FEDERAL COURT OF AUSTRALIA Krampel Newman Partners Pty Ltd v Commissioner of Taxation [2003] FCA 123 INCOME TAX - Investment in Australian film as part of investors' contributions paid during year of income - liability to pay substantial balance deferred to be discharged out of future distributable profits from the film - whether the whole of the contributions allowable as a deduction in the year of income - whether film completed in the relevant year - whether taxpayers became the owners of units of industrial property in the film within the meaning of Div 10B of the Income Tax Assessment Act 1936 ("the ITAA") - whether taxpayers incurred expenditure of a capital nature in relation to producing the film - whether taxpayers used units of industrial property for the purpose of producing assessable income - whether taxpayers retained equitable interests in copyright in the film after the year of income - application of Part IVA of the ITAA - whether there was a "scheme" - effect of matters enumerated in s 177D(b) - whether application of s 82KL of the ITAA attracted - whether amendment of assessment permitted after expiration of four years from date when tax became due and payable under original assessment - whether additional tax by way of penalty properly assessed at 50% of shortfall. Income Tax Assessment Act 1936 (Cth) Pts III, IVA, VIA, Divs 10, 10B, 10BA, ss 51(1), 82KH, 82KL, 90, 124K(1), 124L(1), 124UA, 170(2), 177, 177A, 177C(1), 177D(b), 177F(1), 177G, 222, 222A, 222C, 224, 226, 226L Copyright Act 1968 (Cth) ss 22(4), 86, 90 and 98(3) Explanatory Memorandum to the Taxation Laws Amendment (Self Assessment) Bill 1992 Commissioner of Taxation v Faywin Investments Pty Ltd (1990) 22 FCR 461 Federal Commissioner of Taxation v The Midland Railway Co of Western Australia Ltd (1952) 85 CLR 306 Inland Revenue Commissioners v Pullman Car Co Ltd [1954] 2 All E.R. 491 Federal Commissioner of Taxation v Australian Guarantee Corporation Ltd (1984) 2 FCR 483 New Zealand Flax Investments Ltd v Federal Commissioner of Taxation (1938) 61 CLR 179 Federal Commissioner of Taxation v Flood (1953) 88 CLR 492 Federal Commissioner of Taxation v AGC Ltd (1984) 2 FCR 483 RACV Insurance Pty Ltd v Commissioner of Taxation [1975] VR 1 Stern v McArthur (1988) 165 CLR 489 GP International Pipecoaters Pty Ltd v Federal Commissioner of Taxation (1990) 170 CLR 124 Sun Newspapers Ltd v Federal Commissioner of Taxation (1938) 61 CLR 337 National Australia Bank Ltd v Commissioner of Taxation (1997) 80 FCR 353 Federal Commissioner of Taxation v Myer Emporium Ltd (1987) 163 CLR 199 Federal Commissioner of Taxation v Consolidated Press Holdings Ltd (2001) 207 CLR 235 Vincent v Federal Commissioner of Taxation (2002) 193 ALR 687 Krampel Newman Partners Pty Ltd ACN 005 533 764, Cosmotec Australia Pty Ltd ACN 007 119 717, Project Hardware Pty Ltd ACN 004 867 083, Michael Robert Martin, William Gerard Graham, Stephen John Costley, Martin Tobias Sammon, Gerrard John Sullivan, Bruce Richard Penny -v- Commissioner of Taxation of the Commonwealth of Australia V799 of 2000 and Medico Legal Pty Ltd (ACN 062 936 305), Suzanne Martin, On Ventures Pty Ltd (ACN 058 936 819) Formerly Medico-Legal Administration Pty Ltd -v- Commissioner of Taxation of the Commonwealth of Australia V965 of 2000 And Component Suppliers International Pty Ltd (ACN 006 907 259), Blacktak Pty Ltd (ACN 055 815 202) And Lygon Holdings Pty Ltd (ACN 055 815 202) -v- Commissioner of Taxation of the Commonwealth of Australia V135 of 2001 RYAN J 28 FEBRUARY 2003 MELBOURNE IN THE FEDERAL COURT OF AUSTRALIA VICTORIA DISTRICT REGISTRY V799 of 2000 BETWEEN: KRAMPEL NEWMAN PARTNERS PTY LTD ACN 005 533 764 First Applicant COSMOTEC AUSTRALIA PTY LTD ACN 007 119 717 Second Applicant PROJECT HARDWARE PTY LTD ACN 004 867 083 Third Applicant MICHAEL ROBERT MARTIN Fourth Applicant WILLIAM GERARD GRAHAM Fifth Applicant STEPHEN JOHN COSTLEY Sixth Applicant MARTIN TOBIAS SAMMON Seventh Applicant GERRARD JOHN SULLIVAN Eighth Applicant BRUCE RICHARD PENNY Ninth Applicant AND: COMMISSIONER OF TAXATION OF THE COMMONWEALTH OF AUSTRALIA Respondent JUDGE: RYAN J DATE OF ORDER: 28 FEBRUARY 2003 WHERE MADE: MELBOURNE THE COURT ORDERS THAT: 1. The objection by the first applicant against the amended assessment issued to it in respect of the 1994 year of income be allowed and the amended assessment be remitted to the respondent for reassessment in accordance with the reasons of the Court published this day. 2. There be no order as to costs as between the first applicant and the respondent. 3. The application be otherwise dismissed. 4. Unless other ordered, the applicants other than the first applicant pay the respondent's costs of the application including any reserved costs, such costs to be taxed in default of agreement. 5. Liberty be reserved to any party to apply on the question of costs on not less than 48 hours notice in writing to the other parties. Note: Settlement and entry of orders is dealt with in Order 36 of the Federal Court Rules. IN THE FEDERAL COURT OF AUSTRALIA VICTORIA DISTRICT REGISTRY V965 of 2000 BETWEEN: MEDICO LEGAL PTY LTD (ACN 062 936 305) First Applicant AND: SUZANNE MARTIN Second Applicant AND: ON VENTURES PTY LTD (ACN 058 936 819) formerly MEDICO-LEGAL ADMINISTRATION PTY LTD Third Applicant AND: COMMISSIONER OF TAXATION OF THE COMMONWEALTH OF AUSTRALIA Respondent JUDGE: RYAN J DATE: 28 FEBRUARY 2003 PLACE: MELBOURNE THE COURT ORDERS THAT: 1. The application be dismissed. 2. Unless otherwise ordered, the applicants pay the respondent's costs of the application, including any reserved costs, such costs to be taxed in default of agreement. 3. Liberty be reserved to any party to apply on the question of costs on not less than 48 hours notice in writing to the other parties. Note: Settlement and entry of orders is dealt with in Order 36 of the Federal Court Rules IN THE FEDERAL COURT OF AUSTRALIA VICTORIA DISTRICT REGISTRY V135 of 2001 BETWEEN: COMPONENT SUPPLIERS INTERNATIONAL PTY LTD (ACN 006 907 259) First Applicant AND: BLACKTAK PTY LTD (ACN 055 815 202) Second Applicant AND: LYGON HOLDINGS PTY LTD (ACN 055 815 202) Third Applicant AND: COMMISSIONER OF TAXATION OF THE COMMONWEALTH OF AUSTRALIA Respondent JUDGE: RYAN J DATE: 28 FEBRUARY 2003 PLACE: MELBOURNE THE COURT ORDERS THAT: 1. The application be dismissed. 2. Unless otherwise ordered, the applicants pay the respondent's costs of the application, including any reserved costs, such costs to be taxed in default of agreement. 3. Liberty be reserved to any party to apply on the question of costs on not less than 48 hours notice in writing to the other parties. Note: Settlement and entry of orders is dealt with in Order 36 of the Federal Court Rules. IN THE FEDERAL COURT OF AUSTRALIA VICTORIA DISTRICT REGISTRY V799 of 2000 BETWEEN: KRAMPEL NEWMAN PARTNERS PTY LTD ACN 005 533 764 First Applicant COSMOTEC AUSTRALIA PTY LTD ACN 007 119 717 Second Applicant PROJECT HARDWARE PTY LTD ACN 004 867 083 THIRD APPLICANT MICHAEL ROBERT MARTIN Fourth Applicant WILLIAM GERARD GRAHAM Fifth Applicant STEPHEN JOHN COSTLEY Sixth Applicant MARTIN TOBIAS SAMMON Seventh Applicant GERRARD JOHN SULLIVAN Eighth Applicant BRUCE RICHARD PENNY Ninth Applicant AND: COMMISSIONER OF TAXATION OF THE COMMONWEALTH OF AUSTRALIA Respondent AND BETWEEN: V965 of 2000 MEDICO LEGAL PTY LTD (ACN 062 936 305) First Applicant AND: SUZANNE MARTIN Second Applicant AND: ON VENTURES PTY LTD (ACN 058 936 819) formerly MEDICO-LEGAL ADMINISTRATION PTY LTD Third Applicant AND: COMMISSIONER OF TAXATION OF THE COMMONWEALTH OF AUSTRALIA Respondent AND BETWEEN: V135 of 2001 COMPONENT SUPPLIERS INTERNATIONAL PTY LTD (ACN 006 907 259) First Applicant AND: BLACKTAK PTY LTD (CAN 055 815 202) Second Applicant AND: LYGON HOLDINGS PTY LTD (ACN 055 815 202) Third Applicant AND: COMMISSIONER OF TAXATION OF THE COMMONWEALTH OF AUSTRALIA Respondent JUDGE: RYAN J DATE: 28 FEBRUARY 2003 PLACE: MELBOURNE REASONS FOR JUDGMENT The factual background. 1 In 1989, a film production company, Motion Picture Management ("MPM") commissioned the making of a series of animated films in thirty minute episodes for screening on television under the name "the Dinky-Di's". That series had been made by photographing in sequence many thousands of hand-painted transparencies. That process was first recorded on 35 mm film and the animated imagery was then transferred, within synchronised dialogue, music and sound effects, to a video format. The "Dinky Di's" were shown on television in New Zealand in 1990 and in Australia in about December 1995. The production of the series had been financed by a group of investors pursuant to an Investment Deed dated 18 January 1990 between MPM, Mr John Hodsdon of the accounting firm KPMG, as representative of the investors, and the investors themselves. 2 Clause 12 of a film production agreement dated 12 December 1989, as amended, between MPM as the management company and Roo Pty Ltd as production company, provided; "12.1 In consideration of the amounts to be paid by the Management Company to the Production Company pursuant to clause 8 and subject to clause 12.5 the Copyright in the Dinky-Di's Series will be owned for the Relevant Period as follows:- (a) The Investors as referred to in clause 22 of the Investment Deed: 50% (b) the Production Company: 50% 12.2 Upon the expiration of the Relevant Period the Copyright in the Dinky-Di's Series will be owned absolutely by the Production Company. 12.3 For the purposes of clause 12.1 and in consideration of the amounts to be paid by the Management Company on behalf of the Investors, the Production Company does hereby agree with the Management Company and the Investors that subject to clause 12.5 upon the Copyright in the Dinky-Di's Series coming into existence each Investor will be the owner of the Copyright in the Dinky-Di's Series in the abovementioned respective undivided percentage interest as tenant-in-common in the Copyright in the Dinky-Di's Series. 12.4 During the Relevant Period the Management Company may represent itself as the owner of the whole of the Copyright in all notices of Copyright and all registrations of Copyright. 12.5 The Parties acknowledge and the Management Company will ensure that each of the Investors acknowledge that at the expiration of the Relevant Period the Copyright in the Dinky-Di's Series will be owned absolutely by the Production Company, subject to any marketing or merchandising agreements then in existence." 3 "Relevant Period" was defined as having the same meaning as that term had in the Investment Deed of 18 January 1990, the Schedule to which provided, so far as is relevant; "The Relevant Period as referred to in Clauses 1.1(dd) and 25 of the Investment Deed ends Seven (7) Financial Years from the end of the Financial Year in which the Completion Date occurs and any extension pursuant to clause 25.1 of the Investment Deed. Notwithstanding anything contained in Clauses 25.1(a) and 25.1(b) of the Investment Deed, the Relevant Period shall not exceed ten years." 4 In the first half of 1993, Mr Begg, a director of MPM, conceived the idea of making a feature film using film footage of animated sequences from the "Dinky Di's" series. That process had the advantage of eliminating the need for commissioning thousands of individually drawn frames in order to produce new animated sequences. Scriptwriters were commissioned to produce a synopsis of the story in which Mephisto, a character from the "Dinky Di's" series, would be a central figure and which would link selected excerpts from the film footage of the series. 5 It was proposed that the excerpts from the film footage of the "Dinky Di's" series linked in that way should be brought together with a new sound track to constitute a feature film of approximately 93 minutes in length ("the Feature Film") provisionally entitled, "the Dinky-Di's - Friends on Freedom's Frontier". That title was later changed to "Mephisto's Web". 6 In October 1993, MPM applied to the Australian Cultural Development Office ("ACDO") for a certificate that the Feature Film would be an "Australian film" for the purposes of Div 10B of the Income Tax Assessment Act 1936 (Cth) ("the ITAA"). The application for that certificate was dated 26 October 1993 and stated, in response to requests for information on the standard ACDO application form, that the proposed completion date for the Feature Film was February/March 1994, that the cast members who were then unknown would be Australian and that the editor who "had been chosen for his talents in the edit of Disney's production of "Beauty and the Beast" and "Aladdin" would be a USA resident". The persons who were to be the beneficial owners of the copyright in the film and the proportions of their interests were identified as MPM as to 90% and "Private Investors (Australian)" as to 10%. The budget for the Feature Film was said to be $550,000 by way of private investment from Australia and a summary budget was attached showing in broad outline how that figure had been arrived at. Mr Begg has explained that budget estimate by saying; "The initial application to the ACDO dated 26 October 1993 included a budget estimate for the Film of $550,000.00. This amount represented my rough estimate of the direct production costs of the Film. I did not consider that the amount of the Budget was important as the ACDO is primarily concerned with determining whether or not a film has sufficient Australian content to qualify for a certificate." On the faith of MPM's application, the ACDO, on 1 December 1993, issued the requisite certificate which was numbered 502. 7 After frames from the film footage of the "Dinky Di's" series suitable for inclusion in the Feature Film had been identified, the storyline for the Feature Film was further developed, confining it to about four hours of the total thirteen hours of film footage which constituted the series. Over about three weeks, a film editor from New Zealand, Ms Nicola Smith, produced, by cutting and splicing the selected excerpts from the series, a 35 mm mute copy of the Feature Film which ran for 93 minutes. That mute copy was then, in turn, copied on to U-Matic videotape. 8 A script was then developed and voices, sound effects and music for the Feature Film were recorded on digital audio-tape. The resultant sound track was then transferred to the U-Matic videotape of the Feature Film and fully synchronised with the vision to produce what was called a Master Tape. VHS videotape copies were made from the Master Tape to facilitate the showing of the Feature Film for demonstration purposes to viewers who did not have facilities for screening U-Matic videotape. 9 According to Mr Begg, as work progressed on the Feature Film it became apparent to him that it would be necessary to provide a return to the owners of the copyright in the "Dinky Di's" series. Accordingly, after ascertaining that the cost of production anew of 93 minutes of animated footage would be at least $6 million, he agreed that $6 million should be paid to the investors in the "Dinky Di's" series. That agreement was made with Mr Hodsdon of KPMG as representative of the investors. Mr Hodsdon, who is now deceased, accepted that the price payable for use of footage from the "Dinky Di's" series should be $6 million on the basis that such amount should be payable only out of net proceeds from the exploitation of the Feature Film. A reason suggested by Mr Begg for Mr Hodson's acceptance of the price of $6 million and the contingent basis on which it was to be paid was that sales of the Feature Film would enhance the popularity of the series. 