicant $ $ Fiona Howland-Rose 2,793.57 843.78 Michael John Harvey 14,985.53 5,849.46 Jeffery John Braysich 4,785.86 1,949.82 Anthony Peter Davidson N/A 4,218.18" It is unclear how Mr Lonergan arrived at the figures at least for Ms Howland-Rose, in the light of her evidence recorded in [34] above. Mr Lonergan accepted understandably that the activities to be carried out by BPS involved significant commercial risks, but because of the limited recourse nature of the borrowings, and because of the put option granted to participants who complied with the terms of the Loan Agreement (see [13], [22] and [32] above), he postulated that the only commercial risk in reality to a participant was that the foreshadowed taxation benefits would not be available, implicitly on the footing that if income tax deductibility was in law to be allowed, a participant would not be out-of-pocket, notwithstanding the total loss of his or her invested cash funds. 69 In the events which happened, participants did derive certain income distributions from the BPS, though in the context of this litigation, they did so in controversial circumstances. Such distributions occurred at the rate of $25.55 per unit in respect of the financial year ended 30 June 1997, and $118.44 per unit in respect of the following financial year ended 30 June 1998. The source of such distributions arose out of sale of products commencing in November 1996, which are summarised below from the invoices which issued: "Year ended 30 June 1996: Issued to Dates Country Product description Vitamax Ltd 15/5/96 to 18/6/96 Russia Pharmaceutical Grade Tea Tree Oil Samtech 27/5/96 Japan Oily Hair Shampoo Corporation Dry Hair Shampoo Conditioner Year ended 30 June 1997: Issued to Dates Country Product description Vitamax Ltd 1/8/96 to 27/6/97 Russia Vitamax Brand Tea Tree Oil Creatique 12/7/96; 4/2/97 Australia 5% Haut Repair Crčme Samtech 27/8/96 to 4/4/97 Japan Tea Tree Oil 100% Corporation Tea Tree Oil 15% Oily Hair Shampoo Dry Hair Shampoo Conditioner Mitsue & Co 10/9/96 Australia/Japan Skin Repair Crčme The Body Shop 6/10/96; 28/11/98 Australia 15% Water Miscible Tea Tree Oil Sri Mobius 4.12.96 India 5% Skin Repair Herbals Crčme Main Camp 16/7/96; 11/3/97 Australia (Sales of Tea Tree Marketing Oil accounted for as cost of sales) Year ended 30 June 1998: Issued to Dates Country Product description Vitamax Ltd 4/8/97 to 29/6/98 Russia Vitamax Brand Tea Tree Oil; Vitamax Brand Bodywash Soap; Vitamax Brand Medicated Soap; Vitamax Brand Exfoliating Cleanser Gnome-Blues Ltd 17/11/97 to 1/4/98 Russia Gnome-Blue Ltd Brand Tea Tree Oil The Body Shop 8/7/96 to 1/6/98 Australia 15% Water Miscible Tea Tree Oil, Water Soluble Tea Tree Oil Main Camp 11/9/97; 22/9/97 (Sales of Tea Marketing Tree Oil accounted for as cost of sales) Year ended 30 June 1999: Issued to Dates Country Product description Vitamax Ltd 3/6/99 Russia Vitamax Brand Tea Tree Oil Gnome-Blues Ltd 20/8/98 Russia Gnome-Blue Ltd Brand Tea Tree Oil Year ended 30 June 2000: Issued to Dates Country Product description Vitamax Ltd 11/10/99 Russia Vitamax Brand Tea Tree Oil The Body Shop 29/7/99 to 9/6/00 Australia 15% Water Soluble Tea Tree Oil; Pharmaceutical Grade Tea Tree Oil Year ended 30 June 2001: Issued to Dates Country Product description The Body Shop 23.2.01 Australia 15% Water Soluble Tea Tree Oil ." The products listed above were not developed by the BPS pursuant to its research and development activities, the same being either pure TTO or skin creams, shampoos and body care products, and thus not falling within the three product categories of acne, antiseptic and hospital, and oral hygiene. Such products fell apparently within the field of operations only of the so-called Company Budplan 2. Hence the BPS Report to Investors in relation to the year ended 30 June 1998 stated as follows: "The research institute has completed the required research and development at 30 June 1998. As the results of the research and development into these derivatives are still being evaluated at the date of these accounts, the trustee of the project is unable to determine whether or not the products will be commercially successful." Moreover a Report of Research carried out by ATTORI from June 1996 to June 1988 stated that no antiseptic or other products had yet been commercialised. The subject BPS Report to Investors in relation to the year ended 30 June 1999 stated as follows: "To date ATTORI has been unsuccessful in developing products offering any unique benefit that would support a hospital's decision to switch from established products. There may be an opportunity to market these products as domestic antiseptics and handwashes." 70 Returning to the matter of funds outlaid in cash by participants in favour of PGF by way of loan repayments in relation to their respective borrowings of the two $12,000 parcels (and permitted multiples of $6000 if additionally taken up, as to which see [11], [24] and [29] above), Mr Lonergan pointed to the following further features of participation in the BPS: (i) the loans were limited in recourse to the participants personally, that is to say, as to 25% of principal advanced (see again the table in [17] above, where the principal sum borrowed of $24,000 was repayable to the extent only of $6000), and interest was limited in quantification to the first two years of accrual thereof (the said table in [17] above referring only to $3,600 in respect of a $24,000 loan), absent future profits being available for purposes of any increased recourse in relation to principal and interest, as to which see also (for instance) the last question and answer appearing in [22] above; (ii) thus apart from 75% of principal advanced, there was no entitlement to recourse on the part of PGF to borrowers personally in relation to interest in years 3 to 15 of the Loan Agreement, or thereafter, as additionally explained by the Prospectus as extracted in [22] above, absent again the availability of future profits for that purpose. 71 There were moreover disadvantageous aspects of the contractual arrangements set out in the Prospectus, as Mr Lonergan further emphasised below, being disadvantageous in the sense of rendering the derivation of profit difficult if not unachievable for participants to obtain on the one hand, yet restricting the capacity for redress for maladministration on the part of participants on the other hand: (i) on the sale of any research results, BARM was entitled to be paid a lump sum royalty amounting to 50% of the gross sale proceeds, and to receive remuneration at the rate of 25% of the gross commercialisation income of the BPS (see Clauses 4.6 and 5.3 of the Syndicate Deed extracted in [29-30] above), yet without any assumption of risk, with the consequence that the prospect of participants deriving profitable returns was in Mr Lonergan's opinion remote; (ii) a participant had virtually no opportunity for control over the activities of BPS, in that the Manager (BARM) could only be compelled to retire if more than one half of participants resolved at a meeting that he be so removed (see again [32] above); and (iii) under the Loan Agreement, PGF was entitled to call up and require repayment of the principal sum and payment of outstanding interest, if BARM should retire in such circumstances, thereby ensuring a financial disincentive for participants to seek to exercise control, and in any event a substantial practical obstacle in the way of so doing. 72 The next area in Mr Lonergan's first report, to which I would refer, concerned the likelihood or otherwise of financial viability of the project as a whole, quite apart from individual participation therein. He advanced the thesis that it was reasonably to be deduced from the outset that the projected cash returns made in the Prospectus were unlikely, if not impossible to be achieved. The Commissioner contended that the thesis so advanced, if sustained, had a decisive bearing upon both the subs 51(1) and Part IVA issues. Thus in his first affidavit of 3 September 2001, Mr Lonergan contended that the cash flow projections for income returns to participants set out in the Prospectus (see [20] above) were based on the following "overly" optimistic assumptions, which I have extracted verbatim below from his report the subject of his first affidavit: "(i) a lead time of only 5 years until the Syndicate's products were fully developed and approved for sale by the regulatory authorities of USA, Europe and Japan; (ii) rapid and successful penetration of the market following immediately thereafter; (iii) that the FDA Monograph would be achieved; (iv) market share of some 5% to 50% in the world market for the relevant potential products; (v) net revenue of 5% of the ex-factory price (probably by way of royalty) would flow to the Syndicate as a profit on sale after all expenses. This appears unrealistic given that the Manager was to receive 25% of the gross income of the Syndicate; (vi) there would be sufficient production of tea tree oil to meet the forecast market share assumption." His basis for assertion of such unjustified optimism contained in the Prospectus was stated to be as follows: "In my opinion, these assumptions taken as a whole cast significant doubt over the likelihood that the cash flow projections could be achieved. It appears that the marketing report did not consider (or did not adequately take into account or disclose) negative factors such as: (vii) the international pharmaceutical companies being able to develop a similar formulation without purchasing the product packages; (viii) the possibility of the existence of other competitors already in the market (or who could enter the market ahead of the Syndicate) and develop products in the identified product areas; (ix) the risk associated with a start-up operation with no current market position, no established reputation, no market presence, and no manufacturing distribution or marketing capacity; (x) the very significant expenditure on marketing and distribution which would be required to establish the products in major markets such as the USA and Europe; (xi) the rate of market uptake being dependent on the approval of research results by the regulatory authorities in the relevant markets, then acceptance and adoption by major companies, [and] then penetration and acceptance by the ultimate customers; (xii) the entitlement of BARM to 50% of the gross proceeds of sale of any intellectual property rights arising from the R&D together with the entitlement of BARM to 25% of the gross income of the Syndicate (the emphasis in both cases was that of Mr Lonergan)." What appears in (xii) above may be seen from Clauses 4.6 and 5.3 of the Syndicate Agreement set out in [29-30] above. He added the further observation: "(xiii) Even if the potential negative factors identified in (a) to (e) above were overcome, the significant fees payable to BARM referred to in (f) above would in my opinion made (sic) it extremely unlikely that sufficient profits would arise to allow a cash flow to ever be generated for the benefit of Participants." 73 In order to illustrate the last observation, Mr Lonergan addressed in his first affidavit the subject of actual cash made available to ATTORI as a consequence of repayments of principal and payments of interest by participants to PGF over the period from April 1996 to June 1999, which he calculated to be $15,513,000 made up as follows: "Year Amount ($000) 30 June 1996 241 30 June 1997 4961 30 June 1998 5615 30 June 1999 4696 15513" Mr Lonergan further calculated that the following expenses were incurred by ATTORI in relation to the activities of the participants, which exceeded by $220,000 the monies made available by PGF to ATTORI: "30 June 1996 1997 1998 Total Activity $000 $000 $000 $100 R&D activities 2992 2299 5291 Management fees 5833 2146 7979 Commissions 1974 - 489 2463 1974 8825 4934 15733" 74 The Applicants provided responses to Mr Lonergan's first affidavit mainly in the form of an affidavit by Mr Weeks, a member of the firm of Deloitte Touche Tohmatsu. To the extent that Mr Weeks' report of 20 September 2001 addressed the more critical aspects of Mr Lonergan's report of 3 September 2001, to which I have drawn attention above, his report may be summarised as follows: (i) If the Prospectus forecasts had been achieved, the likely returns to each participant in the long term would have been significant, and considerably greater than the income tax benefits. (ii) Income tax benefits received by participants in respect of their first two years of participation would have been subsequently eroded before a cash distribution was received, depending on whether the loan repayment option selected by a participant, either 100% or 50% of the net earnings, would be applied to the outstanding principal (see [19] and [22] above, and see also [24] above concerning the interest payment obligations of the Loan Agreement). (iii) Thus although the assessment of net savings and benefits was calculated by Mr Lonergan as set out in [68] above for the first two years, the picture for the first three years would have been less advantageous, as follows: "Applicant 1996 1997 1998 Total $ $ $ $ Fiona Howland-Rose 2,793 843 (2,729) 543 Michael John Harvey 14,986 5,849 10,712 10,123 Jeffery John Braysich 4,786 1,950 (3,571) 915 Anthony Peter - 4,218 6,107 10,326" Davidson (iv) As to Mr Lonergan's thesis of the only realistic commercial risk for a participant being that the purported taxation benefits would not be available, Mr Weeks pointed out as follows: "15. In my opinion, it is relevant to note that the Put Option is granted by BARM, and not PGF, which is the lender. Accordingly, the Participant is subject to the risk that at the end of the loan period, BARM will not be in a position to perform its obligations under the Put Option and assume responsibility for the loan. Therefore, if BARM is unable to assume responsibility for the loan, it is my understanding that the participant would still be liable for repayment of the loan balance. 16. In considering BARM's ability to assume responsibility for the loan, we note that the balance sheet of BARM as at 27 November 1995 (as included in the Prospectus) disclosed total assets of $45,000 and net assets of $25,000. At the time of the Prospectus, it would appear that BARM's ability to meet the obligations under the Put Option were heavily dependent on the success of the syndicate and BARM's ability to derive management fees and commissions. Therefore, if the Syndicate was not successful, BARM may not be in a position to meet its obligations under the Put Option. 17. Thus, in my opinion, it is not correct to simply assume that the participant will have no liability for repayment of the loan merely because of the existence of the Put Option." 75 Other areas of difference between Mr Lonergan's first affidavit, and the affidavit in response of Mr Weeks, were as follows: (i) Mr Lonergan estimated that the aggregate tax savings of all investors would be approximately $30 million; Mr Weeks calculated that the same would more precisely have been as follows: Marginal tax rate of 48.5% : $31.9 million Marginal tax rate of 44.5% : $29.2 million Marginal tax rate of 35.5% " $23.3 million. (I should interpolate here however that Mr Lonergan later pointed out that 3 of the 4 Applicants were subject to the highest marginal income tax rate). (ii) As to research and development activities undertaken by ATTORI, the cost of which Mr Lonergan had calculated to be $5,291,000 for the years ended 30 June 1997 and 1998 (see [73] above), Mr Weeks pointed out that Mr Burns, a Certified Practising Accountant and Bachelor of Economics, and formerly Company Secretary and Accountant for ATTORI (inter alia), had calculated ATTORI's expenditure on such activities to be $1,252,539 for the year ended 30 June 1999, and $828,645 for the following period ended 30 April 2000, being calculations with which he agreed (Mr Burns had made an affidavit inter alia to such effect on the instructions of the Applicants' solicitors subsequent to Mr Lonergan's first report). (iii) Mr Weeks next referred to Mr Lonergan's report showing management fees in respect of the period of time up to 30 June 1998 incurred by ATTORI in favour of BARM as totalling $7,979,000, and pointed out that according to Mr Burns' report based on internal accounting records, the sum involved was in fact $5,686,800. Moreover on 26 August 1998, a calculation was made as to the sum of $16,709,901 owing by ATTORI to BARM for management fees, inclusive of the sum of $5,202,324, the latter figure being made up of the abovementioned amount of $5,686,800, less an amount of $484,476 already paid by ATTORI to BARM. (iv) As to Mr Lonergan's figure of $2,463,000 said to have been paid by ATTORI for commissions, Mr Weeks pointed to Mr Burns' calculation of $2,050,272 made on the basis of general ledger records, but he conceded that he had not investigated the difference between the two sums. 76 Concerning Mr Lonergan's conclusion as to remoteness of the prospects of profitable returns ever being derived by participants from the BPS (see again [71(i)] above), Mr Weeks said that "I do not believe that the conclusion… is as clear cut as it implies", and provided detailed reasons for that view, based on his analysis of the Marketing and Technical Consultant's Report of Dr Twomey set out over 5 pages in the Prospectus, which I have summarised in [14-16] above. Mr Weeks predicated his view on that issue upon the achievement of the forecasts of that Report, and pointed out that in any event, the potential annual profit figure of $38.86 million per annum for the BPS and Budplan Company Syndicate in combination, referred to in [16] above, did not purport to take into account BARM's entitlement to 25% of such estimated annual profit, namely $9.7 million (approximately). 77 Mr Lonergan's first affidavit also provoked a comprehensive response from Mr Collins by way of his second affidavit, which may be summarised as follows: (i) A distinction should be drawn between the research and development required for a compound, such as TTO, which had been for sale on the market in Australia for many years, without any history of significant adverse effects upon users, and what would be required of a totally new compound, and that the amount of about $8 million, referred to in [51] and [59(v)] above, was adequate to produce results capable of commercial exploitation. (ii) It was a reasonable expectation that the product packages, as outlined in the Prospectus, could have been produced as a result of research expenditure in the said sum of about $8 million, being packages which included elements such as product formulae, manufacturing method, analytical method, analytical method validation, stability data, raw material specifications, physical specifications, preservative efficacy tests and efficacy studies, both in vitro and in vivo, and irrespective of variations in cost. (iii) By way of support for that conclusion, Mr Collins obtained a cost estimate of $32,711 for a theoretical antiseptic mouth wash with TTO and another active from Technical Consultancy Services Pty Ltd, a specialist supplier of formulations to the health care industry; multiplication of that sum across the board for 74 data packages produced a figure of $2,420,614. (iv) Other significant development costs would nevertheless be incurred, such as development of safety data, efficacy studies and the like, in order to comply with various regulatory agency requirements; those costs were difficult to estimate because of variations for particular products, but one example given was a cost between $1000 to $5000 to conduct an in vitro antimicrobial test for a mouth wash. (v) A clinical trial for an acne treatment product to confirm product efficacy, and to support product claims, could cost between $20,000 and $350,000. (vi) As the BPS would not, under a licensing arrangement, be undertaking any manufacturing, distribution, marketing or other cost incurring activities, the gross income stream from the licensing of Product Packages would not be reduced by any significant expenses, apart from the percentage share of income to be paid to BARM. (vii) The 25% gross income distributable to BARM would still leave 75% gross income to the participants, and an outright sale of research results would leave 50% of the gross sale proceeds available to the participants. (viii) Essentially on the basis of the foregoing illustrations, Mr Collins would not accept Mr Lonergan's thesis as to remoteness of the prospect of participants deriving a commercial return from the BPS. However he would accept the proposition that the cash flow projections of Dr Twomey required to produce the estimated annual profit figure of A$38.6 million for the BPS and Company Budplan Syndicate in combination (see [16] above) were optimistic as at the time the Prospectus was issued, and with the benefit of hindsight, were arguably overly optimistic. (ix) It followed from my summary of Mr Collins' opinions in response, and from some additional observations, which in the circumstances it is unnecessary for me to record, that Mr Collins did not agree with the reasoning of Mr Lonergan set out in [72] above. 