FEDERAL COURT OF AUSTRALIA Calder v Commissioner of Taxation [2005] FCA 911 INCOME TAX - tax avoidance - amended assessments - allowable deductions - whether scheme to which Part IVA of Income Tax Assessment Act 1936 (Cth) applies - investment in tea-tree project - whether it would be concluded that taxpayer entered into scheme with dominant purpose of obtaining tax benefits - dominant purpose considered having regard to the factors in s 177D(1) Income Tax Assessment Act 1936 (Cth) INCOME TAX - deductions – management and farm fees and interest – prepaid management and farm fees and prepaid interest – whether allowable deductions Taxation Administration Act 1953 (Cth) s 14ZZ(a) Income Tax Assessment Act 1936 (Cth) Pt IVA, ss 51(1), 170, 170(2)(b)(ii), 177A(1), 177C, 177C(1), 177D, 177D(a), 177D(b)(i)-(viii) Commissioner of Taxation (Cth) v Spotless Services Ltd (1996) 186 CLR 404 Commissioner of Taxation v Consolidated Press Holdings Ltd (2001) 207 CLR 235 Commissioner of Taxation v Cooke [2004] FCAFC 75 Commissioner of Taxation v Sleight [2004] FCAFC 94 Eastern Nitrogen Ltd v Commissioner of Taxation (2001) 108 FCR 27 Federal Commissioner of Taxation v Hart (2004) 206 ALR 207 Fletcher v Federal Commissioner of Taxation (1991) 173 CLR 1 Peabody v Federal Commissioner of Taxation (1993) 40 FCR 531 Puzey v Federal Commissioner of Taxation (2002) 194 ALR 615 Vincent v Commissioner of Taxation (2002) 124 FCR 350 MICHAEL CALDER v COMMISSIONER OF TAXATION WAD 13 of 2003 WAD 14 of 2003 NICHOLSON J 1 JULY 2005 PERTH IN THE FEDERAL COURT OF AUSTRALIA WESTERN AUSTRALIA DISTRICT REGISTRY WAD 13 OF 2003 WAD 14 OF 2003 BETWEEN: MICHAEL CALDER APPLICANT AND: COMMISSIONER OF TAXATION RESPONDENT JUDGE: NICHOLSON J DATE OF ORDER: 1 JULY 2005 WHERE MADE: PERTH THE COURT ORDERS THAT: 1. The application by way of appeal be dismissed. 2. The applicant pay the respondent's costs of the application by way of appeal to this Court. Note: Settlement and entry of orders is dealt with in Order 36 of the Federal Court Rules. IN THE FEDERAL COURT OF AUSTRALIA WESTERN AUSTRALIA DISTRICT REGISTRY WAD 13 OF 2003 WAD 14 OF 2003 BETWEEN: MICHAEL CALDER APPLICANT AND: COMMISSIONER OF TAXATION RESPONDENT JUDGE: NICHOLSON J DATE: 1 JULY 2005 PLACE: PERTH REASONS FOR JUDGMENT 1 The applicant 'appeals' to the Court against objection decisions each dated 23 December 2002 in respect of the applicant's amended assessments issued on 18 August 2000 for the income years ended 30 June 1994 and 30 June 1995. The amended assessment in respect of the former year disallowed $13 512 as deductible expenses and the latter amended assessment disallowed $2513. Each of these claimed deductions was for a loss from business in respect of his participation in a tea-tree oil project described below. The claimed loss of $13 512 comprised: (a) 'Management Fees' in the amount of $11 725; (b) 'Farm Fees' in the amount of $25; (c) 'Interest' in the amount of $1762. The claimed loss of $2513 comprised: (a) 'Management Fees' in the amount of $1363; (b) 'Farm Fees' in the amount of $25; (c) 'Interest' in the amount of $1125. 2 The appeals are brought pursuant to s 14ZZ(a) of the Taxation Administration Act 1953 (Cth). 3 The issues on the application are whether the deductions are allowable deductions; if so, whether Pt IVA of the Income Tax Assessment Act 1936 (Cth) ('the Act') applies to disallow the deductions; and consequently, whether the applicant is liable to pay the amounts of additional tax included in the amended assessments. evidence 4 The proceeding was conducted on the basis of affidavit evidence. The applicant's case relies upon the evidence given by he and his wife; by Mr McClymont, managing director of an agricultural consultancy; and by Mr Hayer, a former employee of Main Camp Tea Tree Oil Project No. 3 ('the Project'). The respondent called Mr Langridge, a chartered accountant. PROJECT circumstances 5 The applicant and respondent are in common agreement that the following are the circumstances of the Project. the prospectus 6 Participation in the Project was invited by a prospectus dated 20 April 1994 ('the Prospectus') which described the purpose of the Project as follows: - 'By investing in this Project you will engage in the business of growing tea trees on land at Rappville near Casino, NSW for a period of 15 years unless the relevant agreements are terminated earlier. The trees will be harvested and processed by the Manager on your behalf to produce tea tree oil for sale at a profit.' 