10 In January 1994, MPM approached Jerrard & Stuk, a Melbourne firm of solicitors which was known to it as having contact with potential investors in the production of films. Jerrard & Stuk were supplied with drafts of a Production Investment Deed and Instalment Agreement together with an opinion from Dr Holger Sorensen, of the New South Wales Bar, in respect of the tax deductibility of investments in the production of the Feature Film. Mr Stuk, a principal in Jerrard & Stuk, brought the proposal, it seems, to the notice of various acquaintances and clients, including Mr Norman Same, a principal of the accounting firm, Krampel Newman & Partners Pty Ltd ("Krampel Newman"). Mr Same investigated the proposal and obtained testimonials about the reputation of certain principals of MPM. He then recommended the proposal to some clients of Krampel Newman and proposed to his fellow partners that Krampel Newman itself should become an investor in the Feature Film. Mr Begg had explained to Mr Same that, of the budget for the production of the Feature Film, an amount of $6 million would be set aside to pay the investors in the "Dinky Di's" series for the right to use film footage from that series in the production of the Feature Film. 11 In February 1994, Mr Begg prepared a forecast of the potential income which could be derived from the Feature Film. That forecast ended with this passage; "The figures below are calculated by taking the low and high figures from information provided in international industry magazines, information provided by the Australian Film Commission and the experience of the Producers, Motion Picture Management. The figures are purely an assessment based on the experience of the Producers and its resource base. No reliance should be placed on these figures as it is impossible to determine the acceptance of any film property by the general public. The information resources from industry information publications that have been used to assist in obtaining the figures below are: Television Business International International Broadcast Systems Variety Magazine TV World All figures are in US Dollars Note: figures for television sales include network, pay-cable, PBS Network and Syndication LOW HIGH North America/Canada Theatrical Release 5m 12m Television Sales 200,000 2m Central and South America and the Caribbean Theatrical Release 100,00 550,000 Television Sales 50,000 200,000 East and Western Europe and the United Kingdom Theatrical Release 7m 16m Television Sales 110,000 500,000 Australia and New Zealand Theatrical Release 450,000 1m Television Sales 52,000 220,000 Rest of the World Theatrical Release 3m 7m Television Sales 700,000 1.5m The figures above only relate to potential income from the film and do not include ancillary or merchandising products arising from the distribution of the film nor does it include potential re-runs for television. The possibility of the income from the film could be many millions more if the feature becomes a hit with the kids. An example of this potential income is reflected in "The Smurfs" which up until 1989 the returns exceeded $US 1 billion; "The Simpsons" to date has exceeded $US 650 million (and growing); "The Teenage Mutant Ninja Turtles" over approximately seven years exceeded $US 800 million and of course there are the blockbusters such as the Disney properties and the Warner properties which are both billion dollar businesses. We do not suggest that "Mephisto's Web" would reach this type of income but the potential is there to achieve multi-million dollar status. Animated feature films and television programming are generally referred to in the industry as "evergreen properties" which means they are able to be screened every four to five years as each new generation become of age to appreciate the film which also means a new range of merchandise and the existing range of merchandise also has the potential to be rekindled. The merchandising and ancillary range of products, providing the film is successful, have the potential to achieve in excess of $20 million." 12 By letter dated 16 March 1994, MPM notified the ACDO that the provisional title of the Feature Film had been changed to "Mephisto's Web" and that "100% of the beneficial ownership will vest with private Australian investors". Enclosed with that letter was a revised budget for the Feature Film of $7.126 million broken down as follows:- "BUDGET SUMMARY "MEPHISTO'S WEB" (provisional title only) $ $ PRE PRODUCTION PRINCIPAL PHOTOGRAPHY 6,000,000 TOTAL 6,000,000 SCRIPT 20,000 IMAGE EDITING 15,000 EDITOR 30,000 EDITOR'S ASSISTANT 8,000 TRIAL PRINT 14,000 INTERPOSS/INTERDUP/GRADING 51,000 NEG CUTTING AND MATCHING 5,000 PREMIX DIALS 19,000 PREMIX SFX/AT&OS 19,000 FINAL MIX 20,000 SCREENINGS (2) 1,400 FIXUPS 3,400 PRINT MASTER 3,600 MxE MIX DM&E STEREO MIX 6,200 DELIVERY REQUIREMENTS 24,000 MUSICAL UNDERSCORE 25,000 COMPOSE ELEVEN SONGS 45,000 NEW THEME SONG 8,000 RECORD AND MIX ELEVEN (11) SONGS 18,900 RECORD AND MIX THEME 3,500 RECORD AND TRACK LAY (MULTI-TRACK) 20,000 STOCK SPACING (ETC) 3,000 VIDEO EDITING FACILITIES 6,000 TOTAL 369,000 LEGALS 15,000 PRODUCTION MANAGEMENT AND FACILITIES 390,000 PRODUCERS' FEES 180,000 COMPLETION GUARANTOR 16,000 MARKETING 5,000 TRAVEL/HOTEL 20,000 INSURANCE 14,000 OTHER PRODUCTION COSTS 19,000 ANIMATION TITLES 15,000 DEVELOPMENT COSTS 20,000 FRINGE BENEFITS 3,000 CONTINGENCY 60,000 TOTAL 757,000 TOTAL BUDGETED COST $7,126,000 13 As well as recommending MPM's proposal to Krampel Newman which, in turn, brought it to the attention of some of its own clients, Jerrard & Stuk brought the proposal to the notice of other potential investors including clients and members of the accounting firm, Thomson & Associates of Mildura in which the sixth applicant in V 799 of 2000, Stephen John Costley, was a partner. On 5 April 1994, Mr Stuk of Jerrard & Stuk forwarded to MPM a list of persons who had agreed to invest in the Feature Film. Each of those persons executed a Production and Investment Deed ("PID") and a separate Instalments Agreement. Each PID was dated 6 April 1994 and identified MPM as "the Producer", each investor as "the Financier" and Mr Hodsdon of KPMG as "the Representative". Each PID was prefaced by the following recitals; "A. A Deed ("the Series Deed") executed on the 18th day of January 1990 by the Producer and the Representative in their respective capacities as Fund Manager and representative of investors ("the Investors") in the animated television series entitled "The Dinky-Di's" ("the Series") and subsequently amended endows the Producer in its capacity as Fund Manager with certain rights, obligations and powers in relation to the Series. B. Arising from the Producer's rights, obligations and powers under the Series Deed is the right to utilise certain 35mm film footage ("the Film Footage") for the purpose of producing an animated cinematographic feature film ("the Feature Film") the working title of which is "Mephisto's Web". C. The Financier has undertaken to finance the production of the Feature Film which is to be produced by the Producer as an "Australian Film" in terms of Sub-Section 124k(1) of Division 10B of Part III of the ITAA and thus become an owner of a Unit of Industrial Property. D. The Producer and the Financier have agreed that there will be included in the Budget of the Feature Film an amount which represents the agreed value of the Film Footage in replacing the normal pre-production, animation and principal photography processes of production. E. The Producer and the Financier have agreed upon certain terms and conditions under which the Financier will meet its commitment in relation to the provision of that component of the Budget referred to in (D). F. The Representative has agreed to act in the interest of the Financier and the benefits and obligations of the parties are set out in this Deed." 14 Clause 1 of the PID contained, amongst others, the following definitions; ""Available Proceeds" means the balance in the Returns Account after payment or reimbursement or allowance for payment or reimbursement from the account of the several overhead costs and expenses enunciated in the first five items in the order of application of Nett Returns prescribed in Schedule C; ... ... ... "Completion" means the date when the first answer print is available; "Completion Date" means the date of Completion of the Feature Film which shall be no later than 28th June 1994; ... ... ... "Copyright" means the copyright that will, when the Feature Film is completed, subsist anywhere in the world in the Feature Film; ... ... ... "Expiry Date" means the date of the expiry of this Deed which shall be the earlier of the seventh anniversary of the Completion Date and the date on which the total amount of all Nett Returns from time to time deposited into the Returns Account exceeds in aggregate $17.0 million; ... ... ... "Nett Returns" means all money actually received from producing and Marketing the Feature Film after the deduction of any distributors', exhibitors' or agents' commission or expenses, royalties, residuals or other deductions which are made at source or made prior to receipt or recovery and which are all bona fide; Nett Returns shall include but not be limited to money received - (i) under any policy of insurance in respect of the Feature Film or its production; (ii) from Ancillary Rights; (iii) from Merchandising Rights; (iv) as proceeds of any action, suit or proceeding related to the maintenance or protection of the Feature Film, the Copyright of the Feature Film, any Ancillary Rights or any right therein or thereto; (v) by way of awards or prizes other than; a) those made to persons for contributions or merit in making the Feature Film; b) those made to the Feature Film but customarily paid by production companies to any individual or individuals who worked on the Feature Film; (vi) as proceeds of any statutory licence payment under the Copyright Act or otherwise; (vii) interest received on monies provided under this Deed and held in the Representative's Trust Account, the Production Account and the Returns Account; ... ... ... "Specified Period" means the period commencing at the time the Copyright first subsists and ending on 28th June 1994;" 15 The PID went on to set out certain representations, warranties and covenants by MPM as Producer and then stipulated under the heading "Copyright"; "3.1 Ownership (a) It is agreed by the parties that upon Copyright first subsisting, the Financier shall become one of the exclusive owners of the Copyright in proportion to his or its contribution to the Production Funds stated in Schedule D and such ownership shall continue as such for the duration of the Specified Period. (b) On the expiration of the Specified Period the Producer shall be the exclusive owner of the Copyright. 3.2 Exploitation The Producer hereby covenants and warrants that it will administer and exploit the Copyright only in accordance with the provisions of this Deed. 3.3 Rights in Connection with Copyright The Producer will, in respect of the Copyright, hold the sole and exclusive world-wide rights including, without limitation, the rights to use any photographs of the Feature Film or any characters of the Feature Film in all forms of publicity and commercial exploitation and to reproduce, publish, Market and display any and all of such photographs for the purpose of and in connection with the advertising, promotion, Distribution and exhibition of the Feature Film. 3.4 Notices and Registrations Until the Expiry Date, the Producer may represent itself as the owner of the whole of the Copyright in all notices and all registrations of Copyright." 16 Further rights, obligations and undertakings of MPM as Producer were recited in cl 5 of the PID which included the following paragraph; "5.4(a) The Producer agrees to produce the Feature Film using its best endeavours to effect Completion by no later than 28th June 1994;" 17 Clause 9 of the PID provided for the establishment of a "Nett Returns Account" and cl 9.2 provided for "Nett Returns" to be disbursed for the purposes, and in the order, set out in Schedule C to the PID. Schedule A to the PID reproduced the Budget Summary set out at [12] of these reasons. Schedule B contained certain production details including "Completion Date no later than 28th June 1994". Schedule C of the PID provided as follows for the "application of Nett Returns"; "Nett Returns shall be applied for the following purposes and in the following manner and order: First In payment or reimbursement of the costs of administrative, accounting and other services provided or engaged in connection with the collection and disbursement of Nett Returns which, unless otherwise agreed by the parties, shall not exceed: - to the Producer 3% of all Nett Returns received - to the Representative 1% of all Nett Returns received Second In payment or reimbursement of Marketing Expenses which, unless otherwise agreed by the parties, shall not exceed: - 7.5% of the first $1 million Nett Returns received - 5% of all subsequent Nett Returns received Third In payment of any sums recoupable by the Completion Guarantor pursuant to the terms of the completion Guarantee Agreement Fourth In payment or reimbursement of any costs, other than those provided in the budget, necessarily incurred in the interests of the parties to this Deed in the engagement of legal or other professional services in connection with the production or marketing of the film or the administration of the Deed or any Relevant Agreement Fifth In payment or reimbursement of audit fees Sixth The balance then remaining (Available Proceeds) shall be distributed as follows in accordance with Clauses 9.4 and 9.5: · until the Expiry Date, the Financiers and the Producer shall be entitled to share Available Proceeds in the following proportions: - Financiers 90% each Financier being entitled to a share of such proportion of Available Proceeds in the proportion that the amount contributed by it bears to the total of all contributions as calculated in Schedule D - Producer 10% for its own use and benefit · After the Expiry Date, the Available Proceeds will be distributed as follows: - to the Dinky-Di's Series Fund for distribution as Ancillary Fees : 90% - to the Producer for its own use and benefit : 10%" 18 Schedule D to the PID quantified each Financier's agreed contribution by providing; · "The agreed contribution by the Financier in accordance with Clause 10.1(a) is Five Hundred Thousand Dollars ($500,000) · The total of all contributions being the Production Funds is $7.126 million · The proportion that the Financier's agreed contribution bears to the total of all contributions is: (a) x 100 $7.126 m where (a) equals the Financier's agreed contribution · Calculation $500,000 x 100 = 7.0166% $7,126,000 · The percentage so calculated, to four decimal places, represents the Financier's proportionate share of: - Copyright in the Feature Film - Financier's entitlement (90%) to Available Proceeds as per Schedule C" 19 The Instalments Agreement executed by each investor was between the same parties as the PID and contained the following recitals and operative provisions; "A. The Producer, the Financier and the Representative are the parties to and respectively the Producer, a Financier and the Representative under a certain Production and Investment Deed executed on even date ("PID") whereunder the Financier agreed to provide monies totalling Five Hundred Thousand Dollars ($500,000) ("the Principal") for a full length theatrical animated feature film provisionally entitled "Mephisto's Web" to be produced by the Producer. B. The Financier has proposed and the Producer has accepted that payment of the Principal may be made by instalment on the terms and conditions hereinafter set forth: NOW THIS AGREEMENT WITNESSES: 1. Provided that on execution of the PID a minimum of Seventy Nine Thousand and Six Dollars ($79,006) is paid in part payment of the Principal, the Producer hereby agrees to accept as fully satisfying the Financier's obligation under Clause 10.1(a) of the PID, payment of the balance (if any) of the Principal then outstanding by instalment as follows: as and when any Available Proceeds (as defined in the PID) are available for distribution in accordance with the PID ("Distributable Sum") the Financier hereby covenants and undertakes to cause fifty-two percent (52%) of its entitlement under the PID to that and every subsequent Distributable Sum to be paid to the Producer in reduction of the amount of the Principal then outstanding until such time as the whole of the Principal has been paid to the Producer. 2. The Financier hereby authorises the Producer in its capacity as Producer under the PID and the Representative as the Representative under the PID to deduct and remit to the Producer in reduction of the amount of the Principal then outstanding (if any) from every Distributable Sum an amount equal to the lesser of fifty-two percent (52%) of the Financier's entitlement under the PID to that Distributable Sum and the amount of the Principal then outstanding. 