78 As to Mr Hopfner's testimony summarised in [62-63] above, it suffices to record that Mr Collins was dismissive thereof, and having regard to my conclusions in [64] above, it is unnecessary to record Mr Collins' reasons therefor. 79 The second affidavit of Mr Weeks, tendered by the Applicants in response to Mr Lonergan's first affidavit, was addressed by a lengthy second affidavit of Mr Lonergan, which consisted largely of his defence of the controversial aspects of his first affidavit, and in particular the following contentions: (i) the business was high risk and speculative in nature, as indeed was stated in any event on the front cover of the Prospectus (see also the extract from the Prospectus appearing in [13] above) under the heading "Marketing Risk Factors"; (ii) there was a significant risk that: · the R&D activities (ie research and development) would not be successful; · even if the R&D was to be successful, the commercial development might not be successful; · even if the R&D and commercial development had achieved a measure of success, there might be delays in the receipt of commercial benefits, and the quantum of financial returns might be (and, in his opinion, on any realistic analysis would be) less than forecast; (iii) the underlying assumptions as to market share, profitability and timing in the forecasts were overly optimistic; and (iv) even a small change in the forecast revenues and/or profit margins would mean that no net profit would be earned by the participants. 80 Mr Lonergan reviewed Mr Weeks' calculations set out in [73(iii)] above and asserted that the fourth column headed "Total" should be corrected as follows: $ 907 (as to Howland-Rose) 3,165 (as to Braysich) His explanation for the correction was as follows: "The net cash cost occurs in 1998 for the three Applicants who entered into the Syndicate in the year ended 30 June 1996. This is the result of timing differences. Participants entering in to the Syndicate in April to June 1996 claimed as allowable deductions Research and Management fees in full (as prepayments) in the financial years 1996 (for 1997) and 1997 (for 1998). However, they only made one or two months of loan repayments in the 1996 financial year with the two year loan repayment period extending into the 1988 financial year. The payments made in 1998 represent payments of principal and interest as required under the Loan Agreements. Notwithstanding the inclusion of the 1998 negative cash flows and the income tax impact, each Applicant still had a net cash benefit after tax from participation in the Syndicate." 81 Mr Lonergan addressed in particular Mr Weeks' response at [74(iii)] above and asserted that BARM's ability, or otherwise, to honour the exercise of the put option would not have been entertained by most participants, let alone relied upon by them, since "[o]n the basis of the information set out in the Prospectus, a Participant would reasonably conclude that he/she had no liability to repay the loan if the project failed". This rejoinder tended to exemplify the level of hypotheses at which the differences of opinion between the experts were by then evolving in the course of their debates. 82 Further matters stated by Mr Lonergan in his second affidavit, which should be recorded, were as follows: (i) In order for the BPS to have achieved a net profit of 5% of sales after all expenses, the Syndicate was required to achieve a net profit of 30% of sales before payment of BARM's 25% share of gross proceeds, being a level of return which would have been very difficult to achieve, even if the Prospectus forecasts had been realistic, which in Mr Lonergan's opinion was not in any event the case. (ii) A selection from the Standard & Poors 500 Global Classification Standard of the net profits for the financial year 1996 of listed pharmaceutical companies in the USA demonstrated that only one out of 13 achieved a net profit margin of 30%. (iii) Unless the BPS achieved its forecast sales and made a profit of more than or equal to 25% of sales before payment of gross proceeds to BARM, the BPS would not have gained the position of making profit distributions to participants, and the likelihood in reality was one of sustained losses. (iv) The prospect of deriving a commercial return therefore remained remote, indeed in Mr Lonergan's terms "extremely remote", in summary because first, it was highly unlikely that annual sales of anything approaching $778 million were achievable, secondly it was highly unlikely that anything approaching a 30% profit on sales was achievable, and thirdly, and in any event, BARM's entitlement to 25% of gross business proceeds would have absorbed more than the entirety of any profit conceivably generated. (v) As to Mr Weeks' view expressed in [76] above, the same appeared to assume that the forecast $38.6 million revenue could be derived by way of royalty, which according to Mr Lonergan was a "flawed" proposition, essentially for the reason that any royalty on total sales would "fundamentally" alter the cost structure of the business, and on Mr Twomey's analysis, result in BARM having to give up receiving net income of $194 million (ie $778.3 million x 25%) in favour of net income of only $9.63 million (ie $38.6 million x 25%). 83 I have thus far delayed addressing the objection raised by the Applicants to the reception of Mr Lonergan's evidence in its entirety, upon the basis that in giving his viva voce testimony under cross-examination, Mr Lonergan departed from his role or function as an expert, and entered upon advocacy of the Commissioner's case. Mr Lonergan was certainly emphatic, if not at times dogmatic, in the expression of his views under cross-examination. The questioning of Mr Lonergan was on occasions by no means gentle, albeit maintained entirely within the bounds of propriety. As a matter of impression of some of Mr Lonergan's responses to what was a testing cross-examination, I would conclude that he did not trespass beyond the precepts required of an expert, such as to require the exclusion of his evidence from consideration upon the basis of alleged descension into advocacy of the Commissioner's case. It is to be expected that an expert may react with a measure of vigour to intense cross-examination upon controversial expert opinions. Objection was also taken to Mr Lonergan's second affidavit upon the different basis that the same addressed an area of expertise, in relation to which Mr Lonergan had not demonstrated sufficient qualifying knowledge and experience. Reliance was placed by the Applicants in support of the objection upon the following comprehensive passage in a judgment of the New South Wales Court of Appeal in Makita (Australia) Pty Ltd v Sprowles [2001] NSWCA 305 (Priestley, Powell and Heydon JJA) at [85]: "In short, if evidence tendered as expert opinion evidence is to be admissible, it must be agreed or demonstrated that there is a field of "specialised knowledge"; there must be an identified aspect of that field in which the witness demonstrates that by reason of specified training, study or experience, the witness has become an expert; the opinion proffered must be "wholly or substantially based on the witness's expert knowledge"; so far as the opinion is based on facts "observed" by the expert, they must be identified and admissibly proved by the expert, and so far as the opinion is based on "assumed" or "accepted" facts, they must be identified and proved in some other way; it must be established that the facts on which the opinion is based form a proper foundation for it; and the opinion of an expert requires demonstration or examination of the scientific or other intellectual basis of the conclusions reached: that is, the expert's evidence must explain how the field of "specialised knowledge" in which the witness is expert by reason of "training, study or experience", and on which the opinion is "wholly or substantially based", applied to the facts assumed or observed so as to produce the opinion propounded. If all these matters are not made explicit, it is not possible to be sure whether the opinion is based wholly or substantially on the expert's specialised knowledge. If the court cannot be sure of that, the evidence is strictly speaking not admissible, and, so far as it is admissible, of diminished weight. And an attempt to make the basis of the opinion explicit may reveal that it is not based on specialised expert knowledge, but, to use Gleeson CJ's characterisation of the evidence in HG v R (1999) 197 CLR 414, on "a combination of speculation, inference, personal and second-hand views as to the credibility of the complainant, and a process of reasoning which went well beyond the field of expertise" (at [41])." That statement of principles was said to correspond with dicta of Black CJ, Cooper and Emmett JJ expressed in Ocean Marine Mutual Insurance Association (Europe) OV v Jetopay Pty Ltd (2000) FCA 1463 at [21-23]. However the academic and practical qualifications of Mr Lonergan satisfy me that he did possess sufficient expertise to testify on the issues which he raised in his second report, though as will later be seen, I have been unable to accept his critical conclusions. A person skilled in the valuation of shares in trading companies, a skill undoubtedly possessed by Mr Lonergan, provides a sound basis in principle for expressing opinions upon the viability of financial prospects of a business enterprise set forth in a prospectus. 84 It is appropriate to further record that the Commissioner tendered an affidavit of Mr J J Lord, a well known Chartered Accountant, who was engaged by the Australian Securities and Investments Commission to report on a number of matters relating to the Main Camp, BPS and Company Budplan affairs, numbering thirteen in total. In the events which happened, Mr Lord was not cross-examined, the Applicants being prudently content with the course of recording objection in principle to the relevance of the totality of Mr Lord's affidavit, upon the basis of the Commissioner not pressing the final paragraph thereof containing an adverse conclusion as to commercial viability of each of the so-called "Budplans", including the subject BPS undertaking. It is unnecessary therefore to review Mr Lord's material, which was not the subject ultimately of written submissions. The further expert evidence relating more specifically to the extent of achievability of the BPS productivity goals portrayed by the Prospectus 85 The timeframe set by the Prospectus for the attainment of financial returns for the BPS participants was summarised in [20] above. In relation to the third year of the venture, the BPS was projected to become profitable to the extent of 3.2% net earnings, followed by 21% net earnings in respect of the fourth year, and 63.1% net earnings for each of the remaining 11 years of the 15 year term of the life of the BPS. It was the Commissioner's case, as already foreshadowed, that having regard to the nature and extent of the "start-up" research and development envisaged by the Prospectus, such earnings would not have been achievable, and indeed that the prospect of achieving any financial return was remote. Moreover participants ceased to be obliged, in conformity with the Syndicate Agreement, to make further repayments at the end of the initial period of two years, in the absence of profitability to fund such further payments, with the consequence that if the research and development work was not completed within the initial two year framework stipulated for the financial input of participants by way of partial repayment of otherwise non-recourse loans, the research and development work would effectively come to an end. Despite some unspecific and uncorroborated testimony provided on behalf of the Applicants to the effect that research and development work has been since ongoing for the benefit of the participants, the realistic conclusion I must draw for the purpose of the proceedings is that the objectives of the Prospectus have at least substantially aborted, having regard to what has happened after the expiration of that period of time, or more precisely, has been shown by probative documentary material not to have been achieved. The Commissioner contended that the attainment of any such future profitability at any time after the expiration of the two year framework was always going to be "completely unachievable" for the following reasons: (i) the nature of the pharmaceutical research and development involved in the assembly of the data required to manufacture, package, label, register and market the products contemplated by the Prospectus; (ii) the inherently instability, and hence unpredictability, of TTO as a complex natural substance by reason of its 178 compounds; (iii) the uncertain length of time needed to achieve registration of products with the TGA in Australia, and more significantly, from the perspective of generation of profits, to achieve registration (or monographs) in the United States of America, European Union countries and Japan in respect of products to be sold over the counter, being registrations inherent in Dr Twomey's calculations referred to in [16] above; (iv) the requirement for at least 12 months stability data, in order to establish that TTO products proposed to be manufactured and marketed did not disintegrate in the packaging selected for sale, TTO being a very strong solvent; and (v) the requirement for in vivo efficacy testing of each intended product, which in the case of acne trials would require 18 months, upon the basis of a stipulation of the Product Development Brief prepared by Xanadu Consulting Pty Ltd in May 1966 (which Mr Collins regarded however as an excessive estimate of time-frame (Tr 467)). 86 The Commissioner referred to the estimates of potential profitability made by Dr Twomey at the conclusion of his report set out in the Prospectus (see [16] above), and to the agreement of Mr Collins (Tr 431) with the proposition that for the projected income figures in the Prospectus to have "even a possibility of being achieved it was essential to access the US, European and Japanese markets", and further submitted that the evidence disclosed that those markets presented significant barriers to entry, from a regulatory viewpoint, for the following reasons: (i) According to Mr Collins, there was no uniform system of registration in Europe (at least in 1995), with the consequence that the regulatory requirements of each country would need to have been satisfied prior to the products being sold; he added that the stringency of European requirements in respect of therapeutic goods was changing, but the same were still reasonably stringent, though nowhere near those of the United States (Tr 450-451). (ii) No investigations had been undertaken by ATTORI in respect of the Japanese market and its regulatory requirements. (iii) As had been indicated by Dr Bell in his first affidavit, the FDA required satisfactory and conclusive scientific data principally as to the efficacy and safety of ingredients intended for active use in relation to over the counter sales, being data which was required to be distributed by the FDA to qualified experts for review in terms of efficacy and safety of use; moreover as Dr Bell further recorded, as at December 1995, the FDA had not issued a monograph in respect of the use of TTO in connection with any application made by BPS. Alternatively to seeking monographs, Dr Bell said in his first affidavit that another way of having a product accepted by the FDA was to submit a so-called New Drug Application in relation to a single product, though he added that "… once registered, the product cannot be varied without a new application", with the consequence that "this method of acceptance is very limiting". In summary, the prospects of securing FDA approval in a timely manner, or at all, were at best unclear. (iv) In any event, Mr Collins had considered that for new acne products to be marketed, the same needed to be unique, such as a patented ingredient (Tr 469), yet it was only in a relatively small proportion of research activity that something capable of being patented would be discoverable, particularly in the case of TTO products (Tr 477). 87 The Commissioner contended that the formidable difficulty in obtaining patent registration for products of the kind sought to be produced for the BPS was demonstrated by the following circumstances: (i) the international and provisional patent application made in respect of a preservative system for TTO and benzyol alcohol, lodged in the name of Mainstar One Investments, had lapsed; (ii) the application for a provisional patent number for an antiseptic preparation consisting of TTO and chlorhexidine, lodged in the name of ARG, had lapsed; (iii) the application for an international patent synergist in ante-acne preparations, made in the name of Mainstar One Investments, had lapsed. 88 Nevertheless it must be acknowledged that the 7 folders of BPS research material, referred to in [58-59] above and exhibited to the affidavits of Dr Bell, Professor Brown and Messrs Collins and Coupe, contained results of researches, including a large number of so-called "data packages" in respect of particular products, and eleven so-called "product packages". In relation to the contents of the folders, Mr Collins (who in addition to his appointments and his membership of the ATTORI Research and Advisory Board, was a consultant in the health care industry, retained by inter alia Biota Holdings Ltd and Therapeutic Antibodies Inc, primarily in licensing and marketing advisory roles), expressed the following opinions in relation to the contents of those 7 folders of BPS research material: (i) Although the folders did not contain "product packages" having all the elements required by the definition of that term in the Syndicate Deed (see clause 1.1.12 thereof extracted in [28] above), nevertheless there was a considerable amount of data in folders numbered 1 and 2 which, when added to some of the "data packages", would result in substantial compliance with the definition of "product packages" in respect of those data packages. (ii) It may be possible to create some "product packages" from the research results contained in the 7 folders. (iii) A substantial number of products already possessed appropriate stability data. (iv) It would have been possible for BARM, as manager appointed under the Syndicate Deed, to use packages complying with all elements of the definition of "product packages", in order to generate income for participants in the BPS through the licensing or sale of the product packages, in the form of the "commercialisation" activities which he described, and which he asserted to constitute accepted methods of marketing results of research and development incorporated into new products in the pharmaceutical industry. (v) Any potential licensee or purchaser of a new product would require certain elements of a "product package", irrespective of the market or market segment in which the product would compete, and of how the licensee planned to market the product; such mandatory elements were product formulae, product samples and stability information; moreover if a licensee planned to manufacture the product, and in addition make specified product claims (for example in the case of an acne product, "effectively treats acne" or "clear acne spots"), then efficacy and safety data would be required. (vi) With the exception of product samples, all of the above minimum information or data for some products (ie product formulae, product samples and stability information) was available in the 7 folders; moreover the type of company which could be targeted with such minimum information would be an entity which contracts the manufacturing of product to a third party, and would not make any specific product claims, and further, that would most likely market the product on a lower price platform; however the product would need to be one which would not require regulatory approval or registration. Companies of the foregoing description could be those supplying low priced products or product ranges to supermarkets, or those engaged in direct or catalogue selling to customers; thus while some products in the 7 folders have efficacy and safety data, such characteristics may not be sufficient for the larger potential multinational licensees, which usually require substantial efficacy and safety data. Consistent with the latter thesis are the minutes of a meeting of the ATTORI Research Advisory Board, which recorded Mr Collins having stated that in order to attract large pharmaceutical companies, a product was required to be patentable or unique in some way. The following passage appears in the cross-examination of Mr Collins (Tr 477): "…would you agree with me that it's the case that only in a relatively small proportion of work that's undertaken by way of research will a patent be discovered or something that's able to be patented be discovered?