7 Participants completed and signed an Application Form and a Principal Agreement which formed part of the Prospectus. By the terms of the Application Form participants elected to pay in advance management fees totalling $26 175 in the 1994 and 1995 income years. principal agreement 8 The Principal Agreement was between Summerland Lands Pty Ltd ('the Land Owner'), Main Camp Tea Tree Oil (No. 3) Limited ('the Manager'), Australian Rural Group Limited ('the Trustee')and, where applicable, Project and General Finance Pty Ltd ('the Lender')and each individual participant who was named in its schedules as 'Farmer' and 'Borrower'. 9 The Principal Agreement provided that, by executing it, the Farmer/Borrower automatically, upon acceptance of the Application Form by the Land Owner, the Manager and, where applicable, the Lender, became a party to and bound by the Farm Agreement, Management Agreement and, where applicable, the Loan Agreement which were annexed to the Principal Agreement as Annexures 'A', 'B' and 'C' respectively. farm agreement 10 The Farm Agreement was between the Land Owner, the Trustee and the Farmer named in the Principal Agreement and recited that: (a) under a lease dated 20 April 1994, the Land Owner would lease certain specified parts of the property known as 'Main Camp' to the Trustee to be held on trust for the Farmers ('the Project Land'); (b) under a sub-lease dated 20 April 1994 the Trustee would sub-lease the Project Land to the Land Owner. 11 The Farm Agreement provided as follows: (a) the Land Owner granted to the Farmer a right to farm 10 000 tea-trees on the site or sites forming part of the Project Land on which the said tea-trees were established ('Farm'); (b) the term of the right was deemed to commence on 30 June 1994 and end on 30 June 2009; (c) the fee payable to the Land Owner for the grant of the right ('farm fee') was: (i) for each of years 1 and 2 a prepaid fee per Farm of $50; (ii) for each of years 3 to 15 a fee calculated monthly in advance on the basis of $50 plus an annual increment equal to the Consumer Price Index of Sydney to be paid from the income arising from the sale of tea-tree oil from the Project; (d) after the first 2 years the farm fee was to be paid out of the gross income of the Project prior to the payment of management fees pursuant to the Management Agreement. If in any year the gross income was not sufficient to pay the farm fee it could be paid out of the gross income in any subsequent year; (e) the Land Owner was to supply to the Farmer at the Farmer's expense germinated seeds in a healthy condition in numbers equal to 10 000 trees per Farm; (f) the Land Owner would procure the design and survey of the Farm and would record and, if requested, notify the Farmer the position of such Farm; (g) the Farmer would: (i) purchase germinated tea-tree seeds from the Land Owner and grow them out into harvestable trees; (ii) maintain the trees and tree placements according to principles of good husbandry and thereafter harvest the trees and process the leaf into oil; (iii) generally maintain the Farm and conduct the business of farming tea-trees in an efficient manner according to good farming practice. management agreement 12 The Management Agreement was between the Manager and the Farmer named in the Principal Agreement and provided as follows: (a) the Farmer became a party to and bound by a Deed made between the Land Owner, the Manager and the Trustee ('the Investment Deed', sometimes described in submissions as the Project Deed); (b) the Farmer engaged the Manager to manage the business of farming the Farmer's Farm and the harvesting and processing of the tea-trees thereon to produce and market tea-tree oil; (c) the agreement was to commence on 30 June 1994 and continue for 15 years thereafter; (d) the Manager agreed to perform at its expense all the obligations of the Farmer to the Land Owner under the Farm Agreement except for the Farmer's obligation to pay farm fees to the Land Owner and within the initial 13 month period of the Management Agreement to: (i) receive from the Land Owner germinated tea-tree seeds selected to the best of the knowledge and belief of the Manager and the Land Owner from known high yielding stock and in healthy condition; (ii) do all things necessary to ensure that the germinated tea-tree seeds were tended according to principles of good husbandry, grown into seedlings and then planted at the rate of 10 000 per Farm; (iii) conduct the Farm in a commercial manner in keeping with accepted tea-tree oil industry standards; (iv) create and maintain shelter belts and fencing for the protection of the plant placements; (v) prepare the land with