3. By executing this Agreement the Representative acknowledges and agrees to perform its obligations under Clause 2 hereof." The amended assessments. 20 Between 29 January 1999 and 2 March 2000, the respondent ("the Commissioner") issued an amended assessment to each of the applicants in proceedings No V 799 of 2000 disallowing the deduction claimed under Div 10B of the ITAA and imposing, pursuant to s 226L of the ITAA, a penalty equal to 50% of the tax said to have been avoided. Similar amended assessments were issued on 2 March 2000 to the fourth applicant in V 965 of 2000, Medico Legal Pty Ltd, in respect of the tax year ended 30 June 1994 and on 22 July 1999 to the second applicant in those proceedings, Suzanne Martin, in respect of the tax years ended 30 June 1994, 30 June 1995 and 30 June 1996. On 10 April 2000 an amended assessment was issued to the third applicant in V 965 of 2000, On Ventures Pty Ltd, in respect of the tax year ended 30 June 1994 and on 6 April 2000 an amended assessment was issued to the same applicant in respect of the tax year ended 30 June 1995. As well, similar amended assessments were issued to the applicants in V 135 of 2001 as follows; Component Suppliers International Vic Pty Ltd ("Component Suppliers") was issued with an amended assessment on 23 March 2000 in respect of the tax year ended 30 June 1994 and on 27 March 2000 in respect of the tax year ended 30 June 1995. Blacktak Pty Ltd was issued with an amended assessment on 17 March 2000 in respect of the tax year ended 30 June 1994. Lygon Holdings Pty Ltd was issued with an amended assessment on 17 March 2000 in respect of the tax year ended 30 June 1995. (Lygon Holdings Pty Ltd's claim for a deduction in the tax year ended 30 June 1995 arose from a claim by University Meat Supply Pty Ltd ("University Meats") as trustee of a unit trust which had claimed a deduction for the tax year ended 30 June 1994 in respect of expenditure of $626,000 which it claimed to have incurred in that year pursuant to the PID. That claimed deduction resulted in a carried forward loss in the year ended 30 June 1995 of $13,105. As a result of the disallowance of that deduction, the unit trust was treated as having additional taxable income in the year ended 30 June 1995 of $6,533 which was eventually distributed to Lygon Holdings Pty Ltd.) 21 Each applicant in V 799 of 2000 objected to each amended assessment and each objection was disallowed on 14 August 2000 except for that of the ninth applicant, Bruce Richard Penny, which was disallowed on 24 August 2000. Of the applicants in V 965 of 2000, the objections by Medico Legal Pty Ltd and On Ventures Pty Ltd were all disallowed on 30 October 2000 and those by Ms Martin were both disallowed on 14 November 2000. In relation to proceedings No V 135 of 2001, the objections by Components Suppliers were each disallowed on 29 January 2001 and those by Blacktak Pty Ltd and Lygon Holdings Pty Ltd were each disallowed on 30 January 2001. The application to this Court 22 Each of the applicants has appealed to this Court against the objection decision of the Commissioner, affecting the respective applicant, and has applied for that decision to be set aside or varied by allowing the whole or some part of the amount claimed by that applicant in connection with "Mephisto's Web" as a deduction under Div 10 of Pt III of the ITAA or under s 51(1) of the ITAA or partly under both provisions. The relevant provisions of Division 10B of the ITAA 23 Section 124L(1) of the ITAA provided, so far as is relevant; "This Division applies to the owner of a unit of industrial property who: (a) became the owner of the unit by reason: (i) … (ii) of being the first owner of the copyright to which the unit relates; (iii) … and, before the unit came into existence, incurred expenditure of a capital nature directly in relation to devising the invention, producing the work or other subject matter in which the copyright subsists or producing the design as the case may be; (b) incurred expenditure of a capital nature on the purchase of the unit of industrial property; (c) … (d) … and, in the year of income or a previous year of income, has used the unit of industrial property of which he is the owner … for the purpose of producing assessable income." 24 The effect of those paragraphs on the case sought to be made by the present applicants is that each must establish ownership of a unit of industrial property and that expenditure of a capital nature was incurred in the acquisition of that unit of industrial property. In addition, it must be shown that, in the year of income or a previous year of income, the taxpayer has used the unit of industrial property for the purpose of producing assessable income. 25 If Div 10B of the ITAA applies to a taxpayer, the annual deduction allowable is stipulated in s 124M, the relevant subsections of which provide; "124M(1) Where, at any time during the year of income, a taxpayer is the owner of a unit of industrial property to whom this Division applies, an amount equal to the residual value of the unit in relation to the taxpayer as at the end of the year of income divided by a number equal to the number of whole years in the effective life of the unit in relation to the taxpayer as at the commencement of the year of income shall, subject to this Act, be an allowable deduction in respect of the unit. 124M(2) … 124M(3) … 124M(4 Subject to subsection (5), where, during a year of income, the owner of a unit of industrial property ceases to be the owner of the unit, a deduction under this section in respect of the unit is not allowable in his assessment in respect of income of that year of income. 124M(5) Subsection (4) extends to the case where the owner of the unit of industrial property ceases to be the owner by reason that the property ceases to exist but does not apply – (a) where the owner ceases to be the owner of the unit of industrial property by virtue of the transmission of the unit by operation of law; or (b) where the unit of industrial property was purchased or otherwise acquired by the owner for a specified period and he ceases to be the owner by reason that the specified period terminates. 124M(6) …" Ownership of the copyright in the film 26 For the applicants to succeed in their claim to a deduction under Div 10B, they must first demonstrate that ownership of the copyright in "Mephisto's Web" vested in the investors in the 1994 year of income. That requirement raises the following questions: (a) Was there in existence, by no later than 28 June 1994 a film that satisfied the description of the "Feature Film" as defined in the PID? (b) Was such a film "completed" within the meaning of that word as used in the definition of "Copyright" in the PID? (c) Did copyright under the Copyright Act 1968 (Cth) subsist in the film by 28 June 1994? (d) Did ownership in that copyright vest in the investors in the 1994 year of income? (e) Did the investors possess rights under the Copyright Act as the owners of that copyright? 27 It will be recalled that cl 3.1 of the PID reproduced at [15] above stipulated the terms on which the investors were to be the owners of the copyright in "Mephisto's Web". The term "Copyright" was defined to mean the copyright that would, when the Feature Film was completed, subsist anywhere in the world in the Feature Film. The word "completed" was not defined in the PID. However, "Completion" was defined to mean the date when the first answer print was available. The definition of "Feature Film" comprehended the animated Feature Film consisting of approximately 97 to 100 minutes of continuing moving images with sound and music and to be produced under the PID. 28 The applicants contended that, by no later than 28 June 1994, there was in existence a film which satisfied the description of the "Feature Film" as defined in the PID and which had been "completed" for the purposes of the definition of "Copyright" in cl 1.1 of the PID. It was said that copyright in the film subsisted by virtue of the Copyright Act and vested in the investors as tenants in common by virtue of the PID. They relied, in particular, on cl 3.1 of the PID, and s 98(3) of the Copyright Act. The applicants claimed that the investors possessed rights under the Copyright Act as the owners of that copyright. 29 The Commissioner, on the other hand, disputed that there was any copyright of which the investors could become the owners. It was said that no version of the film satisfying the description of "Feature Film" in the PID had been produced by 28 June 1994. Alternatively, it was said that, if there had been such a version, it was not the 'completed' film contemplated by the definition of "Copyright" in the PID. Further, it was submitted that, even if there had been a completed film, it was not a version of the film in which the relevant copyright could subsist for the purposes of Div 10B of the ITAA. 30 The Commissioner contended in the alternative that no rights under the Copyright Act were capable of being possessed by the investors as the rights to be conferred on them under the PID by MPM in relation to the film were not rights that MPM in fact possessed. It was said that MPM owned only half of those rights and an assignment of the other half had not been procured from the other copyright owner as required by the Copyright Act. 31 A further alternative contention advanced on behalf of he Commissioner was that, if the investors possessed any rights as owners, they were not relevant rights prescribed under the Copyright Act. Was there a Feature Film for the purposes of the PID? 32 The applicants submitted that by 28 June 1994 there was in existence a "Feature Film" within the meaning of cl 1.1(u) of the PID. 33 At paragraph 9 of his affidavit sworn 31 January 2002, Mr Begg a director of MPM described as follows the steps taken to produce "Mephisto's Web": "During the first half of 1993 I developed on MPM's behalf the concept of making a new animated film using footage from the Series. The advantage of such a process would be the saving of the cost of producing the animated footage, which is extremely expensive. During the latter part of 1993 I began work to test whether the concept was a practical one. When I was satisfied that the concept would work MPM proceeded to produce the Film. I summarise the steps I followed below - (a) First I explained the concept to a number of scriptwriters and provided them with approximately 6 or 7 tapes of episodes from the Series. They provided me with a synopsis of a story incorporating the Mephisto character and other characters from the Series ("the Film"). The Film was proposed to be 93 minutes in length and was to be produced using carefully selected excerpts from the film footage of the Series in conjunction with a totally new story line, script, music and voices from characters. The Film was originally entitled "The Dinky Di's – Friends on Freedom Frontier". The title was later changed to "Mephisto's Web". (b) Next, I viewed videotape copies of all 26 episodes and identified frames that could be used in the proposed film. I time coded each episode to enable relevant frames to be identified in the future. I performed this work in or around September or October of 1993. By this time I was confident that my concept would work in practice. (c) I then sat down with the scriptwriters and showed them the frames I had identified for further development of the storyline. I drew up a list of each frame we would use with its corresponding time code. Of 13 hours of Series footage, approximately 4 hours was identified as containing the characters, scenes and actions which would be the most useful for the process of making the Film. (d) A film editor from New Zealand, Nicola Smith, then used the U-matic videotape to identify the place in the 35 mm version of the Series to cut. The pieces of tape that had been cut were then spliced together in the required sequence to form a complete, mute 35 mm copy of the Film. This version was then copied onto video tape, thus creating (on U-matic format) 93 minutes of animated imagery. This process took about 3 weeks. (e) The voices, sound effects, script and music for the Film were all separately created and recorded on digital audio tape then transferred to the U-matic video, fully synchronised with the vision. This version of the film was called the Master Tape. (f) VHS videotape copies of the final product including sound track were then produced for demonstration purposes and as evidence of completion of the film and existence of copyright in accordance with the provisions of the investment documents. 34 At paragraphs 21-22 of the same affidavit Mr Begg deposed; "21. Following several months of planning and pre-production work including developing and testing technological processes, selecting footage and creating a storyline, writing the script and music, provisionally securing the services of production personnel, arranging the availability of equipment, audio studio and laboratory facilities and preparing marketing plans, the production of the Film (Step (e) and following) formally commenced on 7 April 1994 in accordance with the processes briefly outlined in Paragraph 9. 22. By early June 1994 the Film existed in 35mm format plus a separate sound recording on digital audio tape (I refer to steps (d) and (e) above). I refer to the affidavit of Dominic Case sworn on 24 January 2002 about the meaning of "first answer print", a copy of which I have read. Mr Case's explanation of the meaning of "first answer print" is completely in accord with my understanding. The Film in 35 mm format with the separate sound recording on digital audio tape was the "first answer print" but we chose to call it the "Director's Cut". Because the Film in 35 mm format could only be played by a twins head projector it was not able to be readily viewed by all the people to whom MPM needed to prove that the film had been completed. In order to provide evidence of the completion of the Film MPM made videotape copies of the 35 mm version of the Film by the following steps. On or about 10 June 1994 a complete copy of the 35 mm footage was transferred to the U-matic video format at Channel 7 Studios in Brisbane (see Step (d) in paragraph 9 above). The synchronised sound track of the Film was then recorded onto video by Grevillea records (see step (e) in paragraph 9 above). I then provided a viewing of the video tape and relevant documents establishing the investors' title to the copyright of the Film to solicitors Nicol Robinson & Kidd. Grevillea Records also produced a VHS video copy of the Film from which a small number of additional copies were "dubbed" by MPM for its records and demonstration purposes. A total of four VHS videotape copies of the Director's Cut were made. MPM sent one copy of the Director's Cut to Nicol Robinson & Kidd, one copy to William Gilbert Associates of London and I believe we retained one copy. Nicol Robinson & Kidd later provided MPM with a letter certifying that copyright in the film was vested in the investors. Now produced and shown to me and marked "HB-8"is a copy of the letter dated 18 June 1994 from Nicol Robinson & Kidd. I then wrote to the Investor's Representative advising that Nichol Robinson & Kidd had certified that the copyright in the Film existed and was vested in the investors. The Investors' Representative accepted this evidence as proof of complete compliance by MPM with its obligations under the Production and Investment Deeds to make the Film before 30 June 1994. Now produced and shown to me and marked "HB-9" is a copy of the letter dated 20 June 1994 to the Investors' Representative." 35 The body of the letter from Nichol Robinson & Kidd to Mr Begg which was Exhibit HB-8 to his affidavit recited; "We have been requested by your Mr Begg to investigate the chain of title in respect of the Director's cut of the animated feature film known as "Mephisto's Web" ("the Feature Film"). Upon instructions from MPM and pursuant to the warranties and representations given to us by MPM and upon inspection by us of the documents provided to us for inspection ("the Documents") we are satisfied that the copyright in the Director's cut of the Feature Film capable of being vested in the Financiers referred to in the Production and Investment Deeds, pursuant to the terms of the Documents inspected by us, are vested in the Financiers pursuant to the terms of the Production and Investment Deeds for the Specified Period referred to in the Production and Investment Deeds." 