--- If we're taking research into products such as the tea tree oil products I think the answer is yes." On the other hand, Professor Brown for his part emphasised the usual, and perhaps the most effective, protection resides in "brand power" rather than patented production, at least in relation to "over the counter" products (Tr 872). 89 Professor Brown also addressed the significance of the content of the 7 folders, and in his second affidavit expressed inter alia the following opinions in relation to the work which had been thereby undertaken: "… In my opinion, a considerable amount of good quality, pharmaceutical research and development work has been done, firstly to investigate the properties of tea tree oil as an active ingredient having animicrobial activity and, secondly, to formulate it in ways to extend its activity by the use of complementary or synergistic additives. Some of this work has been performed using ATTORI staff and facilities but the majority of the work has been performed by a number of external specialist contractors, researchers and clinicians. In addition to the research on the mode of action, allergenicity and irritancy, animal toxicity and mutagenicity of tea tree oil itself, some 73 products have been designed and developed including 41 products for acne treatment, 22 hospital and antiseptic products and 10 products for oral hygiene. In my experience this represents a very large programme of pharmaceutical research and development. For each of the 73 products, the product concept, formulation, manufacturing methodology and quality specifications for finished product, ingredients and packaging have been developed… In addition to pharmaceutical development a large amount of in vitro testing [which is laboratory based testing such as testing for antimicrobial activity or preservative efficacy which does not involve the use of live animals or humans] and clinical testing has been conducted on products for treatment of acne, hospital and antiseptic applications and oral hygiene. In my opinion, the ATTORI project described by the data contained in the 7 folders of results and information was a very ambitious, aggressive programme to develop and greatly extend the application of tea tree oil as an active ingredient for the treatment of acne, for hospital and antiseptic applications and for oral hygiene. Management of the ongoing schedule of efficacy and stability testing, contract research and the constant need for review of findings for the large number of product projects was, in my opinion, a very demanding task." 90 Nevertheless Professor Brown proceeded to state that there was substantial work to be done in order to properly complete the project, notwithstanding the "considerable progress which had been made, particularly by way of provision of clinical evidence of efficacy to the TGA or other regulatory agencies"; specifically distilled in that regard by Professor Brown was the need to perform studies by way of investigation of tissue penetration of TTO, dermal and mucosal absorption of TTO, and phototoxity of TTO, together with studies to demonstrate efficacy in the treatment of acne. Moreover Professor Brown considered that the 7 folders contained formulae and concepts of the kind referred to in the definition of product packages in Clause 1.1.12 of the Syndicate Deed in the areas of acne treatment, hospital and antiseptic applications and oral hygiene, and also concepts and formulae based on Main Camp Pharmaceutical Grade Tea Tree Oil, including formulae, stability and safety information and efficacy data, packaging specifications and data useful for labelling specifications, albeit that there was incompleteness in some respects which he described in detail. 91 Professor Brown further expressed in his affidavit the following views as to the nature of the work and the skills needed to complete product packages utilising the research results: "In my opinion, it should be possible to create further product packages from the data contained in the 7 folders of results of research and development. For a commercially viable product, it is necessary to have a history of acceptable storage stability under accelerated conditions of 30oC and 40oC of at least 12 months in 3 batches of the finished product in the formulation and packaging identical to that to be marketed or sold. Critical to the successful development of products to be marketed for the treatment of acne is the availability of clinical efficacy data on the product to be marketed. In order to register a product which is claimed to be effective to treat acne, it is necessary to provide clinical evidence that it is effective in patients with the condition. This is not available at present and impacts on 41 of the formulations for acne products. However many of the products for acne, oral hygiene and antisepsis would, in my opinion, still be marketable as listed products even if they are not registrable. The creation of the optimal product packages from the data available requires the involvement of personnel with contemporary specialist experience in regulatory affairs having detailed knowledge of the regulatory requirements of Australia, the US FDA, the European Union, New Zealand and Asia for "over the counter products" (OTC's)." 92 I have earlier referred to undocumented ongoing research activity, which occurred subsequently to the winding up of ATTORI being put in place, by interests associated with Mr Stotter, in the context of my overview of Mr Coupe's testimony set out in [52] above. Mr Stotter spoke briefly and unspecifically, in the course of re-examination, about a "very recent evaluat[ion] by a UK based group who perform evaluations of this type by large pharmaceutical groups…", and further that "[t]hey wish to do some further analytical work on the clinical trials because they can be analysed in a number of ways… they thought there was some very strong data there. With respect to the antiseptics, once again there is good potential there, but not as good as the oral hygiene or the acne areas according to that group. We would expect products resulting from these to recommence commercialisation. I think the target date is around about next month or the month after that group". Mr Stotter further testified in that context that "…some further funds have been raised from the participants in this particular Budplan to further the commercialisation" (Tr 788-789). However, no adequate detail, much less supported documentation, was presented to the Court in verification of the nature and extent of the claimed ongoing activity (as I have similarly observed at [52] above), and it is therefore inappropriate for me to attempt to attribute material significance to any such activity, so far as the same may benefit or potentially benefit the Applicants as syndicate participants in the BPS. I think that the Commissioner is correct in his submission that as at the time of the hearing of the proceedings, there is no "concrete evidence to suggest that the participants will ever receive a return from the activities of the [BPS]". Whether of course it follows that there always existed, to adopt the Commissioner's further assertion, an "utter futility of the scheme ever returning a profit", is another issue. In any event, the unsigned minutes of a meeting of the Research Advisory Board of 31 July 1998, which became Exhibit A1 upon the basis of a description thereof suggested by Senior Counsel for the Applicants as "draft rather than approved minutes" (Tr 384), have an inherently uncertain value. 93 The participants did derive certain financial returns from the BPS to the extent detailed in [69] above, summarised as $25.55 per unit in respect of the 1996-1997 financial year and $118.44 per unit in respect of the 1996-1998 financial year, but as there indicated, the products the subject of those financial returns were confined to pure TTO and skin creams, shampoos and body care products, pure TTO being traditionally an antiseptic to minor cuts and abrasions, as Professor Brown verified by reference to TGA literature. Furthermore the Applicants admitted in their response to paras 45, 46 and 47 of the Respondent's Statement of Facts Issues and Contentions that the sales made to Russia were confined to Main Camp TTO. Moreover it is common ground that the remaining products I have just described were not products developed as a result of ATTORI's research and development undertaken for the BPS, and thus not being products falling within any of the three TTO categories described in the Prospectus under the heading "Nature of your Business" in [21] above. In that regard, whilst Clause 1.1.2 of the Syndicate Deed (set out in [28] above) speaks of the business of the BPS in paragraph (i) thereof as including "the production and sale of products and Research Results", in the context of the whole of that paragraph, including the defined expressions "Product Packages", "Research and Development" and "Research Results" contained in the subsequent Clauses 1.1.12, 1.1.13 and 1.1.14 of the Syndicate Deed, the reference to "products" necessarily refers only to products developed pursuant to the research and development activities to be funded out of moneys subscribed pursuant to the Prospectus. That is not to say of course that the resale by the BPS of the abovementioned Main Camp TTO and the skin creams, shampoos and body care products did not produce assessable income for taxation purposes in the hands of the participants, but the relevant point is that assessable income was not derived from the outgoings for which the Applicants claim deductibility under subs 51(1) of the ITAA. Whether the outgoings the Applicants claim to have incurred in the years of income ended 30 June 1996 and 30 June 1997 respectively were allowable deductions under subs 51(1) of the ITAA 94 The text of subs 51(1) of the ITAA has remained constant from the time the ITAA was first enacted, and is reproduced below: "All losses and outgoings to the extent to which they are incurred in gaining or producing the assessable income, or are necessarily incurred in carrying on a business for the purpose of gaining or producing such income, shall be allowable deductions except to the extent to which they are losses or outgoings of capital, or of a capital, private or domestic nature, or are incurred in relation to the gaining or production of exempt income." Each Applicant claims to have incurred outgoings in favour of ATTORI by way of research fees, and in favour of BARM by way of management fees associated with that research, in relation to two fiscal years, being yearly expenditure comprising $12,000, and thus $24,000 in the aggregate, and multiples thereof in the case of Messrs Harvey and Davidson as indicated by [27] above. Such expenditure is asserted by the Applicants to fall within the second limb of subs 51(1), or alternatively the first limb thereof, or both. The convenient course is to first consider the issue of deductibility under the second limb, that issue having been at least initially the preferred focus of the Applicants' case for entitlement to income tax deductibility. 95 The nature and objectives of the business which each participant was informed by the Prospectus would be carried on by him or her as an individual have been identified earlier in these Reasons for Judgment, some examples, and the judgment paragraphs relating thereto, being set out below: "…a business proprietor in a business of development for potential manufacture and sale of specified tea tree oil based products including all necessary research…" [9] "By participating in the Budplan Personal Syndicate you will engage in the business of development for potential manufacture and sale of specified tea tree oil based products including all necessary scientific research…" [12] "Your business is the development and sale of tea tree oil products to marketers or manufacturers of products in the target areas of research…" [21] It was further indicated in the Prospectus that the nature and objectives of the business, which each participant was to conduct, would be incorporated into the Budplan Syndicate Deed by virtue of the definition of "Business" contained in Clause 1.1.2 thereof, which contained in turn the Deed's definitions of "Product Packages", "Research and Development" and "Research Results", all such definitions being extracted in [28] above. Such Syndicate Deed was in turn incorporated in effect into the Principal Deed to be signed by each participant in the circumstances described in [23] above, and the Principal Deeds took effect as sub-trusts in relation to the Trust Deed dated 5 December 1995 identified in what has been extracted at the culmination of [11] above. Incidentally, the Commissioner did not raise any issue as to whether the Applicants, along with the numerous other participants, in substance carried on business in a partnership, and not purportedly as individuals, and if so, the consequences in law that might have followed. 96 The drafting regime adopted in the Prospectus for the purpose of describing the nature and objectives of the business to be undertaken by each participant individually as a member of the BPS, as I have earlier pointed out in [10] above, purported to merge the proposed research and development activities required to be undertaken for the creation of marketable TTO products and product packages, with the processes of manufacture and subsequent distribution of those products and product packages. However, other statements appearing in the Prospectus, also earlier extracted in these Reasons for Judgment in the paragraphs indicated below, reflected more of the reality of what had to be achieved by way of successful research and development in advance of the occurrence of income producing activities: "Both Syndicates will contract with [ATTORI] to undertake the necessary scientific research including enhancing existing product formulae and product concepts and to develop new products" [9] "You will commence business by entering into the Budplan Personal Syndicate Deed and contributing $200 (or multiples thereof) to the Syndicate to cover business establishment expenses and purchase of the initial formulae and product concepts…" [12] Nevertheless as appears from the many events and circumstances set out in the preceding segments of these Reasons for Judgment commencing from [49] above, the BPS members, including of course the Applicants, never achieved the goal of manufacturing and selling TTO products or product packages resulting from the research and development activities foreshadowed and outlined in the Prospectus, the only assessable income ever derived by them as BPS members being that particularised in [69] above, and there explained as income unrelated to the research and development for which subscribers for units or syndicate participations, such as the Applicants, outlaid the funds the subject of claims to subs 51(1) deductibility. Contrary to the Applicants' submissions, and despite what I would describe as the creative draftsmanship readily discernible in the Prospectus to which I have referred on several occasions, it is plain that what was objectively intended by subscribers for syndicate participations, upon the true interpretation of the Prospectus, including the pro forma Syndicate Deed forming part thereof, was that the initial activity of the members of the BPS was research and development activity to be undertaken over an initial period of two years or thereabouts, and further that there was a real risk that the same would be unsuccessful, with the consequence that any income producing activities to result therefrom would never in fact occur. I am therefore unable to accept as accurate the often repeated theme of the Applicants' submissions that "commercialisation [began] at the outset". Of course, to adopt the Applicants' submission, there was a commitment to manufacturing and marketing as well as to research and expenditure, but those activities were not in substance or reality contemporaneous commitments. Without successful research and development in place, there would be no product contemplated by the Prospectus which would be available to be marketed. The fact that only one fund raising process was contemplated by the Prospectus to occur in relation to the BPS does not enable the Applicants to avoid the significance of those mutually exclusive sequential circumstances. 97 The issues therefore to be addressed boil down to whether the expenditures on research and development of the relevant TTO products envisaged by the Prospectus constituted losses or outgoings in the hands of the Applicants, as members of the BPS, and were incurred in gaining or producing assessable income, or were necessarily incurred in carrying on a business for the purpose of gaining or producing such assessable income. The convenient course, having regard to the sequence of addresses adopted by the parties, is to first determine the implications of the expenditures in relation to the second limb of subs 51(1) of the ITAA, that is to say, the issue whether the expenditure of the $24,000 parcels (or multiples thereof) over about two fiscal years, as was contemplated in the Prospectus segment set out in [17] above, constituted losses or outgoings of the Applicants necessarily incurred in carrying on his or her business for the purpose of gaining or producing assessable income, being an issue of which the authorities speak as involving matters of fact and degree, with no one factor being necessarily decisive. 98 The Applicants have referred me to a number of authorities establishing or restating principles relating to the operation of the second limb of subs 51(1). A convenient starting point, in the context of what may be described as small business undertakings, such is the case of each participant's purported individual business said by the Prospectus to be involved, is the often cited dicta of a Full Federal Court (comprising Bowen LJ, Franki and Fisher JJ) in Ferguson v Federal Commissioner of Taxation (1979) 37 FLR 310. At 314, the passage appearing in the joint judgment of Bowen LJ and Franki J reads as follows: "…There are many elements to be considered. The nature of the activities, particularly whether they have the purpose of profit-making, may be important. However, an immediate purpose of profit-making in a particular income year does not appear to be essential. Certainly it may be held a person is carrying on business notwithstanding his profit is small or even where he is making a loss. Repetition and regularity of the activities is also important. However, every business has to begin and even isolated activities may in the circumstances be held to be the commencement of carrying on business. Again, organisation of activities in a business-like manner, the keeping of books, records and the use of system may all serve to indicate that a business is being carried on. The fact that, concurrently with the activities in question, the taxpayer carries on the practice of a profession or another business, does not preclude a finding that his additional activities constitute the carrying on of a business. The volume of his operations and the amount of capital employed by him may be significant. However, if what he is doing is more properly described as the pursuit of a hobby or recreation or an addiction to a sport, he will not be held to be carrying on a business even though his operations are fairly substantial…." And at 321-2, Fisher J added the following observation: "…A person may conduct a business, albeit of a limited nature, the activities of which business are preparatory to or in preparation for the conduct of another business on a larger scale. The question is whether the more limited activities at the earlier stage, standing alone, constitute a business." Guided by the foregoing statements of principle, and notwithstanding that the taxpayer in Ferguson carried on his activities as an individual in a traditional sense (and not as in the circumstances here, where 2371 individual taxpayers undertook the activities now under scrutiny purportedly as such, but in reality in some kind of confederate sense, albeit not purportedly in partnership), I put aside as not disqualifying in principle the circumstances in the present proceedings merely that the financial involvement of each Applicant (particularly in the case of Ms Howland-Rose and Mr Braysich) was relatively modest, and that all four Applicants were primarily engaged otherwise in income-producing activities, mainly as employees, and further that there was not an immediate purpose on their respective parts of profit-making in relation to the fiscal years of expenditure, being those ended on 30 June 1996 and 1997 (except in the case of Mr Davidson, which ended on 30 June 1997 and 1998). 99 Moreover, although the test as to satisfaction of the second limb of subs 51(1) requires an appraisal of the objective circumstances attending the outlay of expenditure, and in particular the objective purpose or purposes of a taxpayer in making the outlay, nevertheless, relevant to the determination of that objective purpose or purposes may be, in the circumstances described in the joint judgment of Deane and Fisher JJ (Brennan J delivering a concurrent judgment) in a Full Federal Court in Magna Alloys & Research Pty Ltd v Federal Commissioner of Taxation (1980) 33 ALR 213 at 233-235, the taxpayer's subjective purpose in so doing. At 235, the joint judgment stated as follows: "To the extent that the subjective element is relevant, what is important in the case of a voluntary outgoing is the identification of the advantage or advantages which the outgoing was intended to achieve on behalf of the taxpayer regardless of whether that advantage or those advantages were seen as the direct result of the outgoing or as individually flowing therefrom or of whether the pursuit of them should be seen as 'purpose' or 'object' or as 'motive'." I would refer also to Federal Commissioner of Taxation v Radnor (1991) 91 ATC 4689 at 4700, where Hill J observed in similar vein: "While an intention to carry on a business must exist this does not mean that the question is subjective… a man will be held to intend the natural and probable consequences of this act, so that, albeit that he does not intend to carry on a business, if his acts amount to a business in fact, he will ordinarily be held to be carrying on a business. However, intention may, nevertheless, be relevant, particularly in a case where the determination of business or no business is to be made at the time of commencement of a business, or in a time of business quietude…" In that regard, and without intending to modify what I have already observed in [42] above, it is pertinent to revisit the evidence of each of the Applicants to the effect that his or her primary intention to commit to BPS participation was the future income forecast by the Prospectus to be derived after a successful completion of the research and development activity contemplated by the Prospectus, rather than the likelihood of income tax deductibility postulated by the Prospectus, albeit that the latter factor provided an important incentive: see again [33-34] as to Ms Howland-Rose, [35-36] as to Mr Harvey, [38] as to Mr Braysich and [39-40] as to Mr Davidson. 100 Following Ferguson, the Applicants referred me to the often cited "small business" dictum of Walsh J in Thomas v Commissioner of Taxation (1972) 46 ALJR 397 at 400-401: "On the foregoing facts, the question whether or not the appellant embarked upon a business venture has to be determined. There is no doubt that the appellant's chief occupation was the practising of his profession and that the tree farming, if it had a business character, was relatively of minor importance both as to the time devoted to it and as to the returns to be expected from it. But a man may carry on a business although he does so in a small way." Subsequently in Walker v Federal Commissioner of Taxation (1983) 70 FLR 354 (Supreme Court of New South Wales) and Federal Commissioner of Taxation v Walker (1984) 2 FCR 283 (Full Federal Court majority on appeal), it was held that a taxpayer, who acquired at the outset only one (albeit expensive) goat for use in an embryo transplant programme with the intention of building up a small herd, thereby commenced the carrying on of a business of primary production for income tax purposes. One member of the majority in the Full Court (Davies J) observed at 296-297 that "A business, as distinct from a scheme or undertaking, has continuity, an ongoing character, though it may have quiescent periods… if there is a transaction, which, if repeated, would be a transaction in a business and if it is shown to be undertaken with the intent it should be the first of several transactions in the carrying on of a business, then that first transaction will be a transaction of a business". That restatement of principle echoed what appears in the passage extracted above from the majority judgment in Ferguson that "…every business has to begin, and even isolated activities may in the circumstances be held to be the commencement of carrying on a business". 101 A further established principle here material is that a person may carry on a business for income tax purposes, notwithstanding that management of the business has been delegated to an agent. Numerous illustrations abound, including the cases upon which the Applicants placed particular emphasis, and which will be considered in some detail below, namely Federal Commissioner of Taxation v Lau (1984) 6 FCR 202, (a Full Federal Court comprising Fox, Jenkinson and Beaumont JJ), Federal Commissioner of Taxation v Emmakell Pty Ltd (1988) 22 FCR 157 (a Full Federal Court comprising Wilcox, Burchett and Beaumont JJ), and Federal Commissioner of Taxation v Brand (1995) 95 ATC 4633 (a Full Federal Court comprising Lee, Lindgren and Tamberlin JJ). As will be seen however from my digest of the circumstances in each below, no deductible expenditure was said to have been initially outlaid by the taxpayers involved in the schemes in order to determine, by way of research and development, whether the intended business activity was soundly based in the first place with appropriate regulatory approvals, and would be productive of financial returns. 102 The taxpayer in Lau sought deductibility in respect of the fiscal year ended 30 June 1981 in relation to the growing of pine trees for the purpose of ultimate pine wood harvesting, for the respective sums of $39,200 outlaid by way of a management fee, $640 outlaid by way of rental, and $180 outlaid by way of legal fees and stamp duty. Such outlays were made pursuant to a scheme promoted by others whereby individual parcels of land marked out for each participant, including Dr Lau, would be planted with infant pine trees or pine tree seeds, and thereafter cared for by the promoters or entities associated with them, and the grown timber when ultimately harvested would be sold for the benefit of the participants. The scheme as presented by promoters was said to be attractive to the participant taxpayer, because it offered the prospect of immediate and substantial tax deductibility, in addition to the ultimate benefit of sale of the timber when harvested. It was apparently common ground that at least seven years would elapse before the trees could be sufficiently developed to be marketable. A number of agreements were contemporaneously entered into by the taxpayer with the scheme promoters' associated companies for terms approximating 21 years, relating first to the leasing by the taxpayer of an area of about 14 hectares, secondly to the management for the taxpayer of the cutting, harvesting and selling of the timber by the companies, thirdly to the guarantee of net proceeds of sales of trees harvested by the companies, and fourthly to the borrowing of funds by the taxpayer to pay the management fees in advance. In the proceedings at first instance before the Supreme Court of Queensland (84 ATC 4618) (Connolly J), the Commissioner disputed that Dr Lau's expenditure fell within s 51(1) of the ITAA, upon the basis, inter alia, that the same was an outgoing of capital. Connolly J found however that the classic test as to deductible expenditure enunciated by Dixon J (as he then was) in Sun Newspapers Ltd & Associated Newspapers Ltd v Federal Commissioner of Taxation (1938) 61 CLR 337 at 362, namely "expenditure is to be considered of a revenue nature, if its purpose brings it within the very wide class of things which in the aggregate form the constant demand which must be answered out of the returns of a trade or its circulating capital, and actual recurrence of the specific thing need not take place or be expected as likely", was satisfied. In the Full Court, both Fox J and Beaumont J delivered separate judgments upholding the taxpayer's entitlement to deductibility under s 51(1) of the ITAA, and Jenkinson J agreed with both judgments. The reasons for judgment of Beaumont J indicate that at least the second limb of the sub-section was applicable, His Honour finding (at 218) as follows: "Once it is concluded that the moneys were outlaid by the taxpayer for a real or genuine commercial purpose, any inquiry as to the manner in which those funds were subsequently applied by their recipients is immaterial for the purposes of s 51." At 219, his Honour continued as follows: "Although the transaction was structured so as to offer tax advantages to participants, it would be wrong to say it was not a real business transaction. The arrangements were underpinned by genuine commercial considerations and, in my view, those considerations are decisive for the purposes of s 51." I would interpolate to observe the adverse implications of that dictum to the viability and relevance of the issues pursued by the Commissioner which are the subject of the substantial evidentiary material I have recorded under the segment headings The nature of the project foreshadowed and outlined by the Prospectus and the expert evidence raised at the hearing of the proceedings in relation thereto and The further expert evidence relating more specifically to the extent of achievability of the BPS productivity goals portrayed by the Prospectus. As in the case of Connolly J at first instance, Beaumont J considered (at 221) that the Sun Newspapers test was duly satisfied, the "contractual quid pro quo for the expenditure determining the nature of the outgoing". All judges in Lau rejected the Commissioner's alternative contention that s 260 of the Act, the precursor of course to Part IVA later to be considered in these Reasons, applied so as to deny deductibility. The difficulty confronting the Applicants in the present circumstances is that the contractual quid pro quo for each Applicant's expenditure was in substance and reality the undertaking of research and expenditure which would not necessarily lead to any assessable income ever being derived from products which might subsequently be manufactured upon the basis of the results therefrom. Whilst it may be said that a successful outcome to the undertaking of the research and expenditure may well have led ultimately to the viable manufacture and sale of TTO products and product packages based upon or arising out of the same, it would not be conceptually correct to categorise such consequences as the contractual quid pro quo for what was in truth research and development expenditure. 103 It is convenient to record at this stage that the judgments in Lau are relied upon by the Applicants additionally for the purpose of rebutting the "round robin" contention propounded by the Commissioner, as foreshadowed in [47] above. The "round robins" in Lau related to cheques contemporaneously banked, whereas in the present circumstances, bills of exchange were exchanged without any accompanying or consequential bank statement entries. At 4621 Connolly J observed as follows: "Both N.Q. and Liberton banked with the Commercial Bank of Australia Limited at its Sherwood Road, Toowong branch. N.Q's account was in credit$70,782.33 immediately before the exchange of cheques and Liberton's was in credit $50. It is not suggested that the bank would have permitted either transaction standing alone. The only conclusion to which one can come is that the bank gave credit to N.Q. in the sum of nearly one quarter of a million dollars for virtually an instant of time on the strict understanding that it would be immediately repaid." 104 In presenting the case on appeal to the Full Court from the decision of the Supreme Court, the Commissioner did not pursue in Lau the contention of sham, but raised the issue as to whether any outgoing was incurred by the taxpayer at all, just as the Commissioner has done here by reference to the "round robin" of bills of exchange. In the reasons for judgment of Fox J concluding at 207, his Honour there found as follows: "The net result of the dealings so far as concerned the taxpayer was to make meaningful the loan to him, as well as to provide a record. The [taxpayer] had performed his obligation to pay N.Q. the balance of the management fee, albeit he had incurred a liability to Liberton for the same amount. Liberton had also incurred a liability to N.Q." To similar effect was the conclusion of Beaumont J at 215 as follows: "Notwithstanding the absence of any real movement of money, his Honour held that the transactions were not shams. On the contrary, he found… that it was the common intention of the participants in the scheme, of Liberton and of N.Q., that the various instruments should take effect according to their tenor." I will return later to the "round robin" issue raised by the Commissioner in the present proceedings. 105 The next authority upon which the Applicants placed particular emphasis, as foreshadowed above, was that of Emmakell. That case arose out of a tea tree growing scheme having the objective of commercial exploitation of the tea tree oil to be obtained therefrom, coincidentally having been promoted by Mr Stotter. Shortly before 30 June 1983, the taxpayer became interested in the scheme, which involved the leasing to participants of parcels of land on which trees were to be planted and cultivated for the production of tea tree oil. Participants in the project were offered firstly, the lease of a one acre parcel located within what had been a grazing property, pursuant to which rentals were payable in advance, and secondly management services pursuant to management agreements. The lease rentals and management fees were payable in advance on or before that date, and subsequently on or before 30 June 1984, 1985, 1986 and 1987. The sole issue was deductibility pursuant to subs 51(1) in respect of the rental and management fees which were payable in advance during the year ended 30 June 1983. The reasoning of the Court's earlier decision in Lau was held by the Full Court in Emmakell to require that the taxpayer's objection to disallowance of deductibility in respect of the rentals and management fees be upheld. The Commissioner did not apparently raise a Part IVA issue in Emmakell, Part IVA having application in respect of transactions entered into after 27 May 1981. 106 Grouped in submission by the Applicants with Lau and Emmakell, as I have earlier indicated, was the subsequent decision in Brand. The circumstances there involved were that the taxpayer entered into an agreement with one company to license certain "acquaculture" ponds in Northern Queensland for the purposes of prawn farming, and a further agreement with another company to manage the prawn farming activity, both agreements being made on 4 June 1987. The two companies were apparently related. The taxpayer made payments, pursuant to those agreements, totalling $16,000 prior to 30 June 1987, and claimed deductibility in respect thereof pursuant to subs 51(1). At first instance, Nicholson J found that the taxpayer's objective was to invest the funds in what he regarded as a good commercial investment, and that tax deductibility of the payment was a consequence, not an objective, of the investment. The trial judge rejected the Commissioner's proposition that a loss or outgoing, to qualify pursuant to subs 51(1), must be made contemporaneously with activity of the taxpayer which is directed to gaining or producing assessable income, being a submission not here made by the Commissioner. In the events which had happened, the prawning activities never in fact began. It was the second ground of attack that the Commissioner pressed on appeal, which related primarily to dicta in Goodman Fielder Wattie Ltd v Federal Commissioner of Taxation (1991) 29 FCR 376, and also to Federal Commissioner of Taxation v Osborne (1990) 26 FCR 63, and Griffin Coal Mining Co Ltd v Federal Commissioner of Taxation (1990) 90 ATC 4870, being decisions to which I will later refer in the context of the present proceedings. The Commissioner submitted in Brand that the taxpayer had merely proposed to commence, but had never actually commenced, carrying on of business as a prawn farmer, and pointed to the circumstance that although the license fee was paid upon the signing of the license agreement, the taxpayer's right to occupy the ponds was expressed to commence only when the same were ready for the growing and harvesting of prawns. In dismissing the appeal, the joint judgment of Lee and Lindgren JJ formulated the following principle, based on dicta of a Full Court (Northrop, Wilcox and Hill JJ) in Federal Commissioner of Taxation v Riverside Road Lodge Pty Ltd (in liq) (1990) 23 FCR 305 at 313: "The circumstances and extent of any lapse of time between the incurring of a loss or outgoing and the commencement of the relevant activity directed to the gaining or producing of assessable income constitute a factor relevant to the question whether the statutory description is met. The cogency of that factor will vary from case to case, and depends on more than a mere measuring of the period. The temporal hiatus may suggest that the outgoing was incurred for some purpose other than the gaining or producing of assessable income." The other judgment of the Court in Brand, delivered by Tamberlin J, expressed agreement with the reasons of the majority, and at 343, his Honour added the following: "This latter finding as to the subjective purpose which the taxpayer had in mind at the time of payment is, in the circumstances of this case, an important element in characterising the outgoing for the purposes of the subsection. This finding does not resolve the question because the ultimate characterisation of the outgoing also calls for an examination of the objective circumstances in which the outgoing was incurred and on the result which the outgoing is objectively calculated to achieve. The circumstances in which the present payment is