36 Mr Dominic John Case, Group Technology and Services Manager for the Atlab Group of Motion Picture Film Processing Laboratories ("Atlab"), gave expert evidence at the request of the Commissioner. By letter dated 20 December 2001 the solicitors for the Commissioner had posed three questions to Mr Case. In paragraphs 3 – 5 of his affidavit sworn 24 January 2002, Mr Case answered those three questions in these terms: "3. In response to question 1 "What is a first answer print?, I quote from my own words in the Australian Film Commission "Production Budgeting and Film Management Manual" referred to above: "The Answer Print is the first completed result of the entire production. The answer print shows the film as the audience will see it. It also serves as a check that the mechanical details are correct (the negative matching was accurate, the sound is in sync, there is no damage, and the colour grading is as required). The term "Answer Print" is usually reserved for the first acceptable fully graded print, with sound, from the final cut negative." The "First Answer Print" is the first such print. Occasionally the film maker may request further colour corrections, in which case a "Second Answer Print" would be required. A first answer print would include opening and closing credits, and would be capable of being screened to an audience in the theatre. 4. In response to question 2 "On what gauge would a first answer print be expected to be printed in respect of a film to be produced on 35mm gauge for theatrical release?, I say that if a film is to be finished for 35mm theatrical release, then the first answer print must be made on 35 mm print film. This is because the first answer print is made from the original negative, which is the master for all subsequent copies of the film made for distribution to theatres for display to the public. Apart from considerations of imagine [sic] quality checking, the answer print serves as a check on the quality of the optical sound negative used to make all subsequent release prints. This could only be checked by means of a 35 mm print. 5. In response to question 3 "At what stage in the production process would the first answer print be produced?", I say that the first answer print is the final stage in post-production. All editing and sound mixing is complete. Any images from other sources have been duplicated onto 35 mm, for example images originally recorded on video tape. The negative has been cut and spliced to match the editor's decisions, and the colour grading (or scene-to-scene colour balancing) is determined. At this point the answer print is produced. After approval, it is usual to make a duplicate negative that is used to make multiple copy release prints, in order to preserve the original cut negative from risk of damage. In some instances "check prints" or "proof prints" are made at an earlier stage, to verify some aspect of the laboratory's work – eg. The quality of a blow-up from 16 mm. These are specifically not referred to, or charged as, "Answer Prints" because they do not serve all the functions defined above, and do not come at the very end of the post-production process." 37 Counsel for the Commissioner pointed to the production particulars specified in Schedule B to the PID in support of the contention that it was necessary for copyright to subsist to have continuing moving images, sound and music incorporated in a single 35mm film. As the version in existence at 28 June 1994 did not answer that description, it was said that the applicants had failed to establish that there was in existence by that date a "Feature Film" as contemplated by the PID. 38 Further, the Commissioner referred to Production and Marketing Updates that had been signed by Mr Hugh Begg and which were all dated after 28 June 1994. They indicated, as follows, further steps to be taken in order to complete the film; August 1994 Final Release Print Arrangements have been concluded with the New Zealand Film Unit to process to "final mix" stage at their facilities in Wellington New Zealand. We have chosen the New Zealand Film Unit to conclude this final part of the film process as we have found them very innovative in their laboratory process. …It is anticipated that the above process will be completed by mid to late September. Marketing – Film Although we have been reserved in respect to releasing information concerning the film to world-wide distributors and theatrical chains, the local interest is quite strong in respect that we have an Australian theatrical theatre chain showing an interest in purchasing the film, although at this stage they have yet to view the film in its entirety. … We have deliberately held back information on the film to hopefully achieve a greater impact once the film is completed thereby hopefully realizing a higher than normal price for this type of property." (emphasis added) 39 Comments similar to those emphasised were made in later Updates dated 14 September 1994 and 28 April 1995. 40 From the evidence presented, it does not appear that what had been produced by 28 June 1994 was what was required under the PID, the definition clause of which contemplated that completion of the Feature Film would be achieved when MPM had produced a first answer print. That first answer print was required by Schedule B of the PID to be an "animated Feature Film consisting of approximately 97-100 minutes of continuing moving images with sound and music" on 35mm film. The evidence indicates that a 'feature film' on 35mm film was produced before it was recorded on videotape, although in its original 35mm format the film had separate digital sound. Although the applicants contended that the videotape accorded with the definition of "Feature Film" in the PID, Mr Hugh Begg deposed in paragraph 22 of his affidavit quoted at [34] above that "in order to provide evidence of the completion of the Film MPM made videotape copies of the 35mm version of the Film." That was explained to be necessary because most of those to whom MPM needed to prove completion of the film would have been unable to view it in its then 35mm format with separate digital sound recording. While the videotape of the feature film was used to 'provide evidence of the completion of the Film', it cannot be equated with the completed film itself. The completed film was, according to the interpretation of the PID which I favour, to consist of 97 - 100 minutes of continuously moving images with sound and music in a 35mm format. The videotape that had been produced by 20 June 1994 did not satisfy those requirements, and it is evident that there were still significant editing and mixing procedures which had to occur before a completed feature film could be said to have come into existence. Was the Feature Film "completed" for the purposes of the definition of "Copyright"? 41 The applicants have contended that the term "completed" should be understood as a derivative of the defined noun "Completion" in the PID. Both expressions, it was submitted, should be construed in light of s 22(4) of the Copyright Act and taken to mean the first copy of the film referred to in that sub-section. If it were not construed in this way, it was said, it would defeat the clear intention of the parties to the contract which was to govern ownership of the copyright between its arising under s22(4) and the "final" print stage. 42 Section 22(4) of the Copyright Act provides: "(4) For the purposes of this Act: (a) a reference to the making of a cinematograph film shall be read as a reference to the doing of the things necessary for the production of the first copy of the film; and (b) the maker of the cinematograph film is the person by whom the arrangements necessary for the making of the film were undertaken." 43 In the same context the applicants referred to the judgment of Bowen CJ and French J in Commissioner of Taxation v Faywin Investments Pty Ltd (1990) 22 FCR 461 where, in the context of Div 10BA of the ITAA, their Honours said, at 471-472; "The second contention that, contrary to the concession made at first instance, Faywin was not a first owner of copyright in the film, was based upon a proposition that "copyright exists in the film as soon as it comes into existence from time to time during the course of production". This submission which became fainter as it was expounded depended upon a concept of copyright in the film as somehow composed of successive copyrights that arise in the partly completed work or parts thereof. This contention is clearly wrong. The copyright in a "cinematograph film" is a right which arises in the completed work by virtue of ss 86 and 90 of the Copyright Act 1968 (Cth). The relevant copyright will not arise until the production process is complete including necessary editing. And although in the present case it is apparent that the bulk of the production work had been done when Faywin made its investment, it is also clear that the film had not been completed and that copyright in the film had not come into existence. Once it can be said that the film has been completed and that copyright has arisen it will not be possible for any new investor to fulfil the qualifying condition in s 124ZAF (1)(c)(i) "expected to become the first owner, or one of the first owners, of the copyright in the film when that copyright came into existence"" 44 Read in the context of s 22(4) of the Copyright Act, the applicants argued, their Honours' explanation entails that the completed work in the present case is to be equated with the first copy of the Film referred to in the PID. 45 The Commissioner contended that the term "completed" in the context of the definition of "Copyright" in the PID should be given its ordinary meaning denoting that the entirety of the production process has finished which, because work done by the New Zealand Film Unit did not commence until September 1994, was well after the date required for completion if copyright were to vest in the Financiers. Further, the attribution of that ordinary meaning to "Copyright" was said to be consistent with the fact that part of the $1.126m actually contributed by the investors was expended on laboratory processing and other production work which occurred after 28 June 1994. 46 It was also submitted on behalf of the Commissioner that the contractual requirements of MPM in relation to the Feature Film were consistent with the view that "Copyright" was to be understood as having its ordinary meaning. The PID thereby obliged MPM to "produce the Feature Film to proper technical and artistic standards and … edit, assemble and synchronise the Feature Film in all aspects in accordance with such standards" (cl 5.6); "do all things necessary to complete the Feature Film" (cl 5.4(d); and "to use all reasonable efforts and its experience to secure distribution for the Feature Film on proper commercial terms" (cl 8.2). 47 It will be recalled that "Copyright" was defined by cl 1.1(l) of the PID to mean 'the copyright that will, when the feature film is completed, subsist anywhere in the world in the Feature Film'. That definition specifically contemplated an interest in a completed feature film, not a collection of animated sequences or other preparatory material. The PID obliged MPM to produce a completed feature film which, I consider, meant at least a first answer print according to the usage explained by Mr Case. The interest which the investors were seeking to acquire was an interest in the completed Feature Film, not material which might come into existence on the way to producing the completed film. Clause 3 stipulated that "upon Copyright first subsisting it should vest in the Financiers and remain with them until the expiration of the Specified Period." There was nothing in that clause or elsewhere in the PID to indicate that "Copyright" was to have the meaning which it has under the Copyright Act. In my view, the "Copyright" contemplated by cl 3 was copyright in a completed feature film. As the feature film had not come into existence by 28 June 1994, it follows that the investors had not, by that date, acquired the copyright for which they had contracted. Did Copyright under the Copyright Act 1968 subsist in the film by 28 June 1994? 48 Under s 124K(1) of the ITAA a "unit of industrial property" is defined as including; "(a) rights possessed by a person under a law of Australia as: (ii) the owner of a copyright; or and includes equitable rights in respect of such a … copyright…" 49 Section 86 of the Copyright Act describes the nature of copyright in cinematograph films by providing; "For the purposes of this Act, unless the contrary intention appears, copyright, in relation to a cinematograph film, is the exclusive right to do all or any of the following acts:- (a) to make a copy of the film; (b) to cause the film, in so far as it consists of visual images, to be seen in public, or, in so far as it consists of sounds, to be heard in public; (c) to broadcast the film; (d) to cause the film to be transmitted to subscribers to a diffusion service." 50 Section 90 provides; "(1) Subject to this Act, copyright subsists in a cinematograph film of which the maker was a qualified person for the whole or a substantial part of the period during which the film was made. (2) Without prejudice to the last preceding subsection, copyright subsists, subject to this Act, in a cinematograph film if the film was made in Australia. (3) Without prejudice to the last two preceding subsections, copyright subsists, subject to this Act, in a published cinematograph film if the first publication of the film took place in Australia." 51 For the Commissioner it was said that s 90 is directed to copyright in a completed film. That view, it was submitted, is consistent with the passage quoted at [43] above from Faywin Investments indicating that ss 86 and 90 of the Copyright Act should be interpreted as concerned with the interest by way of copyright which exists once the entirety of the production process, including all necessary editing, has been finished and although Faywin Investments was decided in the context of Div 10BA of the ITAA it did not erect a concept of cinematographic copyright different from that expressed in those sections of the Copyright Act. 52 I find that analysis persuasive and consider that, for the rights conferred by the Copyright Act to subsist in a cinematograph film like the "Feature Film", it is necessary for the making of the film to have been completed to a point where the film was capable of publication. Did ownership of the copyright vest in the investors in the 1994 taxation year? 53 By cl 3.1 of the PID, the parties agreed that, upon copyright first subsisting (which, as I have just concluded, was when the feature film was completed), that copyright should vest in the investors in proportion to their several contributions to the Production Fund and should remain so vested for the "Specified Period." "Specified Period" was defined by cl 1.1(ba) of the PID to mean "the period commencing at the time the copyright first subsists and ending on 28 June 1994". If, as I have held, no copyright subsisted in the Feature Film by 28 June 1994, it follows that the investors were not the owners of units of industrial property in the Feature Film in the year of income ended on 30 June 1994. Did the investors own copyright in the Film under the Copyright Act 1968 by 28 June 1994? 