made, indicate in my view, that the outgoing can objectively be described as incidental or relevant to the end of gaining or producing assessable income or as being an activity which would be expected to produce assessable income, although none in fact was produced." I interpolate here to mention that his Honour's foregoing dictum, concerning the interaction between a taxpayer's subjective purposes and contemporaneous objective circumstances, lends no support to the Applicants' contention that although "[t]he ultimate test is objective, [yet] unchallenged evidence of the taxpayers is conclusively persuasive as to that objective purpose". Moreover I would not accept the Applicants' further contention that on a fair reading of the cross-examination of each of the Applicants, the essence of the Commissioner's case as to the subjective purposes of the Applicants, was not fairly or adequately put, but in any event, it is what the Applicants' outgoings were calculated to achieve, from an objective perspective, which presents the ultimate hurdle for the Applicants to address. After then referring to Goodman Fielder, Tamberlin J added at 344 the following observation which bears directly upon the circumstances of the present proceedings, to an extent potentially adverse to the Applicants: "The purchase of research expenditure or payment for a feasibility study is firstly to investigate whether a proposed or possible line of business activity is viable and secondly to decide whether to make a commitment to the activity. The third stage is the entry into such a commitment. It does not follow from a favourable research or feasibility study, for example that any commitment or outgoing will be made with a view to producing assessable income. In that sense such studies may be discrete from the relevant business activity and may be "too soon" before the business activity commences to justify classification as an activity expected to produce assessable income. This stands in marked contrast to the present case." 107 It becomes appropriate, at this stage of the discussion of authorities upon which the Applicants expressed reliance, to examine closely the decision of Hill J in Goodman Fielder, aspects of which the Applicants have sought to distinguish. The proceedings related to the years of income 1982 to 1985 inclusive. Two categories of deductions were in issue. The first category related to payments made by the taxpayer Goodman Fielder to fund research to be carried out by the Queensland Institute of Technology for the period from September 1981 until approximately October 1982. The second category comprised expenditure incurred thereafter, and was described in the income tax returns of the taxpayer as relating to manufacturing, administration, research and development, or "merely expenditure shown as such in the operating statement of the applicant in respect of its Mabco Division". The area of dispute concerned the characterisation of undisputed facts. On 14 August 1981, Goodman Fielder had committed to funding the Institute to undertake scientific research into monoclonal antibodies, and the potential application thereof in immune reactions, such research being perceived to have "great commercial potential". The commitment was conditional upon Goodman Fielder having the right to review the outlay of further contributions to the research activities at the end of one year, and again at the end of three years. The research centre was set up, a laboratory was equipped and staff were recruited to conduct the research, which did not actually commence until the early months of 1982. By October 1982 it was clear that the first products, albeit of limited commercial value, would be launched by December 1982, and a decision was made to lease separate premises, and for the abovementioned Mabco Division of Goodman Fielder to set up commercial development and production facilities. Issues arose as to deductibility, pursuant to subs 51(1) of the Act, as well as pursuant to subs 73A(1) thereof, in relation to the research expenditure, including the full time salary of the veterinarian engaged as technical manager. It is only necessary for present purposes to consider his Honour's observations concerning the operation of subs 51(1). Sub-section 73A(1) provides for deductibility for income tax purposes in respect to payments made to an approved research institute for scientific research etc in circumstances where the payments have been made by a person already carrying on business for the purpose of gaining or producing assessable income and was not raised as an issue in the present proceedings. It is difficult to fathom how the "Business Overview" of the Prospectus came to refer to the provision by the Australian Government of "taxation and incentives" for research and development (see [9] above), in the context of the establishment of the BPS. 108 The Commissioner disallowed deductibility under subs 51(1) in respect of the contributions made by Goodman Fielder to the Institute for the period of time until November 1982 (the FCR Report head note at 385 mistakenly refers to 1983), upon the footing that the taxpayer had not in fact commenced the relevant business or income-producing activity until the setting up of the separate premises; prior to that time, the contributions to the Centre had been confined to the activity of research and development. After stating that "[a]n intention to carry on a business will not determine that a business is in fact carried on", citing in that regard the dictum of Lord Buckmaster in J & R O'Cain v Inland Revenue Commissioners (1922) 12 TC 303 that "[t]he intention of the man cannot be considered as determining what it is that his acts amount to", but pointing out nevertheless that intention may not be wholly irrelevant to the issues of deductibility arising under subs 51(1), Hill J referred to Ferguson and Walker, and to the dictum of Mason J (as he then was) in Hope v Bathurst City Council (1980) 144 CLR 1 at 8-9 (with which Gibbs, Stephen and Aickin JJ agreed) to the effect that for a business to be carried on, the activities must possess something of a permanent character. His Honour next observed at 386 as follows: "Critical to the resolution of the present controversy is the characterisation of the business activity itself which is said to have commenced. It was properly conceded by the applicant that if the business claimed to be carried on by it was to be characterised as one of manufacturing and selling monoclonal antibody products, then that business did not commence until around November 1982 when the move to [the new premises] took place." And after further referring to phraseology adopted by Menzies J in John Fairfax & Sons Pty Ltd v Federal Commissioner of Taxation (1959) (Cth) 101 CLR 30 at 49 descriptive of expenditure within the second limb of subs 51(1), namely "part of the cost of trading operations", Hill J concluded at 387 as follows: "For the applicant it was submitted that the income-producing activity or business activity in which the applicant was engaged in the relevant period should be characterised as an activity of researching and developing monoconal antibody products for manufacture and sale. The difficulty in the path of the applicant, however, is that during the relevant period the element of commitment was absent. The evidence, which I have summarised above, makes it clear that the applicant was engaging in activities of a provisional kind only. It is true that it was contemplated that, if the research work funded by the Institute proved successful, there would be products to market and that it was hoped (and this hope was reflected in the initial budget with Dr Watson's proposal) that sales could be embarked upon at an early time. However, the funding of the centre in which research was to be carried on was directed at research into such products as the work of the centre might show to be commercially viable. It was research, to quote the proposal of 7 July 1981: "from which a defined range of marketable products will emanate." In fact, the July proposal identified two products, that concerned with Brucella abortus and that concerned with Campylobacter foetus which, in fact, were never marketed at all by the applicant in the period in which it was concerned with monoclonal antibodies. The activity in which the applicant was engaged through until November 1982 can only be described as an activity of funding a research project in which it was an essential collaborator, both as to the provision of funds and as to serving on the management committee. Notwithstanding that the applicant accounted for this activity as a separate division, it is not possible, in my view, to characterise the activity as a business or, for that matter, as an activity of gaining or producing assessable income so as to fall within the first limb of s 51(1)." 109 As I have pointed out in [95-96] above, the Prospectus purported to incorporate or merge into the notion of carrying on the business of manufacturing and distributing TTO products and product packages the activities of the research and development required to successfully bring into existence such products and product packages. Indeed the Appellants' submissions were to similar effect, with their theme as to "commercialisation begins at the outset". During the period of research and development, which the Prospectus forecast to take about two years, it was not envisaged by the Prospectus that any revenue would be derived by the participants from the sale of products the subject of research and development or otherwise, and of course no such revenue was ever subsequently derived. The Prospectus eschewed moreover the existence of any certainty that the contemplated research and development activities would be productive of revenue in favour of the participants: see for instance the references to "the inherent risks" in the material firstly extracted in [12] above, and to "the risk is also high" in the material subsequently extracted in [12(vii)] above, and more emphatically to "[t]here is no guarantee that the revenue expected will be derived…" in [13] above; see also the list of Dr Twomey's "ASSUMPTIONS" in the Prospectus in [16] above, and the passage commencing "[i]n the event research is not proving to be successful…" extracted in [21] above. As in the case of the Goodman Fielder activities described by Hill J in the passage extracted above, and to adopt his Honour's phraseologies, the activities for which the Applicants subscribed during the subsistence of the BPS, and until the exhaustion of the participants' financial resources, were "activities of a provisional kind only", being "research into such products as the work of the centre might show to be commercially viable…", which could "only be described as an activity of funding a research project…". 110 The Applicants submitted that by virtue of the terms of the Prospectus, and their taking up of units or syndicate participations pursuant thereto, their respective commitments to the business of marketing products and product packages was "clear and unequivocal", and crystallised "immediately… [f]rom the time of execution of the Syndicate Deed". Reliance was placed on the Prospectus material extracted in [9], [12], [13], [21] [28], [29] and [31] above. I have made adverse observations earlier on what I would characterise as the contrived endeavours of the Prospectus to converge the activities of research and development into activities by way of manufacturing and marketing of products, in advance of the former activities being first successfully concluded or brought to fruition, whether within the time limits contemplated by the Prospectus, or otherwise. The Applicants further submitted that commitment is not an activity, but is in the nature of decision-making, in the context of their endeavour to circumvent for instance the stipulations of Clause 5.2 of the Syndicate Deed, summarised at [30] above. It was also submitted on their behalf that Clause 5.2 "simply recognises the undoubted speculative nature/risk attached to the business", and that "[w]hat is important is that, notwithstanding this risk, commercialisation begins at the outset". I am unable to accept the substance of those submissions. They ignore the reality that without successful research and development, there can be no feasible manufacture and marketing of the products the subject of the research and development, and it cannot be realistically contended that the Prospectus predicated otherwise. 111 I am unable to accept that the Applicants gain assistance from the authorities to which I have been referred, and which I have summarised, in some instances with lengthy citations, from [98] to [106] above. On the contrary, the Applicants' submissions are inconsistent with the passages cited above from Brand, Goodman Fielder and John Fairfax. The Applicants never reached the stage of carrying on any relevant business activities, much less activities having the permanent character spoken of for instance in Hope. Whilst a Full Federal Court (Lee, Heerey and Merkel JJ) in Esso Australia Resources Ltd v Federal Commissioner of Taxation (1998) 84 FCR 541 made the following observation at 556: "We accept the nature, scope and extent of exploration activities of the kind engaged in by the appellant might, in some cases, be sufficient to constitute the carrying on of an exploration business" that was not the situation of the Applicants, any more than was the same found to be true of the taxpayer in that case. Different considerations may apply where a manufacturer is already engaged in making particular products, and in that context expends funds on research in order to improve such products (or where subs 73A(1) in any event is fulfilled). As was subsequently said in Esso at 556: "Intent of the taxpayer alone in respect of the expenditure is not sufficient to establish deductibility under s 51(1) for outgoings or expenditures that are not themselves productive of income, but are intended to lead in the future to the production of income." In any event, even if the Applicants had committed to carrying on the manufacture and sale of the products, the subject of research and development, in line with the sometimes equivocal or elusive terms of the Prospectus, the requirements of the second limb of subs 52(1) were in my opinion plainly not satisfied. As was observed by Brennan J (with whom St John J agreed) in Inglis v Federal Commissioner of Taxation (1979) 40 FLR 191 at 195: "Whether any of the outgoings qualify for deduction under the second limb of s 51(1) depends upon whether a pastoral business was being carried on during the relevant years, 'the outlay must have been incurred in the carrying on of a business, that is, it must be part of the cost of trading operations' (per Menzies J in John Fairfax & Sons Pty Ltd v Federal Commissioner of Taxation (1959) 101 CLR 30 at 49)." 112 The Applicants' purported emphatic reliance upon Lau, Emmakell and Brand cannot therefore in my opinion be justified from a correct understanding of the circumstances and reasons for judgment in each case. The subscribers to the schemes in those cases were not depending on the viability of the proposed growing activities being first established by research and development, but instead committed themselves from the outset to the growing activities of businesses immediately being launched as ongoing concerns, and to production from growing activities, in contrast to activities of research into the feasibility of developing products required to meet external standards of safety, efficiency etc, being research undertaken in advance of any manufacture and marketing which might never occur. 113 It must therefore follow that the expenditures of the Applicants, which were outlaid in the acquisition of syndicate participations in the BPS, did not qualify for deductibility under the second limb of subs 51(1) of the ITAA. The disqualifying principles cited in the judgment of Hill J in Goodman Fielder in [108] above apply to the circumstances of the subject expenditures, and as I have already indicated, the circumstances in Lau, Emmakell and Brand are in contrast and distinguishable. The expenditures of the Applicants were in the nature of and related to steps anterior to carrying on business, as I think the Commissioner rightly submitted. 114 I have made reference in [106] above to Obsorne, being a decision of a Full Federal Court (Spender, Pincus and French JJ) upon which the Commissioner relied. I should refer to the same for completeness. The taxpayer was denied deductibility by the Court for outgoings incurred in preparing land for planting chestnut trees, in relation to a year of income involving a nil return from primary production. The project was subsequently abandoned, but had abandonment not occurred, about six years would have passed between planting and the first harvest. The earlier decision in Lau was not cited in Osborne, and understandably so, because the taxpayer in Osborne was not committed to an income producing venture, whether contractually or at all. The circumstances in Osborne were similar to those in Southern Estates Pty Ltd v Federal Commissioner of Taxation (1967) 117 CLR 481, where the High Court (though not unanimously) disallowed scrub clearing and fencing expenditures undertaken in advance of any grazing activity by a farmer on his own land. Doubtless for that reason, Osborne was not cited in Emmakell or Brand. 115 I have also made reference in [106] above to Griffin Coal, to which the Commissioner also referred, the reason for which I should explain, whilst still discussing the issue arising under the second limb of subs 51(1). The issue involved was whether a company engaged in a substantial coal mining going concern was entitled to deductibility in respect of certain aluminium smelter feasibility study costs. At first instance, Lee J found that the costs related to a planned new source of income, and were not deductible under either limb of subs 51(1), and his conclusion was upheld by the majority of a Full Federal Court (Wilcox and French JJ) on the same basis. Davies J dissented in the Full Court on the basis that the expenditures were essentially devoted to the improvement of the taxpayer's existing coalmining operations and business objectives, the same arising out of and being reflected in the taxpayer's need to obtain an enhanced market which would enable it to exploit the coal reserves contained within its existing mining leases, and were in his opinion related to revenue-type activities. Unlike the circumstances of each of the present Applicants, the Griffin Coal company was already engaged in the business of marketing its coal production at the time of its research expenditure in question, whereas the Applicants were not engaged in the business of marketing TTO product packages or products at the time of their outlay of research and development expenditure, and as I have earlier pointed out, the later ad hoc selling activities of the BPS detailed in [69] above were unconnected to any products the subject of that research and development. I should record for completeness that special leave to appeal to the High Court was refused in Griffin Coal (22 ATR 404), the High Court holding that because an argument directed to a relationship between income and expenditure, based on the converse approach taken by the High Court earlier in relation to subs 25(1) of the ITAA in Federal Commissioner of Taxation v Myer Emporium Ltd (1987) 163 CLR 199, had not been raised on the preceding appeal of Griffin Coal to the Full Federal Court, the grant of leave to appeal in relation to that issue was inappropriate, notwithstanding that the point involved a question of importance. The Applicants made the formal submission to me that the Full Federal Court minority approach in Griffin Coal should be applied, and the majority view repudiated, for at least the reason so ventilated on the special leave to appeal application, and the Applicants reserved the opportunity to argue the point, in the event of an appeal to a Full Federal Court being brought in the present proceedings. I would merely observe that the circumstances in Griffin Coal were in any event significantly at variance with those of the Applicants here, for reasons already made apparent. 116 An alternative subs 51(1) submission was pursued by the Applicants, based upon the first limb thereof, which must next be addressed. An alternative issue referrable to the first limb was raised by the taxpayer in Goodman Fielder (but rejected by Hill J at 387) upon the basis that the activity of funding the research project in which that taxpayer was "an essential collaborator" could not be characterised "…as an activity of gaining or producing assessable income so as to fall within the first limb of s 51(1)". There have been a number of statements made by the High Court as to the scope of operation of the first limb of subs 51(1). It may be observed that the first limb tends to provide a narrower base to which a taxpayer might seek recourse, in contrast to the wider base of the second limb. In the respected work of the late Professor Parsons, Income Taxation in Australia 1985, the following appears at par 5.49 in the context of his comprehensive discussion of the first limb: "The view of the framework of s 51(1)… has the consequence that, to be deductible, an expense must be relevant to the derivation of assessable income, and must be a working expense. These two elements tend to run together in much of the judicial elaboration of the operation of s 51(1). It is summed up in the phrase 'incidental and relevant'. The phrase is unhelpful, to the extent that it places the two elements out of their logical order. The first issue must always be whether the expense is relevant. If it is not, it is not deductible…. If the expense is relevant, it will be deductible if it is a 'working expense' – a phrase which is more expressive of the criterion than 'incidental'. Other expressions of the criterion are 'constant demand', 'operating' or 'maintenance'. If a relevant expense is not a working expense, it may be described as 'capital'." And in the same context at par 5.52 the learned author added: "Where questions of relevance and working character are run together, it is generally because there can be no question of relevance and the issue is simply whether the expense is a working as distinct from a capital expense…." Expenditure upon research and development would not normally meet the operation of the first limb of subs 51(1), according to the foregoing criteria. 117 Subsequently to the publication of Professor Parsons work, the High Court in Fletcher v Federal Commissioner of Taxation (1991) 173 CLR 1 (Mason CJ, Brennan, Deane, Dawson, Toohey, Gaudron and McHugh JJ) undertook a review of the authorities relating to the first limb of subs 51(1). I have cited below certain passages from the joint judgment (commencing from 18), which was preceded by observations inter alia that for an outgoing to qualify for deductibility under the first limb involves a question of characterisation, and that the subjective motivation of a taxpayer in making an outgoing is sometimes a relevant factor in the task of characterisation, though not ordinarily so where the outgoing gives rise to the receipt of a larger amount of assessable income. The present circumstances involve of course the outlay of $12,000 (or multiples thereof) per annum in advance for each of two successive years of income by a participant individually upon research and development work, which outlays, in the events which have happened, have not been productive of any assessable income whatsoever. In relation to situations of that kind, the judgment in Fletcher proceeded as follows: "The position may, however, well be different in a case where no relevant assessable income can be identified or where the relevant assessable income is less than the amount of the outgoing. Even in a case where some assessable income is derived as a result of the outgoing, the disproportion between the detriment of the outgoing and the benefit of the income may give rise to a need to resolve the problem of characterisation of the outgoing for the purposes of the sub-section by a weighing of the various aspects of the whole set of circumstances, including direct and indirect objects and advantages which the taxpayer sought in making the outgoing. Where that is so, it is a "commonsense" or "practical" weighing of all the factors which must provide the ultimate answer. If, upon consideration of all those factors, it appears that, notwithstanding the disproportion between outgoing and income, the whole outgoing is properly to be characterised as genuinely and not colourably incurred in gaining or producing assessable income, the entire outgoing will fall within the first limb of s 51(1) unless it is either somehow excluded by the exception of "outgoings of capital, or of a capital, private or domestic nature" or "incurred in relation to the gaining or production of exempt income". If, however, that consideration reveals that the disproportion between outgoing and relevant assessable income is essentially to be explained by reference to the independent pursuit of some other objective and that part only of the outgoing can be characterised by reference to the actual or expected production of assessable income, apportionment of the outgoing between the pursuit of assessable income and the pursuit of that other objective will be necessary." 118 The principles which I have extracted lead to the inevitable conclusion, in my opinion, that the outlays of the Applicants referred in the preceding paragraph must fail to qualify within the first limb of subs 51(1), since the same were wholly related to the cost of research and development, and are not capable of being identified with the derivation of any assessable income by any participant in the BPS, in the sense of assessable income derived as a result of those outlays, much less some disproportionate amount of income in the sense described in Fletcher. Research and development is normally undertaken upon the footing that if fruitful, steps will thereafter be taken to produce or manufacture or otherwise acquire, and to market, the successfully researched and developed product. To repeat again the description of Hill J in Goodman Fielder extracted in [108] above, "the activity of funding a research project" is not an activity which gains or produces assessable income for or on behalf of the principal. In my opinion, the Applicants have no entitlement of recourse to the first limb of subs 51(1) for deductibility of their funds subscribed to ATTORI and BARM for research and development. 119 I should add for completeness that the conclusion I have reached as to the absence of entitlement of the Applicants to deductibility pursuant to either limb of subs 51(1) inherently carries the consequence that the loan application fee outlaid by each Applicant (see again the table at [17] above) was not deductible in the hands of participants, in light of the text of subs 67(1) of the ITAA reading as follows: "Subject to this section, so much of the expenditure incurred by the taxpayer in borrowing money used by him for the purpose of producing assessable income as bears to the whole of that expenditure the same proportion as the part of the period for which the money was borrowed that is in the year of income bears to the whole of that period shall be an allowable deduction." 120 The conclusions I have reached above in relation to the unavailability of deductions based upon either limb of subs 51(1) renders strictly unnecessary the need for deciding upon the viability of the project discussed at length within [49-93] above. Nevertheless, having regard to the time and expense devoted by the parties to the resolution of this complex factual issue, it is appropriate that I should determine the same, whilst bearing in mind that the test for resolving the kind of evidentiary issue which the Commissioner has raised is no higher than that postulated by Beaumont J as a member of a Full Federal Court in Lau at 218, in terms of "real and genuine commercial purpose" of a taxpayer, as set out in the passage extracted in [104] above. That test does not necessarily require a taxpayer to establish that the venture he or she determines relevantly to pursue or become involved in would necessarily have been productive of assessable income, based on the information available at the time of financial commitment (such as contained in a prospectus). Obviously enough there are graduations of risk of loss in any business venture, in relation to events which may subsequently happen, and reliance upon the benefit of hindsight will often be questionable. 121 The starting point in favour of the Applicants upon this area of controversy is the judicially recognised measure of legitimacy, from an evidentiary perspective, of the subjective purposes of the Applicants to which I have earlier referred in the context of the second limb of subs 51(1): see the passage cited from Radnor in [99] above), and also the discussion of the High Court in Fletcher at 17-18, only part of which I have extracted in [117] above. The respective testimonies of the Applicants summarised in [33-41] above, to the effect that they identified from the Prospectus the existence of prospects of success for the BPS venture, and thus of derivation of future income therefrom, are entitled to some evidentiary weight in the ultimate objective analysis. That is not to overlook my earlier finding that the Commissioner's submission made in [42(i)] above, to the effect that each of the Applicants was aware that the income projections in the Prospectus were based upon the series of assumptions, and further that there was a risk that those assumptions would not be fulfilled. 122 My perception of the testimonies of such of the promoters of the BPS venture who gave evidence in the proceedings, namely Messrs Stotter, Priest and Lucas, and also Dr Twomey who was involved in a consultancy capacity to the promoters from 1989, and further Dr Bell, whose involvement with ATTORI commenced in 1997, was that they had genuinely believed that the BPS venture would be successful and ultimately financially viable. Indeed they continue to harbour a significant measure of that belief. Having had the opportunity of seeing and listening to each of them in the course of lengthy and searching cross-examination, my view is that they did not intentionally or carelessly engage in a process of misleading and deceiving potential participants to subscribe moneys to a venture which, with the benefit of hindsight, possessed no prospect of financial success achievable at least within the timeframes set by the Prospectus. Each of these persons, to my observation, have remained enthusiastic about, if not also dedicated to, the future development prospects of TTO products and product packages. There can be little doubt that their original enthusiasm evolved into misplaced optimism, as set-backs unfolded. With the exception perhaps of Mr Stotter, they were prepared as a general rule to face up to the need to make realistic concessions in cross-examination. The searching cross-examination conducted by the Commissioner demonstrated in a number of instances that in the events which have happened, the forecasts and predictions of the Prospectus were significantly short on justification or fulfilment as at the time the Prospectus issued, but that is not to say that the promoters caused to be published in the Prospectus anything which they knew at the time of issue to be untrue and unattainable. There is little doubt in my mind that each of the promoters whom I have identified above, and in addition Dr Twomey and Dr Bell, who had been for a material period of time associated with them, and who gave expert as well as historical evidence in the proceedings, were enthusiastically committed from the outset to the ventures portrayed in the Prospectus, and believed that the BPS venture would be financially rewarding for the participants as well as themselves. Where they were plainly lacking in the kind of conservative and restrained judgment which was required from the outset, related to estimations of the time and the cost required to achieve successful research and development of the planned TTO products and product packages, such as was reasonably to have been expected to obtain necessary recognition in the European Community, the United States of America and Japan. As has been seen, in the events which happened, the BPS research and development projects, as portrayed by the Prospectus, evolved literally into financial disaster, not being productive of any return to participants. It appears that one contributor to the ultimate financial collapse of the project may well have been the high proportion of the funds raised which were expended upon BARM's administration, being a factor which would have inherently depleted the financial resources otherwise available for better and more effective advancement of research and development, but that is a matter which is unnecessary for me to further explore, no detailed enquiry having been undertaken, nor having been essential to the issues arising, as to the justification for the amount of expenditure in that direction. 123 In support of the conclusions which I have expressed in the last paragraph, which must be understood as formulated only in the context of the resolution of taxation issues, I would mention the following matters to which I have earlier referred in the course of any evidentiary summaries: (i) The extent of progress in development of products still achieved by ATTORI by the year 2000 (see [50] above); (ii) The expert view of Professor Brown as to the probable or possible sufficiency of $8 million "…to do as much as they were trying to do", though not for research and development of products in the vicinity of 70 in number (see [51] above); however I should add that Mr Priest had thought that approximately $12 million would be needed for the research for the initial period of two years, and $24 million for the remainder of the 15 year term of the BPS, though he was speaking in that regard of a greater number of product packages than did Professor Brown; (iii) The far from pessimistic view of Mr Coupe concerning the extent of research and development results achieved by ATTORI in relation to certain products (see [52 above); (iv) The summary of Mr Priest as to progress achieved based on product briefs and research protocols (see [57] above); (v) The 7 folders of "Data Packages", which were achieved by ATTORI, presented in Mr Collins' view the possibility of creating some "Product Packages", but apparently did not contain "the finished product"; Mr Collins appeared to lend support to Professor Brown's thesis as to the sufficiency of $8 million expenditure (see [59] above). (vi) Dr Twomey's defence of the projections for market share estimates, and the value thereof contained in his segment of the Prospectus (see [60] above). (vii) The positive opinion of Mr Collins as to the progress made towards achieving the creation of entire product packages, and the potential for future income to be derived therefrom, particularly in the light of efficacy and safety data discernible in relation to some products (see [88] above). (viii) The opinion of Professor Brown as to the nature and objectives of the ATTORI project, and the considerable amount of good quality pharmaceutical research and development work apparent from the 7 folders (see [89] above). (ix) The positive opinion of Professor Brown relating to product packages and other data to similar effect as that of Mr Collins (see [91] above). However my conclusion at the bottom line must I think inevitably be, based upon the substantial amount of testimony which has been placed before me in the course of many hearing days, preceded by many comprehensive affidavits, that at the time the participants subscribed for their respective units or syndicate participations, it could not have been safely or prudently postulated that the projections of the Prospectus as to the length of time sufficient to achieve the productivity objectives were capable of fulfilment, given that the financial accommodation available for research and development would be limited to levels which, in the events which happened, were actually available for the research and development required. That of course is a judgment I have made with the benefit of hindsight, and is not intended to gainsay what the four Applicants, for instance, claim to have genuinely believed, from reading the Prospectus, as to the prospects of financial return in accordance with the forecasts thereof (as to which see again [20] above). 124 There remains for conclusion the related factor of achievability of the financial returns estimated and forecast in the Prospectus, which I have summarised in [20] above, or indeed any financial returns, having regard to the other terms of the Prospectus, and the documentation put in place as stipulated in the Prospectus. Mr Lonergan made formidable inroads in support of his thesis that based on the information disclosed in the Prospectus, and putting aside the benefit of hindsight, the prospects of the participants ever achieving a financial return were extremely remote from the outset: I refer in particular to what I have already recorded of Mr Lonergan's views set out in [71(i)], [72(xii)] and [72(xiii)] of his first affidavit. The respective testimonies proffered by the Applicants, in response to Mr Lonergan's thesis, from Mr Weeks (see [74-76] above) and Mr Collins (see [77] above) have nevertheless left me with sufficient conviction that I should not accede to the radical conclusion put forward by Mr Lonergan to the effect that at the time the Applicants subscribed for their respective units, there was in substance and reality no prospect, or else only an extremely remote prospect, that they would ever derive any financial returns, whether commencing in the third year of activity of the BPS, or at all. Mr Weeks was careful and conservative in his approach as an expert chartered accountant to possible future profitability of the BPS (as set out in [76] above), as was Mr Collins in his capacity as an expert in the marketing of pharmaceutical products (as set out in [77] above). Mr Lonergan's affidavit in reply to Mr Weeks and Mr Collins, in pursuit of his prognosis of an "extremely remote" prospect of BPS ever deriving a commercial return, put the Commissioner's case marginally too high, and was guided largely with the benefit of hindsight. Mr Weeks in his affidavit in reply asserted that if the Prospectus forecasts had been achieved, the likely return to participants in the long term would have been significant, and considerably greater than the income tax benefits (see [74(ii)] above). I do not think that in the context of resolving taxation issues, it is appropriate for the Court to resolve what I think boil down to largely conjectural, albeit bona fide, professional opinions. The Court should not, in circumstances such as the present, venture beyond enquiry as to fulfilment or otherwise of the kind of evidentiary test exemplified by Beaumont J in Lau at 218 (see [102] above), namely whether moneys have been outlaid by a taxpayer for a real and commercial purpose. If the evidentiary test is to be expanded to the point where enquiry may be made as to whether, independently of satisfaction of that "real and genuine commercial test", deductibility is to be denied in circumstances where it is established objectively by experts that the prospect of derivation of assessable income was from the outset non-existent or remote, the cost of resolution of tax deductibility disputes may become prohibitive. Conclusions on the "round robins" 125 The circumstances giving rise to this further issue raised by the Commissioner have been summarised in [43-46] above, the issue being whether the Applicants are disqualified from entitlement to deductibility pursuant to subs 51(1) in any event, for the reason that, according to the Commissioner, the Applicants never in fact subscribed their respective funds of $12,000.00 in respect of each of their first two fiscal years of involvement, or multiples thereof in the case of Mr Harvey and Mr Davidson, for the gaining or producing of assessable income, because such finds were said not to have been fact paid to ATTORI and BARM respectively in the fiscal years for which deductibility was respectively claimed. All that was relevantly paid, so the Commissioner's contention proceeded, was in the case of each Applicant part of the sum allegedly borrowed pursuant to the Loan Agreement made with PGF, together with 2 years interest calculated on the whole of that sum (see again the table of the Prospectus set out in [17] above). 