54 Section 98 of the Copyright Act governs ownership of copyright in cinematograph films by providing; "(2) Subject to the next succeeding sub-section, the maker of a cinematograph film is the owner of any copyright subsisting in the film by virtue of this Part. (3) Where – (a) a person makes, for valuable consideration, an agreement with another person for the making of a cinematograph film by the other person; and (b) the film is made in pursuance of the agreement; the first-mentioned person is, in the absence of any agreement to the contrary the owner of any copyright subsisting in the film by virtue of this Part." 55 By cl 3.1 of the PID, the investors were to become owners for a specified period of the copyright in the feature film upon copyright in it first subsisting. That provision, the applicants argued, was in accordance with s 98(3) of the Copyright Act and allowed the investors to be owners of the copyright, despite MPM having made the film. Although cl 3.1 of the PID allowed ownership of the copyright to be held by the investors for the Specified Period, because the feature film had not been completed by 28 June 1994, they did not receive an interest in the copyright. There was, therefore, an agreement to the contrary within the meaning of s 98(3) of the Copyright Act and the investors had not acquired a unit of industrial property in the film, as required by Div 10B of the ITAA in the year of income ending on 30 June 1994. Did the investors' incur expenditure of a capital nature in relation to producing the Feature Film" 56 The applicants argued that both the $1.126m paid "up front" by the investors, and the $6m deferred part of the payment was an expenditure of a capital nature incurred in the acquisition of copyright in the Feature Film. As to the paid up portion, it was submitted, applying the observations of Bowen CJ and French J in Faywin Investments (supra) at 473, there was a 'sufficiently close connection' between the outlay of $1.126m paid by the investors (not the expenditure incurred by MPM) and the expenses of the production process. 57 The feature film was produced using animated footage from the original "Dinky Di's" television series. The $6m deferred payment was to cover the acquisition of the copyright in that footage, which had been arranged by MPM which, in turn, undertook to pay the owners of the copyright in the "Dinky Di's" series, as provided by cl 5.25 of the PID which stipulated: "The Producer, in its capacities as Producer under this Deed and Manager under the Series Deed, warrants and covenants that the component of Production Funds which represents the agreed value of the pre-production, animation and principal photography elements of production and which is to be provided per medium of the Film Footage will be paid forthwith to the Marketing Account of the Series as and when received for distribution as "Gross Proceeds" under the formula in the Series Deed relative to Ancillary Fees." 58 In support of the contention that the $6m represented expenditure of a capital nature in relation to producing the Feature Film, Counsel for the applicants contended: · the fact the amount was payable out of profits did not prevent it from being a cost or an outgoing to the taxpayer - Federal Commissioner of Taxation v The Midland Railway Co of Western Australia Ltd (1952) 85 CLR 306 per Dixon J at 318; Inland Revenue Commissioners v Pullman Car Co Ltd [1954] 2 All E.R. 491; · a taxpayer will be considered to have 'incurred' a cost if he or she has been subjected to a liability which has been assessed according to a method fairly designed to reflect the extent of the liability for the year in question – Federal Commissioner of Taxation v Australian Guarantee Corporation Ltd (1984) 2 FCR 483 per Toohey J at 493; · a contingent, future liability maybe treated as incurred so long as it is referable to the relevant accounting period – New Zealand Flax Investments Ltd v Federal Commissioner of Taxation (1938) 61 CLR 179 per Rich J at 193 and per Dixon J at 207. 59 In respect of the money paid "up front" by the investors, the Commissioner contended that the $1.126m was not expenditure with the requisite connection to producing the feature film in which copyright was to exist. It was submitted that moneys expended after 28 June 1994 totalling $416,467.94 should not be included in deductions under Div 10B, nor should money paid to the New Zealand Film Unit for work which it did in New Zealand after 28 June 1994. As well, it was said, the amount of $356,300 paid to Jerrard & Stuk should not be allowed as a deduction under Div 10B as it was not expenditure "incurred … directly in relation to producing the Film". In this context the Commissioner relied on Faywin Investments (supra) as supporting the conclusion that there was not a sufficiently close connection between the outlay and the production process'. 60 In relation to the deferred liability of $6m it was argued on behalf of the Commissioner that no identifiable part of that amount had been, or would become, payable. The legal obligation of the investors to pay $6m or any part of it was contingent on available proceeds becoming distributable to the investors. Furthermore, of those available proceeds becoming distributable to the investors, only 52% was to be applied to discharging their liability for the remaining $6m. There were in fact no profits made from the Feature Film and so no proceeds were distributable to the investors. Accordingly, no payment was made to the owners of the copyright in the "Dinky Di" series. 61 I uphold the Commissioner's contention in respect of the fee of $356,300 paid to Jerrard & Stuk. It did not, to apply the dichotomy erected in Faywin Investments (supra), represent a contribution to a "production account" but was rather a procuration fee for raising capital to be injected into the production account and, accordingly, represented "non-production expenses." 62 I do not consider that the deferred liability of the investors to pay $6m for the use of the footage from the "Dinky Di's" series was expenditure incurred in the purchase of units in the industrial property. It is to be remembered that the units of industrial property were to inhere in the Feature Film and invest in the investors from the date of its completion until 28 June 1994. Thereafter, in accordance with cl 3 of the PID reproduced at [15] above, MPM was the exclusive owner of the copyright. It is true that the Instalments Agreement contained a promise to pay to MPM 52% of each investor's share of any available proceeds. In that sense, the assumption of the contingent liability to pay the balance of $6m was part of the consideration for MPM's undertaking to exploit its copyright in the Feature Film in the manner set out in the PID. That is borne out by cl 10(1)(a) of the PID which provided; "By executing this Deed, the Financier: (a) agrees and covenants on execution of this Deed to provide the sum specified in Schedule D hereof as his or its agreed share of Production Funds in consideration of his or its entitlement to ownership of the Copyright described in Clause 3.1(a);" 63 However, whether the full monetary extent of the liability was "incurred" when the PID was entered into depends on whether it was then "encountered, run into or fallen upon" which does not include "a loss or expenditure which is no more than impending, threatened or expected"; see Federal Commissioner of Taxation v Flood (1953) 88 CLR 492, at 506 - 8. The extent of the liability has to be assessed according to a method fairly designed to reflect that extent for the year in question; Federal Commissioner of Taxation v AGC Ltd (1984) 2 FCR 483 at 493. It is not that the liability is contingent that prevents it from being incurred in a given year, but, rather, the likelihood, as at that year, of the contingency's occurring being so remote as to make the amount of the liability then incapable of more or less accurate estimate; cp RACV Insurance Pty Ltd v Commissioner of Taxation [1975] VR 1, at 8. In the present case, the applicants have not discharged the onus of proving that any part of the deferred liability of $6m was fairly referable to the year of income ending 30 June 1994. Did each investor use the unit of industrial property for the purpose of producing assessable income? 64 A further requirement for the invocation of Div 10B is that, under s124L(1), the owner of the unit of property "in the year of income or a previous year of income, has used the unit of industrial property of which he is the owner … for the purpose of producing assessable income." 65 The applicants, relying on the Commissioner's Ruling IT 2658, argue that copyright may be used to produce assessable income even though there is not a direct nexus between the use of the copyright and the identifiable assessable income (or even a right to assessable income) attributable to that use. The same Ruling states that eligibility for deductions under Div 10B begins as soon as the unit of industrial property exists and it is put to use with the ultimate object of producing assessable income. The applicants identify the assessable income as the entitlement to the share of profits from the exploitation of the copyright in the Feature Film. That exploitation was said to be evidenced by MPM's efforts to market the film, recounted in Mr Begg's affidavit, where he deposed: MPM devoted substantial efforts to marketing the Film, beginning in June 1994 … a copy of the video of the Film being forwarded to Mr James J Jusko, who was MPM's representative in Los Angeles. The screening at Roadshow in February 1995 took place in an effort to sell the Film to Roadshow." 66 There were also references in the evidence to other screenings in an effort to promote the film. In response, the Commissioner has contended that the affidavit of Mr Begg established only that a representative of MPM had been sent a copy of the video tape of the feature film in June 1994 but there was no evidence that the video tape had been used by the representative for the purpose of producing assessable income within the required time. 67 Consistently with my finding that there was no completed feature film by 28 June 1994, there was by that date no unit of industrial property which could have been used to produce assessable income. The mute 35mm film was not capable of being used by the investors (as owners of the units of industrial property) for the purpose of producing assessable income. Moreover, Mr Begg's affidavit makes clear that the transfer of the mute 35mm film and sound to video tape occurred solely because those who needed to view the film for promotional or other purposes were not able to do so in what was intended to be its completed format. Did each investor retain an equitable interest in the copyright in the Feature Film after 28 June 1994? 68 It is submitted on behalf of the applicants that, if, as I have held, they had not acquired units of industrial property in the Feature Film by 28 June 1994, they should nevertheless be regarded as having acquired equitable interests in the copyright in the Feature Film which enured beyond the Specified Period ending on 28 June 1994. Those equitable interests were said to be analogous to the interests of a purchaser under an uncompleted contract for the sale of land discussed by Deane and Dawson JJ in Stern v McArthur (1988) 165 CLR 489 at 522. However, in my view, that analogy breaks down when it is remembered that, by force of cl 3 of the PID, MPM, after 28 June 1994, became the exclusive owner of the copyright in the Film. Thereafter, the investors' rights were exercisable purely against MPM personally. The fact that cl 8.11 of the PID empowered the Investor's Representative to "register, preserve, maintain or enforce the Copyright including proceedings to prevent or recover damages for infringement thereof" if MPM failed to do so, does not entail that the investors retained a beneficial interest in the copyright. It conferred, rather, a right of subrogation intended to make the investors' contractual rights against MPM more effectual. For these reasons, even if their purported elections under s 124UA(2) of the ITAA can be disregarded, the investors were not entitled pursuant to s 124UA(1) to deductions over two years in respect of the consideration payable under the PID. Were the investors entitled to deductions under s 51(1) of the ITAA? 69 The applicants have contended, in the alternative, that if the liabilities which they assumed under the PID did not entitle them to deductions under Div 10B of the ITAA, they should have been allowed some deductions under s 51(1). That sub-section provides: "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." Were the Investors' expenses of a revenue rather than capital nature? 70 Counsel for the applicants referred to the Commissioner's Ruling IT 2629, where it is recited in [28]; "Costs which would not be considered to form part of the cost of an industrial unit under subsection 224R(1) include the cost of the acquisition of film material copyright not used in the film, brokerage and legal expenses and marketing costs. Costs have to be capital in nature, and, where the taxpayer is the original owner of the copyright, also directly incurred in relation to the film's production, to qualify for deduction under Division 10B. These tests also have to be applied where a taxpayer elects under section 124ZAE that the provisions of Division 10BA not apply and so the costs fall for consideration under Division 10B. Some costs which can be characterised as revenue expenses such as marketing costs can generally be claimed under subsection 51(1). Unlike Division 10BA, the deductibility of revenue costs is not limited by the operation of section 124ZAO (see paragraph 32 below)." 71 In reply the Commissioner argued that, if losses and outgoings had been incurred, they were of a capital nature rather than on revenue account, and therefore not deductible. In this context reference was made to GP International Pipecoaters Pty Ltd v Federal Commissioner of Taxation (1990) 170 CLR 124, where in a joint judgment of the High Court it was observed, at 137; "The character of expenditure is ordinarily determined by reference to the nature of the asset acquired or the liability discharged by the making of the expenditure, for the character of the advantage sought by the making of the expenditure is the chief, if not the critical, factor in determining the character of what is paid." 72 The Commissioner accordingly contended that any expenditure by the investors was capital in nature, being by way of consideration for the acquisition of copyright in the Feature Film as stipulated by cl 10.1(a) of the PID quoted at [62] of these reasons. However, as I have held, the investors never acquired copyright in the feature film because no copyright had come into existence by 28 June 1994 when the Prescribed Period came to an end. Accordingly, all that the investors acquired after that date was the right to have the copyright arising subsequently and vested exclusively in MPM exploited for their benefit in accordance with the PID. 73 In my view, no part of the amount of $79,006 paid "up front" by each investor can be identified as "marketing expenses" or otherwise attributed to revenue account in the sense used in the extract just quoted from Ruling IT2629. The proper characterisation of that payment is that it was the indivisible consideration paid to MPM for producing and exploiting the Feature Film with a view to generating a return to the investors in accordance with the PID by way of "Nett Returns" distributable in accordance with Schedule C until the Expiry Date. In that sense, the payment was by way of a final or once and for all provision to secure the future use or enjoyment of a share of the "Nett Returns" from the Feature Film and was therefore on capital account; Sun Newspapers Ltd v Federal Commissioner of Taxation (1938) 61 CLR 337 per Dixon J at 363. By contrast with National Australia Bank Ltd v Commissioner of Taxation (1997) 80 FCR 353, to which I was referred by Counsel for the applicants, the investors did not receive a marketing or other advantage in the conduct of any business being carried on by them. Nor do I accept the submission advanced on behalf of the applicants that the fact that a single payment of this kind may be income in the hands of a recipient (like MPM) as it was held to be in Federal Commissioner of Taxation v Myer Emporium Ltd (1987) 163 CLR 199 entails that it should be treated as made on revenue account by the person paying it. Each payment or receipt has to be examined in accordance with established principle against the background of all the circumstances surrounding it. To my mind, the salient circumstance in the present case is the manifest intention of the investors to take advantage of Div 10B of the ITAA where, in s 124L(1) it is expressly stipulated that the expenditure incurred shall be of a capital nature. Was the deferred liability a loss or outgoing incurred in producing assessable income or carrying on business for the purpose of gaining or producing such income? 74 The respondent contends that the effect of the Instalments Agreement was that the balance of the $500,000 agreed to be paid by each investor, after deducting the "up front" payment of $79,006 as not "incurred" by the relevant investor in the sense required by s 51(1) of the ITAA. 75 For the reasons explained at [63] above, the likelihood of each investor being required to pay, in the tax year ended 30 June 1994, any part of the balance of the sum of $500,000 stipulated in the Instalments Agreement was too remote to permit a more or less accurate estimate of the amount of the liability referable to that year. Accordingly, the liability was at that time, "no more than impending, threatened or expected" and no part of its monetary value was then deductible under s 51(1). Part IVA of the ITAA 76 For Part IVA of the ITAA to apply, it needs to be shown:- (a) that there was a scheme within the meaning of s 177A(1) which was entered into or carried out; (b) that a tax benefit was obtained by the taxpayer within the meaning of s 177C(1); and (c) that, having regard to the factors listed in s 177D(b), it can objectively be concluded that the person or persons who entered into or carried out the scheme or part of the scheme did so for the sole or dominant purpose of enabling the taxpayer to obtain that tax benefit in connection with the scheme. Was there a "scheme" as defined in s 177A of the ITAA? 77 Section 177A(1) of the ITAA defines 'scheme' to mean: (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. 78 The Commissioner has identified the scheme as the course of action or conduct by which the investors entered into the PID, the Instalments Agreement and an Acknowledgement Authority and Disclosure Statement ("AADS") addressed to Jerrard & Stuk and gave effect to those agreements by making the financial contributions and undertaking the liabilities imposed thereby for which each investor claimed deductions under the ITAA. The applicants have not suggested that this characterisation of the alleged scheme was erroneous. "Tax benefit" 79 Part IVA applies to taxation benefits in connection with a scheme including, as provided by s 177C(1)(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". 80 Under s 177C(1)(d), the amount of the tax benefit shall be taken to be "the amount of the whole or the deduction or of the part of the deduction, as the case may be, referred to in par 177C(1)(b)". That paragraph is capable of applying to deductions, if allowed, claimed by the present applicants under Div 10B or s 51(1). Had the applicants not entered into the identified scheme, they would have been able to claim the deductions under either of those provisions which they did claim and which, they assert, should have been allowed to them. Factors required by s 177D(b) to be considered. 81 Section 177D(b) sets out eight factors which must be regarded when considering whether a taxpayer has entered into a scheme for the purpose of enabling him or her to obtain a tax benefit in connection with the scheme. Section 177D provides that Pt VIA applies to any scheme, whether entered into or carried out in Australia where: "(a) a taxpayer (in this section referred to as the `relevant taxpayer ´) has obtained, or would but for section 177F obtain, a tax benefit in connection with the scheme; and (b) having regard to - (i) the manner in which the scheme was entered into or carried out; (ii) the form and substance of the scheme; (iii) the time at which the scheme was entered into and the length of the period during which the scheme was carried out; (iv) the result in relation to the operation of this Act that, but for this Part, would be achieved by the scheme; (v) any change in the financial position of the relevant taxpayer that has resulted, will result, or may reasonably be expected to result, from the scheme ; (vi) any change in the financial position of any person who has, or has had, any connection (whether of a business, family or other nature) with the relevant taxpayer, being a change that has resulted, will result or may reasonably be expected to result, from the scheme; (vii) any other consequence for the relevant taxpayer, or for any person referred to in subparagraph (vi) of the scheme having been entered into or carried out; and (viii) the nature of any connection (whether of a business, family or other nature) between the relevant taxpayer and any person referred to in subparagraph (vi), it would be concluded that the person, or one of the persons, who entered into or carried out the scheme or any part of the scheme did so for the purpose of enabling the relevant taxpayer to obtain a tax benefit in connection with the scheme or of enabling the relevant taxpayer and another taxpayer or other taxpayers each to obtain a tax benefit in connection with the scheme (whether or not that person who entered into or carried out the scheme or any part of the scheme is the relevant taxpayer or is the other taxpayer or one of the other taxpayers)." Where more than one purpose can be imputed to a taxpayer or other person who has entered into the scheme, the position is governed by s 177A(5) of the ITAA which provides; "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." 82 It is accepted on both sides that the relevant purpose of the person who entered into or carried out the scheme is to be determined objectively, in accordance with Federal Commissioner of Taxation v Consolidated Press Holdings Ltd (2001) 207 CLR 235, at 264. 83 The applicants have contended that they, as taxpayers, entered into the scheme for various reasons, including that of investing in the production, deriving income from exploitation of copyright in the Feature Film and gaining financial benefits in the form of taxation deductions. That variety of reasons or purposes was said to be demonstrated by the investigations undertaken by Mr Norman Same into the bona fides of MPM on behalf of Krampel Newman and its clients. In an affidavit by Joseph Krampel, it was stated at paragraphs 3 to 5 that it was the practice of Krampel Newman to undertake inquiries and analysis of a project or venture through a principal of the firm. It was said to be understood that film projects were "inherently risky ventures" and that "it might take a long time for the project to become profitable". Nevertheless, Krampel Newman decided that the project would ultimately be worthwhile. 84 The applicants also contended that other investors had been involved in the financing arrangements for the purpose of obtaining benefits in the form of future profits to be derived from exploitation of the film. Mr Stephen Costley, the sixth applicant in proceedings No V799 of 2000, was a partner in the Mildura accounting firm of Thomson & Associates, four members of which became financiers of the Feature Film. At paragraph 5 of his affidavit he deposed that his; "main criteria for deciding whether or not to participate in the film project were first, that it should provide a genuine opportunity to earn a return on the investment, secondly that I should be protected from liability in respect of the unpaid part of the film project in the event that the film was not successful and thirdly that my participation in the project should provide a legitimate tax deduction". 85 Mr William Graham, the fifth applicant in V 799 of 2000 is a bookmaker who was a client of Krampel Newman and had been introduced to the prospect of investing in the Feature Film by Mr Norman Same. According to Mr Graham, Mr Same advised him that, if the film were successful, he (Graham) would become entitled to considerable profits. Nevertheless, he realized that the project was "an extremely risky one." He went on to depose in paragraph 2 of his affidavit; "Mr Same told me that I would be entitled to a tax deduction for the amount of my contribution to the project. I was attracted to the proposal because by nature I am not afraid of making a risky investment if there is an opportunity to make significant profits from it. I also believe that if the investment failed I would at least be entitled to a tax deduction for it." Under cross-examination, Mr Graham answered affirmatively when he was asked by Ms Davies for the Commissioner; "You understood that although you would only make an up-front payment of $79,006, that the deduction which you would be entitled to claim in the 93-94 income year would be for the full amount of your contribution, that is, the $500,000?" 86 Mr Fernando Liuzzi was a director of University Meats, the trustee of the unit trust which contributed $98,922 to the making of the Feature Film and became a party, as a Financier, to the PID. The $98,922 was the minimum part payment which University Meats was obliged to pay under the Instalments Agreement which it executed and under which it had agreed to provide a total of $626,000. University Meats is not a party to the present proceedings. In his principal affidavit, Mr Liuzzi deposed that he had procured University Meats to enter into the arrangement at the suggestion of Mr Krampel. The relevant part of the affidavit continued; "He told me that if the film was successful, I would make a lot of money. In addition, I would be entitled to claim a tax deduction for the full amount of the contribution. The film was Mephisto's Web. Mr Krampel explained that the film would be an animation that would be produced using footage from a TV series. He also explained to me that part of the contribution would be payable out of future sales of the film. He told me that his firm had checked out the producers of the film and that he was satisfied that they would make the film in accordance with their promises. He told me that film projects are risky ventures and there could be no guarantee that it would make money, but if it was successful it could be very profitable. I asked him if he would be contributing money to the film and he said he would be. I then said - "Joe, if you think it's okay I will put money into it."" 87 Under cross-examination, Mr Liuzzi indicated that he had made no independent enquiries before University Meats entered into the PID and Instalments Agreement, but relied solely on what Mr Krampel had told him. He also understood that, by making a payment of $98,922, University Meats would obtain a tax deduction of $626,000. Mr Liuzzi further acknowledged that University Meats would only be obliged to pay the balance of the $626,000 by applying to it 52% of the proceeds from the film (if any). He understood that to be a contingent liability dependent upon University Meats' receiving any available proceeds, and that University Meats bore no financial risk in relation to the payment of the balance if there were no proceeds from the film. Mr Norman Same acknowledged that Krampel Newman was in no better position than its investor clients to evaluate the prospects of the Feature Film's becoming a commercial success. I find, in the light of this evidence, that the ability to claim a tax deduction for $500,000 for the year ended 30 June 1994, when a cash contribution of only $79,000 would be required, was regarded as the single certain, and most important, benefit to be derived from the arrangement. If the film were to have generated sufficient future returns, that would have been a welcome extra benefit. However, I am satisfied that neither the principals of Krampel Newman nor any of the other investors made any attempt at a realistic assessment of the chance that such future returns would be received. That chance, I find, was therefore not influential in their decision to enter into the arrangement. 88 The applicants pointed to the bona fides of the directors and employees of MPM in undertaking the production of the Feature Film as demonstrating that the whole enterprise was actuated by a genuine desire to create a marketable film from which real profits could be derived. However, even if such a genuine concern can be imputed to MPM, it does not follow that its contribution to the part of the scheme identified at [78] above in which it was concerned, was not for the dominant purpose of enabling the investors to obtain a tax benefit. 89 It is convenient now to examine separately, and in order, the matters to which s 177D(b) requires the Court to have regard, in determining whether each investor who entered into the scheme did so for the dominant purpose of obtaining a tax benefit. (i) Manner in which the scheme was entered into or carried out. 90 The scheme was essentially marketed or promoted by solicitors and accountants to their clients none of whom, on the evidence, had any particular interest in, or past experience of, producing or exploiting animated films. No expert opinion was sought as to how the Feature Film was to be marketed or how likely it was to generate profits for the investors. Nor was any attempt made to procure an independent assessment of the value, as at 30 June 1994, of copyright in the "Dinky Di's" series for which the deferred or contingent liability of $6m was then being assumed. The fact that "up front" contributions were made, in many cases before the PID, the Instalments Agreement and the AADS had been executed, and without enquiring as to the progress achieved in producing the Feature Film, also suggests a preoccupation with obtaining a tax benefit referable to the year ending on 30 June 1994. Moreover, neither the investors nor their advisers seem to have evinced much interest in the deductions to be made before future "Nett Returns" would become distributable or otherwise in how those returns were to be calculated. (ii) The form and substance of the scheme. 91 In form, the relevant part of the scheme provided for copyright in the Feature Film to vest in the investors for only a very small "window" of time which bore no relation to the period over which future profits might reasonably be expected to be derived from the scheme. The separation, as a matter of form, between the PID imposing, in most cases, a total liability of $500,000 and the Instalments Agreement which made clear that the substantial bulk of that liability was deferred to a contingency which might never arise, reinforces the impression that there was a preoccupation with making it appear that the whole liability was being incurred in the tax year ending 30 June 1994. In substance, only 15.8% of that liability was actually incurred in that year and the investors were effectively protected against incurring the rest of the liability except by application of 52% of highly speculative future profits. (iii) The time at which the scheme was entered into and the length of the period during which the scheme was carried out. 92 The fact that all investors were introduced to, and entered into, the scheme in the last months of the 1993 - 1994 tax year together with the very short period, ending on 28 June 1994, in which they were each to become the owner of a "unit of industrial property" in the Feature Film also suggests a preoccupation with obtaining the benefits of Div 10B for that year. As explained earlier in these reasons, the steps taken in the actual production of the Feature Film were far from synchronised with the tax driven concerns of the investors in the scheme and its promoters. (iv) The result in relation to the operation of the ITAA that, but for Part IVA, would be achieved by the scheme. 93 Had each investor, contrary to what I have held earlier in these reasons, incurred in the tax year ended 30 June 1994 expenditure of a capital nature to the extent of $500,000 on the purchase of a unit of industrial property in the Feature Film, that unit would have ceased to have a residual value by the end of that year. Accordingly, the whole capital cost would have been an allowable deduction to the investor. Had all the requirements of Div 10B been satisfied, that would apparently have been a result intended or contemplated by the Division. Accordingly, I regard the matter to which s 177D(b)(iv) draws attention as neutral in the application of Pt IVA. (v) Any change in the financial position of the relevant taxpayer that could be expected to have resulted from the scheme. 