126 A similar contention was raised by the Commissioner in Lau at first instance, in relation to an exchange of two cheques between related scheme promoter companies, each involving substantial sums made up of the initial purported subscriptions of funds of participants in the scheme, in circumstances where neither of the companies had sufficient funds in their respective bank accounts to honour the face value of the cheques, in the absence of prior arrangements made with the bank or banks of the drawers of the cheques. Connolly J rejected the submission of the Commissioner that the underlying transaction constituted a sham payment, making the observation and finding already extracted at [103] above, and the Full Federal Court took a similar view (see [104] above). In the present proceedings, the Commissioner made no allegation of sham, but advanced the proposition of absence of any payment in advance actually made by the syndicate participants to ATTORI and BARM of their respective contributions to the totality of the moneys (ie $24,000 or multiples thereof for each participant) required for research and development (I should add for completeness that there was no suggestion of non-payment of the "business establishment fee" of $200 and the "loan application fee" of $300). 127 In Fletcher, the circumstances of the controversial payment of funds by scheme participants were more analogous to the present, in the sense that there was an exchange of commercial bills alone, that is to say, not accompanied by entries in the bank accounts of the payer participants and the payee promoters. The High Court said as follows (at 14) as to the significance of such methodology of payment by the taxpayers in the circumstances there involved: The fact that the relevant "payments" were purportedly made by "round robins" of bills of exchange which were not supported by equivalent amounts of cash and which all ended up in the hands of the original drawees does not, once arguments of sham and fiscal nullity are rejected, necessarily preclude those "payments" from being effective and legally binding. Depending upon the circumstances, they could constitute counterbalancing set-offs of credit and debit amounts. Prima facie, it would seem that they so operated in the circumstances of the present case. Whether they did is, however, a mixed question of law and fact." Those circumstances in Fletcher appear to have been similar to the circumstances of the "round robins" which here took place. 128 The Commissioner placed reliance in the present proceedings however upon the unreported decision of the Supreme Court of Queensland Court of Appeal in Australian Horticultural Finance Pty Ltd v Jekos Holdings Pty Ltd (MacPherson JA, Thomas and de Jersey JJ, 9 December 1997, unreported). That case concerned the taking up of prescribed interests in relation to plantations to be cultivated and cropped. The scheme provided for the investors' representative to receive the subscription moneys from growers, to be held in trust until the minimum subscriptions had been received, and thereafter to be applied for the purpose of paying the license and management fees for the first year of venture. The scheme also provided for the grant of loans to approved investors to finance the acquisition of their respective interests. The project was expected to be self-sustaining for the remaining 14 years of its intended duration. The project did not however proceed according to plan, due to lack of funds caused mainly by the circumstance that a larger proportion of investors than was expected elected to borrow, rather than to pay, their subscriptions in cash, with the consequence that the promoters received too little money to carry out acquisition and development of the plantations. I interpolate to point out that in the case of the BPS, it is to be readily inferred from the structure of the Prospectus that the implicit anticipation of the promoters must have been that all or virtually all of the participants would take up the borrowing facility proffered thereby in the form of the Loan Agreement partly extracted in [24-26] above. The plaintiffs in Jekos sued to recover interest which they had outlaid, upon the basis that no loans had been in fact made to them, and that the relevant participation agreements were not carried into completion. A "round-robin" of cheques was arranged between the management companies and the plantation company with a bank's assistance, whereby the defendant promoter company's account became duly credited with the amount the subject of the "round-robin". To adopt the summary as to non-payment contained in the joint judgment, "[i]n this way the amounts supposedly credited by depositing the cheques delivered in each instance were returned to the source from which they had originally come, which was the defendant". 129 The trial judge (Dowsett J) found that payment had not been made according to law, and his finding was upheld by the Queensland Court of Appeal. The finding of payment in Lau at first instance and on appeal (see [103-104] above) was distinguished, upon the basis that "… the parties to the transactions in question agreed to be, and so were, bound by the course adopted", whereas in Jekos, "[t]he defendant had an obligation to each plaintiff, which obligation could only have been discharged in accordance with the terms of the agreements, unless the parties agreed to vary those terms". The Court of Appeal reasoned as follows: "The success of the plantation venture depended upon its promoters obtaining enough money to carry it out by acquiring the land, preparing and planting and cultivating it to the stage of crop production. Their expectations were disappointed by the course which events took at the very early stage. Instead of furnishing the funds with which the plantation would be developed, the investors elected, as they were entitled under the scheme to do, to call on the defendant to provide them in the form of loans in exchange for their promises to repay the amounts being borrowed under the Deeds of Loan. Contrary to the expectations of the promoters, the venture turned out not to be funded by the contributions of the investors, but required the infusion of capital from sources of their own. They could not, and in fact did not, obtain money by adopting the expedient of writing cheques which they knew would not produce the funds needed to finance the project. They ought at that stage to have confessed the failure of the project through inability to obtain the means needed to carry it out. Instead, they elected to create a facade by writing on pieces of paper, which they proceeded to pass around at the Bank, knowing that, as a source of the money they needed, it would have signified nothing." 130 The circumstances here involved are distinguishable from those in Jekos. Subscribers for syndicate participations envisaged that their payments for scientific research and of management fees would be effected upon the footing of the financial arrangements outlined in the Prospectus, that is to say, the scheme of 100% borrowings of principal repayable in part over two years, and of interest in respect of such borrowings payable over two years, upon the footing of the amount of principal outstanding at the end of that cash repayment period, and of interest thereafter to accrue in respect of the outstanding principal, being non-recourse in the sense of being only payable by participants out of future profits: see those parts of the Prospectus extracted at [11], [12(iii)], [13], [17], [18], [22] and [24-25] above. The conclusion is therefore open rightly to be drawn that each grouping of the bills of exchange that were drawn and circulated, and the book entries made pursuant thereto by way of "counterbalancing set-offs of credit and debit amounts" (to adopt the description in Fletcher extracted in [127] above), in the accounting records of PGF, BARM and ATTORI respectively, were duly authorised by the respective participants for the purpose of providing the means for, and effecting payment of, their respective contributions to scientific research expenditure and of their respective obligations to pay management fees, each as envisaged by the Prospectus. The circumstance that FSI (first identified in [45(ii)] above) was included in that equation of transactions of payment does not detract from my conclusion. Accordingly I would reject the contention of the Commissioner that the Applicants did not effect payment according to law of the relevant sums respectively of $24,000 (or multiples thereof in the case of Messrs Harvey and Davidson) appertaining to the first two years of participation in the BPS (or for that matter together with interest thereon related to such period of time). The Commissioner's contention as to the absence relevantly of "commercial value", an expression used in a different revenue context in Moreau v Federal Commissioner of Taxation (1926) 39 CLR 65 at 70 (Isaacs J), an authority to which the Commissioner referred, should not be sustained. Whether Part IVA applies adversely to the Applicants, in the event that deductibility should be allowed pursuant to subs 51(1) (contrary to my preceding finding) 131 The provisions of Pt IVA of the ITAA contain several key definitions in s 177A thereof as follows: "(1) 'scheme' means: (a) any agreement, arrangement, understanding, promise or undertaking, whether express or implied and whether or not enforceable, or intended to be enforceable, by legal proceedings; and (b) any scheme, plan, proposal, action, course of action, or course of conduct, … (3) The reference in the definition of 'scheme' in sub-section (1) to a scheme, plan, proposal, action, course of action or course of conduct shall be read as including a reference to a unilateral scheme, plan, proposal, action, course of action or course of conduct, as the case may be. (4) A reference in this Part to the carrying out of a scheme by a person shall be read as including a reference to the carrying out of a scheme by a person together with another person or other persons. (5) A reference in this Part to a scheme or a part of a scheme being entered into or carried out by a person for a particular purpose shall be read as including a reference to the scheme or the part of the scheme being entered into or carried out by the person for 2 or more purposes of which that particular purpose is the dominant purpose." I next set out the material part for present purposes of subs 177C(1) of Pt IVA as follows: "177C(1) Subject to this section, a reference in this Part to the obtaining by a taxpayer of a tax benefit in connection with a scheme shall be read as a reference to – … (b) a deduction being allowable to the taxpayer in relation to a year of income where the whole or a part of that deduction would not have been allowable, or might reasonably be expected not to have been allowable, to the taxpayer in relation to that year of income if the scheme had not been entered into or carried out; …." 132 The issue arises as to the application of Pt IVA adversely to the claims of the Applicants to deductibility for income tax purposes in respect of the research fees, management fees, interest and borrowing costs, if I am incorrect in my conclusion that deductibility should be denied to such outgoings, pursuant to subs 51(1) and subs 67(1) of the ITAA (as the case may be). Given the "test case" character of the present proceedings, it is appropriate that I resolve that issue in any event. In Federal Commissioner of Taxation v Spotless Services Limited (1996) 186 CLR 404, the following passage in the joint judgment of Brennan CJ, Dawson, Toohey, Gaudron, Gummow and Kirby JJ at 422 appears: "Beaumont J, in his dissenting judgment, held that the form and substance of the EPBC proposal had been to take steps to ensure that the source of the interest was located in the Cook Islands. The dominant purpose of the taxpayers in doing this was to achieve a tax benefit in Australia in the form of the exemption made under section 23(q) of the Act. Without that tax benefit, the proposal would have made 'no sense'. We agree with those conclusions." The above catchwords "no sense" have received widespread recognition since their original formulation by Beaumont J of this Court in his dissenting judgment in a Full Federal Court in Federal Commissioner of Taxation v Spotless Services Limited (1995) 62 FCR 244 at 271. As to identification of a "tax benefit", the joint judgment of the High Court in Spotless continued as follows: "A particular application of the definition provision of 'tax benefit' in section 177C(1) thus involves consideration of the particular materials answering the various categories in paragraph (b) of section 177D." Those categories set out in paragraph (b) of s 177D, to which regard should be had in particular in the present circumstances, are reproduced below: "(i) the manner in which the scheme was entered into or carried out; (ii) the form and substance of the scheme; (iii) the time at which the scheme was entered into and the length of the period during which the scheme was carried out; (iv) the result in relation to the operation of this Act that, but for this part, would be achieved by the scheme; … (vii) any other consequence for the relevant taxpayer… of the scheme having been entered into or carried out; …." The categories are of course designed to assist, as the joint judgment of the High Court indicated earlier at 422, a determination of the ultimate requirement of s 177D as to the existence or otherwise of objective facts from which a conclusion may be drawn that taxpayers have entered into or carried out a scheme for the dominant purpose of enabling taxpayers to obtain a tax benefit in connection with the scheme. Subsequently to Spotless, the High Court in Federal Commissioner of Taxation v Consolidated Press Holdings Limited (2001) 2001 ATC 4343 observed at [95], in relation to the operation of Pt IVA, as follows: "… One of the reasons for making section 177D turn upon the objective matters listed in the section, it may be inferred, was to avoid the consequence that the operation of Pt IVA depends upon the fiscal awareness of a taxpayer." 133 Consequently it would not be to the point that any one or more of the Applicants testified as to a primary purpose of deriving assessable income from participation in the BPS. What is called for is an objective analysis of relevant facts, and the drawing of conclusions therefrom as to the existence of a dominant purpose of enabling a participant in the BPS, such as any one or more of the Applicants, to obtain a tax benefit. An objective analysis must be chiefly based upon the contents of the Prospectus which have been comprehensively extracted in these Reasons for Judgment. Perforated syndicate participation application forms were contained in each printed copy of the Prospectus, and a pro forma of the Loan Agreement and of the Syndicate Agreement were embodied therein, preceded by explanations, summaries and illustrations of the operation of such Agreements, including the fiscal implications thereof. In the context of a disputed claim for tax deductibility, and in concluding that Pt IVA adversely applied to disallow the claim, Gyles J in Hart v Commissioner of Taxation [2001] FCA 1547, adopted the abovementioned theme in Spotless as to "making no sense", along with the related notion of "commercial rationale", in the following context: "48. It can hardly be seriously doubted that a purpose of both Austral and the ordinary borrower in entering into a transaction such as that in issue here would be to take advantage of the tax benefits claimed and demonstrated by Austral, namely, the deductibility of all interest, including additional and further interest. This was a significant advantage of the product. … 49. I am satisfied that there would be no commercial rationale for the arrangements in issue without the borrower being able to deduct all of the interest incurred for taxation purposes. It would make no sense otherwise. This is borne out by the manner in which the product was presented by Austral." 134 The Applicants however sought support for resisting the application of Pt IVA upon the basis of a recent decision of the New Zealand Court of Appeal in Commissioner of Inland Revenue v BNZ Investments Limited (2001) 20 NZTC 17,103,in which there was emphasised the need to establish the existence of consensual conduct, an element which the Applicants asserted to be here absent. The Applicants referred in particular to passages appearing in the joint judgment of Richardson P, Keith and Tipping JJ (at par 50), and the judgment of Blanchard J (at par 172), which respectively read as follows: "In short, an arrangement involves a consensus, a meeting of minds between parties involving an expectation on the part of each that the other will act in a particular way. The descending order of the terms "contract, agreement, plan or understanding" suggests that there are descending degrees of enforceability, so that a contract is ordinarily but not necessarily legally enforceable, as is perhaps an agreement, while a plan or understanding may often not be legally enforceable. The essential thread is mutuality as to content. The meeting of minds embodies an expectation as to future conduct. There is a consensus as to what is to be done. [50] It is a fundamental pre-requisite to the use of section 99 against the taxpayer that there be a contract, agreement, plan or understanding (the words the legislature chose to use in s 99(1) in defining "arrangement") in which the taxpayer is a participant. This state of affairs cannot exist for the taxpayer unless there has been formally or informally – even if unenforceably – a consensus between the taxpayer and another or others as to what, in general terms, will occur pursuant to the arrangement. The taxpayer does not have to know all the detail or be able to discern exactly how the arrangement will avoid tax by producing the illegitimate tax advantage, by which I mean an advantage which the legislature cannot have contemplated as flowing from the legislation. But the taxpayer must at least have a broad appreciation of the character of what is occurring." [172] However the operation of the New Zealand legislation is controlled by a statutory definition of "arrangement", which reads as follows: "'Arrangement' means any contract, agreement, plan or understanding (whether enforceable or unenforceable) including all steps and transactions by which it is carried into effect." That definition is to be contrasted with the wider and more comprehensive definitions of "scheme" etc which I have extracted above from s 177A of the ITAA, and which extend inter alia to unilateral courses of action by a particular person or persons, being not necessarily the taxpayer who obtains a tax benefit in connection with a scheme. I therefore derive no assistance from the dicta in BNZ cited above, and reject the Applicants' submission that "[t]here cannot be a relevant scheme to which the taxpayer is a party which has features of another scheme to which the taxpayer is not a party", even if it was correct to say here that there existed relevantly a scheme to which the Applicants or any one of them were or was not privy (as to which see [136] below). 