94 Had the full amount of $500,000 which it was contemplated would be incurred in acquiring a unit of industrial property in the film been allowable, but for Pt IVA, as a deduction in respect of the year of income ended 30 June 1994, the financial position of each investor could have been expected to change to the extent to which that investor's taxable income had been reduced by a deduction of $421,000. As already indicated, there was no prospect of an investor's being required to pay the amount of $421,000 out of his, her or its own funds. Moreover, the likelihood of that amount being recouped by the owners of the copyright in the "Dinky Di's" series from 52% of future profits from the Feature Film was extremely remote and posed no threat of any further cost in real terms to the investors. The resultant net beneficial change in the financial position of each investor was therefore entirely referable to the expected tax benefit and can reasonably be regarded as pointing to a dominant purpose of obtaining that benefit. (vi) Any change in the financial position of any person having a connection with the relevant taxpayer. 95 Counsel for the Commissioner pointed, in this context, to the receipt by Krampel Newman of $45,000 as a "spotter's fee" for procuring investors, the receipt by Jerrard & Stuk of $356,300 and by MPM of $193,000 (which presumably included the "producer's fee" of $180,000 set out in the components of the total "budgeted cost" reproduced at [12] above). In my view, it is not so much the fact that fees were paid for finding investors prepared to contribute to the production of the Feature Film but the professional identity as solicitors and accountants of the persons to whom they were paid and the amounts of those fees which tend to the conclusion that the dominant purpose of the investors from whose funds they were paid was to obtain a tax benefit. The receipt by MPM of a producer's fee was equally consistent with the investors having as their dominant purpose the production and exploitation of a commercially successful film. Similarly, I regard the receipt by the "Financiers' representative" of a fee of $20,000, to which the Commissioner also pointed in this context, as neutral on the issue of the dominant purpose of the investors. (vii) Other consequences of the scheme having been entered into or carried out. 96 Counsel for the Commissioner pointed, under this head, to cl 8.2 of the AADS which provided; "In the event that any investor in The Film is denied a deduction (in full or in part) for his investment in The Film, the Solicitor will contribute up to $15,000.00 in value of its professional time to the cost of a test case disputing any adverse assessment that might be made by the Australian Taxation Office denying in full or in part a deduction for any Film Investor's investment in The Film. Any Film Investor who does not apply for a private ruling concerning his or its tax position under the Taxation Administration Act will be eligible to be a participant in that test case." (original emphasis) 97 That provision acknowledged, I consider, that the obtaining of a tax benefit was an important part of the scheme and that an adverse assessment might be made by the Australian Tax Office. However, the stipulation limiting participation in a test case underwritten to the extent of $15,000 by Jerrard & Stuk, to those investors who had not applied for a private ruling did not, in my view, reinforce the indication to which I have just referred that the scheme was tax driven. Nor have I been able to attribute that effect to cl 20 of the PID to which the Commissioner also referred. That clause embodied an undertaking, subject to the qualifications in cl 20.2, by each party to the PID to "maintain in confidence the terms of this Deed and all confidential information disclosed to any other parties to any of the Relevant Agreements in connection with this Deed." That undertaking was, I consider, equally consistent with a dominant purpose of acquiring copyright in the Dinky Di's Series, producing the Feature Film and exploiting it commercially until the Expiry Date. (viii) The nature of any connection between the relevant taxpayer and any person referred to in subparagraph (vi). 98 I have already referred, in having regard to subparagraph (vi), to the professional relationship between the investors and Krampel Newman as accountant and Jerrard & Stuk as solicitors. That I regard as the extent to which that relationship can be regarded as indicative of the dominant purpose of the investors. The combined effect of the matters enumerated in s 177D(b). 99 It will be apparent from the analysis just undertaken in[90] to [98] of these reasons that I have not been persuaded to draw all the inferences adverse to the investors which the Commissioner invited. However, for reasons which I have endeavoured to explain, the preponderant effect of the totality of those matters supports the conclusion that the dominant purpose of each investor was to obtain a tax benefit in connection with the scheme identified by the Commissioner. Section 82KL 100 Section 82KL(1) of the ITAA provided; "Where the sum of the amount or value of the additional benefit in relation to an amount of eligible relevant expenditure incurred by a taxpayer and the expected tax saving in relation to that amount of eligible relevant expenditure is equal to or greater than the amount of the eligible relevant expenditure, notwithstanding any other provision of this Act but subject to this section, a tax benefit is not and shall be deemed never to have been, allowable in respect of any part of that amount of eligible relevant expenditure." 101 By s 82KH(1AD) it was stipulated, so far as is relevant: "A reference in this Subdivision to a tax benefit being allowed or allowable or not being allowed or allowable in respect of relevant expenditure incurred by a taxpayer shall be read as a reference to - (a) in a case where the relevant expenditure is relevant expenditure to which paragraph (h), (n) or (v) of the definition of "relevant expenditure" in subsection (1) applies - a deduction being allowed or allowable or not being allowed or allowable, as the case may be, to the taxpayer under section 124M or 124N in respect of the residual value of a unit of industrial property where that residual value would be calculated by reference to the relevant expenditure; and (d) in any other case - a deduction being allowed or allowable or not being allowed or allowable, as the case may be, to the taxpayer in respect of the relevant expenditure." 102 "Relevant expenditure" in relation to a taxpayer was defined by the following applicable paragraphs of s 82KH(1) to mean:- "(g) a loss or outgoing incurred by the taxpayer in respect of - (i) the production, marketing or distribution of a film; or (ii) the acquisition of a copyright subsisting in a film; to the extent to which a deduction would, apart from section 82KL, be allowable to the taxpayer under section 51 in respect of the loss or outgoing; (h) expenditure incurred by the taxpayer in respect of a unit of industrial property, being a unit of industrial property that relates to copyright subsisting in a film, to the extent to which the amount of that expenditure is taken into account, or would, apart from subsections 124R(2) and (3), be taken into account, in calculating the residual value of the unit of industrial property in ascertaining whether, apart from section 82KL, a deduction would be allowable to the taxpayer under section 124M or 124N in respect of the residual value of the unit of industrial property;" 103 By s 82KH(1F) "eligible relevant expenditure" was defined by providing, so far as is relevant: "For the purposes of this Subdivision, an amount of relevant expenditure incurred by a taxpayer shall be taken to be an amount of eligible relevant expenditure if - (a) that amount of relevant expenditure was incurred after 24 September 1978 by reason of, as a result of or as part of a tax avoidance agreement entered into after that date; (b) by reason of, as a result of or as part of the tax avoidance agreement the taxpayer has obtained, in relation to that relevant expenditure being incurred, a benefit or benefits in addition to: (i) in a case to which subparagraph (ii) does not apply: (A) the benefit in respect of which the relevant expenditure was incurred; and (B) any benefit that resulted directly or indirectly from the benefit in respect of which the relevant expenditure was incurred and is a benefit that, in the opinion of the Commissioner, might reasonably be expected to have resulted if the benefit in respect of which the relevant expenditure was incurred had been obtained otherwise than by reason of, as a result of or as part of a tax avoidance agreement; …" 104 "Tax avoidance agreement" was also defined in s 82KH(1) as follows: "tax avoidance agreement" means an agreement that was entered into or carried out for the purpose, or for purposes that included the purpose, of securing that a person who, if the agreement had not been entered into or carried out, would have been liable to pay income tax in respect of a year of income would not be liable to pay income tax in respect of that year of income or would be liable to pay less income tax in respect of that year of income than that person would have been liable to pay if the agreement had not been entered into or carried out; " 105 "Additional benefit" was likewise defined by s 82KH(1) in these terms: ""additional benefit", in relation to an amount of eligible relevant expenditure, means the additional benefit, or the aggregate of the additional benefits, as the case may be, referred to in paragraph (1F)(b) in relation to that eligible relevant expenditure;" 106 The Commissioner contended that, had the claimed deductions been allowable in full under Div 10B, s 82KL of the ITAA would have operated to disallow a 'tax benefit' in respect of an amount of 'eligible relevant expenditure'. In the light of those provisions, the Commissioner further contended that each investor who had claimed an allowable deduction of $500,000 in respect of a unit of industrial property in the Feature Film had obtained a benefit in addition to that in respect of which that expenditure had been incurred. The latter benefit, as I understood the argument, was no more than the actual worth of the unit of industrial property or the value of having the Feature Film produced. It was implied that such benefit could not have exceeded the $79,000 contributed "up front" by each investor. To the extent that any greater benefit accrued to an investor in the form of an allowable deduction for the balance of the $500,000, that was an "expected tax saving" within the meaning of s 82KL. Accordingly, the resultant tax benefit was not, and should never have been, allowable in respect of any part of the $500,000 which exceeded $79,000. 107 For the reasons explained above in relation to Part IVA, I am satisfied that the arrangement constituted by the PID, the Instalments Agreement and the AADS and the payments made and the liabilities assumed thereunder was a "tax avoidance agreement" within the meaning of s 82KH(1F). 108 Had it been achieved, the ownership of a unit of industrial property in the Feature Film for the very limited period expiring on 28 June 1994 would have been a benefit in respect of which relevant expenditure was incurred as contemplated by s 82KH(1G). However, in my view, that limited ownership of part of the copyright would not have been the benefit in respect of which the relevant expenditure had been incurred. Nor would it have been a benefit which might reasonably be expected to have resulted had the expenditure been incurred otherwise than as part of a tax avoidance agreement. 109 For these reasons, it follows, by force of s 82KL, that, if, contrary to my primary conclusion, a deduction had been otherwise allowable in respect of so much of each $500,000 "expenditure" as exceeded $79,000, the resultant tax benefit would not have been allowable and should be deemed never to have been allowable. Krampel Newman 110 The amended assessment against Krampel Newman was issued on 2 March 2000 which was outside the period of four years after the date on which tax became due and payable under the original assessment issued against Krampel Newman for the tax year ended 30 June 1994. Accordingly, it is necessary to consider, in relation to Krampel Newman, the application of s 170(2) of the ITAA. In the form in which it existed before its amendment by Act No 179 of 1999, that sub-section provided; "Subject to this section, where there has been an avoidance of tax, the Commissioner may: (a) if the Commissioner is of the opinion that the avoidance of tax is due to fraud or evasion - at any time; and (b) if any other case: (i) where the taxpayer is a relevant entity within the meaning of Division 1B of Part VI and the assessment is deemed by section 166A to have been made - within 4 years from the date upon which the assessment is so deemed to have been made; or (ii) otherwise - within 4 years from the date upon which the tax became due and payable under the assessment; amend the assessment by making such alterations in it or additions to it as the Commissioner thinks necessary to correct the assessment." 111 On behalf of the Commissioner it was contended that the making of the amended assessment against Krampel Newman was authorised by s 177G of the ITAA, sub-s (1) of which provides; "Nothing in section 170 prevents the amendment of an assessment at any time before the expiration of 6 years after the date on which tax became due and payable under the assessment if the amendment is for the purposes of giving effect to subsection 177F(1)." 112 Section 177F(1), in turn, provided; "Where a tax benefit has been obtained, or would but for this section be obtained, by a taxpayer in connection with a scheme to which this Part applies, the Commissioner may - (a) in the case of a tax benefit that is referable to an amount not being included in the assessable income of the taxpayer of a year of income - determine that the whole or a part of that amount shall be included in the assessable income of the taxpayer of that year of income; or (b in the case of a tax benefit that is referable to a deduction or a part of a deduction being allowable to the taxpayer in relation to a year of income - determine that the whole or a part of the deduction or of the part of the deduction, as the case may be, shall not be allowable to the taxpayer in relation to that year of income; and, where the Commissioner makes such a determination, he shall take such action as he considers necessary to give effect to that determination." 113 It was submitted on behalf of Krampel Newman that Pt IVA of the ITAA only applies if the deduction claimed would, but for that Part, have otherwise been allowable. Since, as I have held, the deduction claimed by Krampel Newman was not allowable under either Div 10B or s 51(1), it was said to follow that the Commissioner could not avail himself of s 177G to extend the time within which the presumptively illegitimate tax benefit could be included in the assessable income of the taxpayer. Support for that submission is derived from the conclusion reached by a Full Court of this Court in Vincent v Federal Commissioner of Taxation (2002) 193 ALR 687 where, in a joint judgment, there was noted, at 706, the obvious difference recognized by various provisions of the ITAA between deductions which are allowed and deductions which are allowable. Their Honours continued: "91. ……… The former expression is concerned with what the Commissioner has actually done in the assessment process; the latter expression looks to the terms of the legislation to determine whether in calculating the taxable income there is an amount which is by the terms of the Act, allowable. The language employed might not be fatal to the submission if, reference both to the policy of the legislation and the context demonstrated that there had been a legislative slip. But that is not the case. It is clear from s 177F that the question which is raised for determination is the conclusion as to the dominant purpose of a person who entered into or carried out the scheme or part of it. It would be very unlikely that viewed objectively it would be concluded that the Commissioner would wrongly assess and then not amend the assessment for four years. Yet, for the Commissioner's argument to succeed it would be necessary to ask whether, in a case where a deduction was not allowable as a matter of law (for example, as here, because s 51(1) did not operate to give a deduction) it would be concluded that there was a party who entered into or carried out the scheme or a part of it with the dominant purpose of obtaining a benefit consisting of a deduction which was not allowable, but which was ultimately allowed and which, only as a result of inaction was not reversed within the four year limitation period. 92. The Commissioner's submission could, indeed, operate perversely in other cases too. If the word "allowable" was to be construed as meaning allowed, at least in the case where there had been an assessment which required amendment as a result of a determination under s 177F being made, and the amount allowed in the primary assessment was considerably less than the amount which, but for Part IVA would have been allowable, the Commissioner might not be able to succeed on Part IVA because of the low figure allowed when had the test been one of allowability, the conclusion required by Part IVA could be reached. Take a taxpayer who entered into the present scheme but was allowed by the Commissioner say $500 as a deduction under s 51(1) when correctly the sum allowable, but for Part IVA would have been $100,000. It would be simple to conclude that the taxpayer entered into the scheme to get a deduction of $100,000 but most unlikely that the same conclusion would be reached if the tax benefit was but $500. 93. The reason why Parliament employed the word "allowable" rather than the normal formula of allowable or allowed is because the question of dominant purpose will usually be determined by reference to the time when the scheme is entered into. We accept that there can be cases where purpose is tested which the scheme is still being carried out. But in all cases the question of dominant purpose arises before ever there has been an assessment and by reference to a date no later than the expiration of the year of income in which the scheme is either entered into or is being carried out. The question of tax benefit, therefore, is not, at least for the purpose of s 177F to be looked at a time after an assessment has been made. 94. Further, we fail to see why this interpretation creates any great difficulty for appeals to the Tribunal or this Court having regard to s 177G. If the case is one where the relevant conclusion as to dominant purpose is reached the Commissioner is empowered to make a determination and give effect to it. The determination in a deduction case will be that a deduction otherwise allowable is not to be allowable. The making of a determination operates to change the legal operation of the Act in the particular case so that once the determination has been then there never was an occasion when the deduction was ever available. What action the Commissioner may then take to give effect to that determination will depend upon the circumstances. In a case such as the present where a deduction has been allowed, which should not have been allowed, the Commissioner is authorised to issue an amended assessment within the period of six years stipulated in s 177G. Section 177G for this purpose prevails over the four year limitation period in s 170. But the question here is not a difficulty for s 177G. The difficulty arises because of the need to test dominant purpose by reference to an allowable deduction. Once it is clear that no amount was ever an allowable deduction it is clear that Part IVA could never operate on the facts of the present case. 95. Once it is clear that no amount was ever an allowable deduction it is clear that Part IVA could never operate on the facts of the present case." That authority, I consider, binds me to uphold Krampel Newman's contention in this respect. Penalty 114 It will be recalled that the Commissioner imposed on each applicant, by way of penalty, additional tax equal to 50% of the difference between the tax which he considered to be properly payable by the applicant and the tax that would have been payable if tax had been assessed on the basis that the disputed part of the liability incurred under the PID had not been deductible. The applicant's contest the imposition of additional tax at the rate of 50%. They contend that it should only have been imposed at the rate of 25%. 115 Counsel for the applicants pointed to three provisions which provide, in substantially similar terms, a facility for the Commissioner to impose additional tax by way of penalty. The first is s 224 of the ITAA which provides; "(1) Where: (a) for the purpose of making an assessment or arising out of the consideration of an objection, the Commissioner has calculated the tax that is assessable to a taxpayer in relation to a year of income; (b) a step (in this subsection referred to as the relevant step) in the calculation of the tax consisted of: (i) an amount being included in the assessable income of the taxpayer; or (ii) a deduction or rebate not being allowable, in whole or in part, to the taxpayer; (c) the relevant step was dependent on, or involved, any one or more of the following, namely: (i) the formation by the Commissioner of, or the refusal or failure of the Commissioner to form, an opinion that relates to a tax avoidance scheme; (ii) the attainment by the Commissioner of, or the refusal or failure by the Commissioner to attain, a state of mind that relates to a tax avoidance scheme; (iii) the making by the Commissioner of, or the refusal or failure by the Commissioner to make, a determination that relates to a tax avoidance scheme; (iv) the exercise by the Commissioner of, or the refusal or failure by the Commissioner to exercise, a power to treat a matter or thing that relates to a tax avoidance scheme in a particular way; being an opinion, state of mind, determination or power under, or referred to in, a provision of this Act (other than a provision of Division 13 of Part III or Part IVA); and (d) either of the following subparagraphs apply: (i) in a case to which subparagraph (b)(i) applies—the taxpayer did not include in the taxpayer's return for the year of income or the objection, as the case may be, the amount referred to in that subparagraph as part of the taxpayer's assessable income; or (ii) in a case to which subparagraph (b)(ii) applies—the taxpayer claimed or included in the taxpayer's return for the year of income or the objection, as the case may be, the deduction or rebate or the part of the deduction or rebate, as the case may be, referred to in that subparagraph as, or as part of, an allowable deduction or rebate, as the case may be; the taxpayer is liable to pay, by way of penalty, additional tax equal to: (e) in a case to which subparagraph (b)(i) applies—the penalty percentage of the difference between the tax properly payable by the taxpayer and the tax that would have been payable by the taxpayer if it were assessed on the basis that the taxpayer's assessable income were reduced by the amount referred to in subparagraph (b)(i) or the part of that amount that the taxpayer did not include in the taxpayer's return for the year of income or the taxpayer's objection, as the case may be, as part of the taxpayer's assessable income, as the case may be; or (f) in a case to which subparagraph (b)(ii) applies—the penalty percentage of the difference between the tax properly payable by the taxpayer and the tax that would have been payable by the taxpayer if it were assessed on the basis that the taxpayer's allowable deductions or rebates, as the case may be, were increased by the amount of the deduction or rebate or the part of the deduction or rebate, as the case may be, referred to in subparagraph (b)(ii) that the taxpayer claimed or included in the taxpayer's return for the year of income or the taxpayer's objection, as the case may be, as, or as part of, an allowable deduction or rebate, as the case may be. (2) In subsection (1), tax avoidance scheme means a scheme within the meaning of Part IVA that was entered into or carried out for the sole or dominant purpose of enabling a person to pay no tax or less tax. (3) In subsection (1): penalty percentage means: (a) subject to paragraph (b)—50%; or (b) if it is reasonably arguable that the provision or provisions under which the step described in paragraph (1)(b) or the action described in paragraph (1)(c) was taken do not apply to include the amount or disallow the deduction or rebate—25%." 116 The second relevant provision is s 226 which allows the Commissioner to impose additional tax by way of penalty where Pt IVA applies. That section provides; "(1) Where: (a) for the purpose of making an assessment or arising out of the consideration of an objection, the Commissioner has calculated the tax that is assessable to a taxpayer in relation to a year of income; (b) in calculating the tax assessable to the taxpayer, a determination or determinations made by the Commissioner under subsection 177F(1) was or were taken into account; and (c) either of the following subparagraphs apply: (i) no tax would have been assessable to the taxpayer in relation to the year of income if no determination had been made under subsection 177F(1) in relation to the taxpayer in relation to the year of income; (ii) the amount of tax (in this section referred to as the amount of claimed tax) that would, but for this section, have been assessable to the taxpayer in relation to the year of income if no determination had been made under subsection 177F(1) in relation to the taxpayer in relation to the year of income is less than the amount of tax referred to in paragraph (a); the taxpayer is liable to pay, by way of penalty, additional tax equal to: (d) in a case to which subparagraph (c)(i) applies—the penalty percentage of the amount of the tax referred to in paragraph (a); or (e) in a case to which subparagraph (c)(ii) applies—the penalty percentage of the amount by which the amount of the tax referred to in paragraph (a) exceeds the amount of claimed tax." 117 Finally, s 226L provides; "Subject to this Part, if: (a) a taxpayer has a tax shortfall for a year; and (b) the shortfall or part of it was caused by the taxpayer in a taxation statement treating an income tax law as applying in relation to a scheme in a particular way; and (c) the scheme was a tax avoidance scheme within the meaning of subsection 224(1); and (d) none of the scheme sections applies in relation to the scheme; the taxpayer is liable to pay, by way of penalty, additional tax equal to: (e) if, when the statement was made, it was reasonably arguable that the way in which the application of the law was treated was correct—25% of the amount of the shortfall or part; or (f) in any other case—50% of the amount of the shortfall or part." 118 By s 222A "tax shortfall" is defined as follows: "tax shortfall", in relation to a taxpayer and a year, means the amount, if any, by which the taxpayer's statement tax for that year at the time at which it was lowest is less than the taxpayer's proper tax for that year;" 119 The same section includes this definition of "statement tax": "statement tax", in relation to a taxpayer, a year and a time, means the tax that would have been payable by the taxpayer in respect of that year if it were assessed at that time on the basis of taxation statements by the taxpayer after allowing the credits claimed by the taxpayer;" 120 A step in the making of each amended assessment in the present case consisted of a claimed deduction for the amount of the deferred liability said to have been incurred under the PID not being allowable. That step did not involve the Commissioner's formation of, or refusal or failure to form, an opinion, his attainment of, or refusal or failure to attain, a state of mind, his making or refusal or failure to make a determination or his exercise of, or refusal or failure to exercise, a power to treat a matter or thing in a particular way in relation to a tax avoidance scheme. Nor could it be said that the Commissioner in issuing the amended assessments exercised the discretion conferred by s 177F(1). I therefore consider that s 226L was the applicable penalty provision. I am reinforced in that view by the reference which Counsel for the applicants furnished to the Explanatory Memorandum to the Taxation Laws Amendment (Self Assessment) Bill 1992 at pp 90 - 91 which indicated, Counsel said, "… that s 226L is intended to apply the same level of penalty as s 224, 225 and 226 for schemes entered into for the sole or dominant purpose of avoiding tax, but in respect of which the Commissioner has not applied any of the anti-avoidance provisions because the schemes are ineffective under the ordinary provisions of the ITAA e.g. s 51." 121 I consider that, in the present case, a "tax shortfall" arose which was caused by each taxpayer treating Div 10B or s 51(1) as applying in relation to the scheme identified earlier in these reasons by allowing the full liability incurred under the PID to be deductible in (in most cases) the tax year ended on 30 June 1994. In my view, it is sufficient for the shortfall to have arisen by the taxpayer's having treated an income tax law as applying to a tax avoidance scheme of the kind to which s 224(1) applies. It is not necessary for the Commissioner to have disallowed the deduction by invoking Pt IVA or to have formed an opinion or engaged in any of the other conduct specified in s 224(1)(c). It follows that the only remaining question to be resolved in the application of s 226L is whether, at the time when the taxation statements were made, it was reasonably arguable that the way in which the application of the law was treated as allowing a deduction in the tax year ended on 30 June 1994 for the whole of the liability incurred pursuant to the PID was correct. The concept of the correctness of the treatment of the application of a law being "reasonably arguable" is governed by s 222C which provides, so far as is relevant; "(1) For the purposes of this Part: (a) the correctness of the treatment of the application of a law; or (b) another matter; is reasonably arguable if, having regard to the relevant authorities and the matter in relation to which the law is applied or the other matter, it would be concluded that what is argued for is about as likely as not correct. … … … (4) In this section: "authority" includes: (a) an income tax law; or (b) material for the purposes of subsection 15AB(1) of the Acts Interpretation Act 1901; or (c) a decision of a court (whether or not an Australian court), the Tribunal or a Board of Review; or (d) a public ruling within the meaning of Part IVAAA of the Taxation Administration Act 1953." 122 In the light of the authorities and legislative provisions discussed earlier in these reasons, in respect of neither a deduction being allowable under s 51(1) nor the applicability of Div 10B were the contentions of the applicants as likely as not correct. The challenge to the assessment by way of penalty of additional tax equal to 50% of the shortfall must therefore be rejected. Conclusion 123 For the reasons explained above, each of the attacks mounted by the applicants against the amended assessments, except that for Krampel Newman has failed. Each application will therefore be dismissed with costs, subject to an order being made in V 799 of 2000 that the amended assessment in respect of Krampel Newman be remitted to the Commissioner for reassessment in accordance with these reasons. There will be no order as to costs as between the Commissioner and Krampel Newman. I certify that the preceding one hundred and twenty-three (123) numbered paragraphs are a true copy of the Reasons for Judgment herein of the Honourable Justice Ryan. Associate: Dated: 28 February 2003 Counsel for the Applicants: Mr J W de Wijn QC with Mr M T Flynn Solicitor for the Applicants: Jerrard & Stuk Counsel for the Respondent: Mr D H Bloom QC with Ms J Davies Solicitor for the Respondent: Australian Government Solicitor Dates of Hearing: 5, 7, 8, 11, 12 & 19 February and 8 March 2002. Subsequent Written Submissions filed: 19 March and 7 October 2002. Date of Judgment: 28 February 2003