135 My extensive summary of the contents of the Prospectus, set out at some length earlier in these Reasons for Judgment, demonstrates that prospective applicants for syndicate participations were informed that although there were potentially high returns for participants, the risks involved in participation in the business as described, including the activities of research and development, were also high, and in particular that there was no guarantee that "the revenue expected will be derived " (see again [12(vii)] and [13] above). Nevertheless prospective applicants were also informed by the Prospectus that there were limitations upon financial recourse on the part of PGF as financier/lender to the participants personally, by virtue of certain terms of the Loan Agreement, as well as fiscal or taxation advantages. In summary, those limitations and advantages were as follows: (i) each participant's personal commitment to the BPS scheme would be limited to $10,100 per syndicate participation payable over 2 years (apart from the relatively minor "business establishment fee" and "loan application fee"), made up of $6000 for principal loan reduction (ie for every $24,000 lent in two successive yearly amounts of $12,000) and $3,600 for interest (calculated for 2 years); (ii) each participant would obtain tax deductibility in excess of the above amounts of principal and interest so repaid of $6,000 and $3,600, being deductibility calculated in relation to an amount of $27,600 per syndicate participation over 2 years, made up of $24,000 to be purportedly borrowed to make payment in respect of research and development over that period of time, together with the said sum of $3,600 for interest (I put aside reference to the amount of $300 said to be additionally deductable for "loan application fee"); and (iii) even if the BPS was to be an entire commercial failure, in the sense of producing no assessable income, each participant would nevertheless obtain an ultimate cash 'surplus', as calculated at page 13 of the Prospectus, as a result of the postulated income tax deductibility entitlements exceeding the amount of the actual cash commitments. Thus, what has been earlier extracted extensively from the Prospectus, and in particular that which is set out in [17-18] above, provided all prospective applicants for syndicate participations with information to the effect that irrespective of an entirely adverse financial outcome to their involvement in the BPS, in the sense of recovering no monetary return, if tax deductibility was allowed by the Commissioner to the extent calculated in the Prospectus, all tax-paying applicants would achieve a return of surplus funds over their cost of acquisition of the syndicate participations, or more precisely, their respective costs of research and development and associated management. 136 The Commissioner provided extensive particulars of the integers of the scheme which were asserted to have been brought into existence and implemented, and which were said to satisfy the requirements of Pt IVA. In summary, the scheme so particularised comprised the Prospectus and all pro formadocumentation set out in the Prospectus, certain additional documents collateral to the transactions said to be contemplated by the Prospectus, and the carrying into effect of all such documents by the parties thereto. The parties to the scheme so particularised were said by the Commissioner to be those entities and persons privy to a certain Option Deed entered into shortly prior to the issue of the Prospectus between Main Camp Marketing Pty Ltd and BARM, and the directors and officers of those two companies, and the advisers to such entities and persons. The tax benefits asserted by the Commissioner to have been obtained by the Applicants in connection with the scheme comprised the tax deductions attributable to the research and development fees paid to ATTORI, the management fees paid to BARM, the interest paid over two years to PGF, and part of the borrowing costs (the latter being identified in [17] above as "Business Establishment Fee"). 137 As to the first of the categories set out in paragraph (b) of s 177D of the ITAA reproduced in [132] above, namely "the manner in which the scheme was entered into or carried out", the Commissioner particularised numerous matters; I would highlight the following below, without adhering literally to the descriptive language adopted more elaborately by the Commissioner: (i) The surplus moneys obtainable by participants over the first two fiscal years of participation, by reason of the difference between the monetary value of the income tax deductibility obtainable by participants in respect of that period of time, and the lesser amount required to be outlaid over the same period of time for reduction in the principal amount of moneys borrowed plus interest in respect thereof, and additionally the so-called business establishment fee and loan application fee; that surplus was represented by the sum of $27,720 exemplified in the Prospectus and being identifiable in [17] above. (ii) The net effect of the arrangements outlaid by the Prospectus, whereby the entire contribution of participants to research etc fees would be funded by borrowing from PGF with interest, and the fact that the borrowing would be undertaken pursuant to non-recourse lending arrangements whereby the participant would only be required to repay principal as to $6,000 and interest as to $3,600, plus the minor fees of $500 for "business establishment" and "loan application", totalling $10,100 in respect of each borrowing of the principal sum of $24,000 (again as set out from the Prospectus in [17] above). (iii) The circumstances that during the period of about two years for which the abovementioned income tax deductions would be claimed, a substantially lesser sum was actually outlaid in cash by participants to ATTORI and BARM than would have been the case had participants outlaid cash of $24,000 from their own resources, instead of purportedly borrowing units of $24,000 from PGF. (iv) The consequence that participants (with one exception out of 2721 participants) purportedly achieved a "deduction acceleration factor of nearly 300%, that is to say, they generated tax deductions of $27,720 over two years out of $10,100 outlaid in cash, with the consequential surpluses illustrated in [18] above. (v) By reason of the implications flowing from Clauses 6.3 and 6.4 of the Syndicate Deed, which I have referred to but not extracted in full in [30] above, BARM was not required to provide so-called "follow-up support and data… to enable the Manager… to obtain necessary licenses and registrations" beyond the initial term of two years. 138 As to the next category of paragraph (b) of s 177D to be examined, namely "the form and substance of the scheme", it suffices to extract below the particulars provided by the Commissioner, which were essentially an abbreviation of those summarised above in relation to the first category: "(ii) "the form and substance of the scheme" (a) the form of the scheme involved Participants purportedly paying an amount of $24,000 each to ATTORI as consideration for ATTORI developing and testing products in accordance with the terms of the Budplan Personal Syndicate Deed; (b) in substance the scheme involved; (i) no actual contribution of any cash pursuant to the purported loan transactions; (ii) the funding of ATTORI to carry out its contractual obligations as to product development and testing activities out of cash made available by the Participants' loan repayments; (iii) the conduct of the affairs of the Budplan Personal Syndicate on a basis which was highly unlikely ever to produce any commercial return to the Participants from the development and exploitation of products; (iv) the limitation of a Participant's involvement to the signing of the Prospectus documentation, and the making of payments of $9,600 over two years; (v) the structuring of legal arrangements, in particular the limited recourse loans, in such a way as to ensure the at Participants would become entitled to claim deductions over two years in an amount of $27,720 while they would be protected from financial liability for any amount greater than $9,600." The above reference to "payments over two years" was of course only to payments on account of principal, and not of interest. 139 The succeeding categories (iii), (iv) and (vii) of paragraph (b) of s 177D, to which I referred in [132] above, merely attracted from the Commissioner certain of the particulars I have already summarised and extracted above. 140 Apart from the submission based upon BNZ, which I have rejected for the reasons set out in [135] above, the Applicants sought to answer the Commissioner's case by reliance upon dictum of Emmett J in Metal Manufactures Ltd v Federal Commissioner of Taxation (1999) 99 ATC 5229 (his Honour's judgment was affirmed on appeal: Federal Commissioner of Taxation v Metal Manufactures Ltd (2001) 108 FCR 150), and in particular the following passages in what appears at 5275: "260 … a taxpayer may have a particular objective or requirement that is to be met or pursued by a particular transaction. The shape of such a transaction need not necessarily take one form. It is only to be expected that the adoption of one form over another may be influenced by revenue considerations… Nor, in my opinion, does the fact that a taxpayer chooses one or two more alternative courses of action, being the one that produces a tax benefit, determine the answer to that questions. Part IVA will be satisfied if it was the obtaining of the tax benefit that directed the relevant persons in taking steps they otherwise would not have taken by entering into the scheme – Spotless Services Ltd at ATC 5210; CLR 423. 261 However, more is required that that a taxpayer has merely arranged its business or investments in a way that derives a tax benefit. The scheme must be examined in the light of the eight matters set out in section 177D(b). Further that examination must give rise to the objective conclusion that some person entered into or carried out the scheme or part of the scheme for the sole or dominant purpose of enabling the taxpayer to obtain a tax benefit in connection with the scheme. Such a conclusion will seldom, if ever, be drawn if no more appears than that a change of business or investment has produced a tax benefit for a taxpayer -… Nor should such a conclusion be drawn if no more appears than that a taxpayer adopted one or two or more alternative courses of action, being the alternative that produces a tax benefit." 141 The statement of principles set out in Metal Manufactures above does not assist the Applicants. The decision of each of the Applicants to participate in the BPS was not made in the context of existing business operations which they were respectively conducting, as in the case of Metal Manufactures, so that it was not the situation here of the Applicants merely adopting a particular course of action capable of being influenced by revenue considerations, nor the case of the Applicants adopting one of two alternative courses of action, being the one that produces a tax benefit. In circumstances such as the present of an isolated investment activity de novo, it is appropriate to apply in principle the "no sense" test in Spotless. As was observed in Hart, it can hardly be doubted that an objective purpose of each of the Applicants, in entering into participation in the BPS scheme, was to take advantage of the tax benefits propounded in the Prospectus. It was thus a situation of the Applicants choosing whether or not to participate in an investment scheme offered by promoters. Given the circumstances that the Prospectus demonstrated, as set out in [17] above, that participation would result in a cash surplus to participants of the order exemplified variously in [18] above, notwithstanding an entire loss of the participant's invested funds in research and development which might be wholly unsuccessful, there was in my opinion no commercial rationale, or "no sense", for participation in the BPS arrangements, without being able to underwrite the "no cash loss" situation held out by the terms of the Prospectus. As has been seen, all prospective participants were duly warned by the Prospectus that a negative outcome of research and development was a real possibility. What the Prospectus presented was not deductibility for expenditure actually outlaid, but deductibility for expenditure not to be in fact immediately outlaid (other than to the extent of 25% thereof), except out of future profits which might well never be attained in any event. The fact that all but one of 2721 participants took up the Prospectus scheme with the financial consequences to participants illustrated in [17-18] above is testimony to the fundamental attraction of the tax deductibility structure which literally underwrote the scheme. The unprecedented subs 51(1) incentives, and the encouragements elsewhere in the Prospectus to borrow the whole of the funds to be subscribed, so readily apparent from the material set out in [12(iii)], [13], [19] and [22] above, indicated implicitly that the promoters expected all or virtually all participants to enter into the borrowing arrangements. 142 The impact of the material in the various parts of the Prospectus which I have identified immediately above leads inevitably in my opinion to the conclusion that contrary to my earlier finding as to the absence of deductibility pursuant to subs 51(1), the Applicants acquired their respective syndicate participations objectively for the dominant purpose of obtaining the benefit of the taxation deductibility opportunities so prominently featured in the Prospectus. The circumstance that each Applicant testified as to an incentive of deriving substantial revenue in due course, as a consequence hopefully of future successful research and product development, cannot in my opinion avoid the result that he or she adopted a mechanism for so doing by way of participation in the process of research and development at no, or virtually no, ultimate cash shortfall, by reason of the excess or likely excess of the monetary benefits flowing in principle from the incidents of taxation deductibility over the cost of participation outlaid in cash. 143 I would therefore hold that if I am wrong in my opinion as to the absence of entitlement of the Applicants to deductibility relevantly pursuant to subs 51(1), each of them should be in any event denied deductibility by reason of an adverse application of Pt IVA of the ITAA. Section 82KZM 144 Alternatively to denial of deductibility under subs 51(1) or pursuant to Pt IVA of the ITAA, the Commissioner contended that the provisions of s 82KZM thereof should apply in relation to the sums the subject of claims to subs 51(1) deductibility. Section 82KZM reads as follows: "Where (a) a taxpayer incurs expenditure under an agreement entered into after 25 May 1988; (b) the expenditure is: (i) incurred in return for the doing of a thing under the agreement that is not to be wholly done within 13 months after the day on which it is incurred; and (ii) not excluded expenditure; and (c) a deduction under section 51 in respect of the expenditure would, apart from this section, be allowable from the assessable income of the taxpayer of the year of income in which the expenditure is incurred; then, for the purposes of this Act, instead of the deduction under section 51 being allowable as mentioned in paragraph (c), a proportion of the deduction is allowable from the assessable income of the taxpayer of each year of income during which the whole or part of the eligible service period in relation to the expenditure occurs, being a proportion ascertain in accordance with the formula: Period in year Eligible service period Where: Period in year is the number of days in the whole or part of the eligible service period that occurs in the year of income; Eligible service period is the number of days in the eligible service period." 145 The Commissioner initially propounded, but subsequently eschewed reliance upon s 82KZM at an early stage in the hearing, apparently by reason of Clause 6.3 of the Syndicate Deed, which reads as follows: "6.3 In consideration of the research fees the Institute shall for a period of twelve (12) months from the Payment Date and for a further period of twelve (12) months from the day after the expiration of the Initial Period (pursuant to the payment made under sub-clause 2.2.2 hereof) conduct the Research and Development and shall engage or cause to be engaged such personnel and facilities as are in its discretion necessary for the completion of the Research and Development." 146 When the Applicants provided written submissions in chief on 9 November 2001, there appeared the following: "In addition, clause 6.4 required ATTORI to provide follow-up support and data to enable BARM to obtain necessary licenses and registrations for the research results, including product packages. This clearly extends beyond the first 2 years covered by clause 6.3 and was so understood by Dr Bell who was responsible for overseeing the ATTORI R & D program. ATTORI did in fact continue collecting data on the product packages developed for the Syndicate after the expiry of the initial 2 year period until it went into voluntary administration in May 2001." Clause 6.4 of the Syndicate is reproduced in [149] below. 147 Those submissions provoked the Commissioner to seek to re-agitate reliance upon s 82KZM, upon the following basis: "If it is held that ATTORI was contractually bound to provide services beyond the initial 24 month period and it is further found that the expenditure in respect thereof is deductible under section 51(1) of the Act, the respondent submits that such expenditure is required to be pro-rated pursuant to section 82KZM over a period of 10 years (no lesser "eligible service period" have been specified)." 148 The Applicants opposed any such re-agitation of the s 82KZM issue, and referred me to what was said in the House of Lords by Lord Griffiths in Ketteman v Hansel Properties Ltd [1987] AC 189 at 219, which related to a late attempt to raise a limitation defence. The Applicants submitted as follows: "If the Commissioner is now permitted to raise s 82KZM, the applicants will be prejudiced by reason of the way they conducted the trial. In particular, in order to meet the Commissioner's suggestion that the projections in the Prospectus were unrealistic, the applicants adduced evidence from witnesses to establish that clause 6.4 of the Syndicate Deed would enable BARM to obtain assistance from ATTORI to achieve necessary licences and registrations for the research results beyond the two year period covered by clause 6.3 of the Syndicate Deed: Bell, T392 lines 7-25. The Applicants' Written Submissions also highlighted that clause 6.4 required ATTORI to perform work after the expiration of the initial 2 year research period (see para 28). This would not have been done if the Commissioner had maintained that s 82KZM applied." 149 Clause 6.4 of the Syndicate Deed read as follows: "6.4 The Institute shall provide the Manager as Agent for the Participant and Manager of the Syndicate with such follow up support and data as may be reasonably required by the Manager as Agent for the Participant and Manager of the Syndicate to enable the Manager as Agent for the Participant and Manager of the Syndicate to obtain necessary licenses and registrations for the Research Results including Product Packages and finished Products." 150 I accept Senior Counsel's assurance set out in [148] above and decline to permit re-opening of the Commissioner's case. I would however observe that in the light of the text of Clauses 6.3 and 6.4 of the Syndicate Deed, the Commissioner's reliance upon s 82KZM would probably have failed. The issue is academic in any event, in the light of my conclusions upon the subs 51(1) and Pt IVA issues. Conclusion 151 I would accordingly uphold the assessments of the Commissioner in relation to each of the Applicants, and therefore dismiss the Applications. For the reasons foreshadowed in [3] above, I make no order as to the costs of the proceedings. I certify that the preceding one hundred and fifty-one (151) numbered paragraphs are a true copy of the Reasons for Judgment herein of the Honourable Justice Conti . Associate: Dated: 18 March 2002 Counsel for the Applicant: G K Downes QC and M Richmond Solicitor for the Applicant: Minter Ellison Lawyers Counsel for the Respondent: D H Bloom QC, B J Sullivan SC, E Collins, M White and J H Momsen Solicitor for the Respondent: Australian Government Solicitor Date of Hearing: 4-6 June 2001, 8 June 2001, 26-28 September 2001, 2-5 October 2001, 29-31 October, 2001, 12-15 November 2001, 21-22 November 2001 Date of Judgment: 18 March 2002