adequate drainage and ensure proper drainage was supplied by the Land Owner; (vi) provide suitable fertilisation to the tea-trees; (vii) eradicate pests, keep the Farm free of competitive weeds and keep down and exterminate vermin, noxious animals, insects, plants and weeds ('the Initial Obligations'); (e) subsequent to the Initial Obligations, the Manager agreed to perform at its expense all the obligations of the Farmer to the Land Owner under the Farm Agreement except for the Farmer's obligation to pay farm fees to the Land Owner and to: (i) continue to perform the obligations set out at subpars (iii) to (vii) above; (ii) use its best endeavours to harvest the tea-trees at or about the time estimated by it to produce the best results for the Farmer; (iii) use processing facilities supplied by the Land Owner to process the harvested tea-tree leaf into oil; (iv) sell and distribute such tea-tree oil using its best endeavours to obtain the maximum price available and account to the Farmer and the Trustee for the proceeds of such sale; (v) where the Manager believed it was in the best interests of the Farmer to do so, to pool the oil produced from the Farmer's trees with oil produced from other Farmers' trees and other projects in which event the proceeds of sale of oil pro rata would be divided between the Farmers. (f) the Farmer agreed to pay the Manager as follows: (i) if the Farmer prepaid the fee in respect of the Initial Obligations, $23 450 per Farm (reduced from $27 000); (ii) for the period of 13 months commencing at and including 30 June 1995, $2725 plus $12.50 per kilo of oil produced (reduced from $3133 if paid in advance on 30 June 1995); (iii) for each year thereafter commencing 30 June 1996 the management fee was the sum of $2725 per Farm plus $12.50 per kilo of oil produced, and thereafter such costs would increase at an increment equal to the Consumer Price Index of Sydney; (iv) the management fees for the year commencing on 30 June 1996 and thereafter were to be paid out of the gross income of the Project and in the event that the gross income in any year was not sufficient to pay the management fees for that year the fees could be paid out of the gross income of the Project in any subsequent year; (v) subject to the gross income of the Farmer being made available in its entirety by the Farmer to the Manager for the purpose of paying the management fees the Manager would have no recourse to the Farmer for such management fees; (g) the Farmer authorised and directed the Manager to pay to the Land Owner out of the Farmer's gross income of the Farmer's Project any farm fees due and payable by the Farmer to the Land Owner pursuant to the Farm Agreement prior to payment of the Manager's remuneration. loan agreement 13 The Loan Agreement was between the Lender and the Borrower named in the Principal Agreement and provided as follows: (a) the Lender advanced to the Borrower the Principal Sum referred to in the Principal Agreement and being: (i) $23 500 per Farm in Year 1; (ii) $2775 per Farm in Year 2; (b) the term of the loan was eight years from the date of the Loan Agreement and deemed to commence on 30 June 1994 for the purpose of calculating principal and interest; (c) as consideration for the Lender discounting the interest rate by 2 per cent per annum, the Borrower agreed to pay upon execution of the Loan Agreement the first year's interest at the rate of 15 per cent per annum; (d) as consideration for the Lender reducing the rate of interest during the second year of the Loan Agreement to 12.66 per cent, the Borrower agreed to pay the Lender on 30 June 1995 interest for 12 months in advance on the principal then outstanding; (e) as consideration for the Lender reducing the rate from and including year 3 onwards to 6.5 per cent per annum, the Borrower agreed to pay the Lender interest monthly in advance on the principal sum outstanding subject to such payment being due from the sale of oil and payable from the income there from after payment of all farm fees and all management fees and charges; (f) the Borrower was to make one principal repayment to the Lender on 1 October 1994 of $8500 per farm; (g) the balance of the principal sum and interest was to be repaid to the Lender by direct deduction from the income from the business (as defined) and by executing the Loan agreement the Borrower authorised the Manager to pay the Lender all such monies; (h) the Borrower could elect to have the income of the Farmer available for repayment of principal calculated as either: (A) the balance ofthe gross income of the farm (a term not defined in the Loan Agreement) after payment in order of priority of all farm fees, all management fees and interest due and payable; or (B) $250 plus 50 per cent of the balance of the gross income of the farm (a term not defined in the Loan Agreement), after payment in order of priority of all farm fees, all management fees and interest due and payable; (i) subject to the Borrower making the specified principal and interest payments by the due dates and performing his obligation under the Farm Agreement, the Borrower would have no other liability for payment of the balance of the principal sum or interest thereon other than out of the income from the Project, provided that should the Borrower's income from the Project be insufficient to pay the principal sum and interest by the expiration of eight years from the date of the Loan Agreement then the term of the loan was to be extended for no more than 15 years from the date of the Loan Agreement until the principal and interest is paid from such income; (j) at the expiry of 15 years from the date of the Loan Agreement, the Loan Agreement and the Borrower's obligations to repay any outstanding principal and interest were to cease; (k) the Borrower authorised the Lender to remit the Principal Sum to the Trustee to be applied by the Trustee toward the obligation of the Borrower to pay management fees and farm fees, and the Lender irrevocably agreed to remit such funds in satisfaction of the Borrower's obligations under the Farm Agreement and the Management Agreement. APPLICANT'S EVIDENCE 14 The applicant was, and remains, a retired Captain of the Royal Australian Navy. In March 2004 he and his wife received funds from the sale of their yacht, which they decided to invest for the purpose of producing additional income for their retirement. 15 Between March and June 1994, the applicant examined a number of investments, and in the course of doing so responded to a newspaper advertisement regarding the Project, received a copy of the Prospectus directly from the Manager and discussed it with his accountant ISIS Financial Services Pty Ltd ('the Accountant'). 16 The Project forecast net before tax returns of $59 166 on a net before tax outlay of $23 700, and an average return before tax of 19.2 per cent per annum over the expected 15 year life of the Project. It made commercial sense as an investment (albeit of a higher risk level than some) ignoring any tax advantages. 17 The applicant has some personal knowledge of the medicinal benefits of tea-tree oil. His family had started using it in the 1970s. He regularly used tea-tree oil for its medicinal purposes and still does so. He often recommended it to others. 18 Ultimately the applicant and his wife decided to re-invest their surplus funds in shares in various companies (eight different ones in all) and also to make an investment in the Project. 19 The applicant saw the investment in tea-tree oil farming and production as a long term investment in a new and expanding alternative medicine industry which carries with it a prospect of good returns. 20 In the year ended 30 June 1994 the applicant's wife had a larger taxable income than the applicant, due to a taxable capital gain in that year. However, her income in later years was expected to be (and in fact was) much less than the applicant's. The applicant contends that objectively viewed, if the primary purpose of the applicant and his wife in investing in the Project had been to achieve a taxation benefit, those facts would have caused them to make the investment from the funds available to them in his wife's name alone, so as to achieve the maximum taxation benefit and not, as was the case, in equal shares. 21 In or about June 1994 the applicant and his wife Rosemary Calder ('the Calders'): (a) completed the Application Form to the Manager and the Lender; (b) elected pursuant to the Application Form: (i) to apply to enter into a Farm Agreement; (ii) to apply to enter into a Management Agreement; (iii) to prepay management fees on execution of the Management Agreement; (iv) to apply for a loan from the Lender in the initial principal amount of $23 500; (v) to make a principal repayment of $8500 per farm on or before 1 October 1994; (vi) Loan Option 2 as the method of principal repayment; (c) entered into the Principal Agreement with the Land Owner, the Manager, the Trustee and the Lender. 22 In the year ended 30 June 1994 the applicant paid and/or incurred a liability to pay, for the purposes of the Project, and pursuant to the agreements relating to it: (a) management fees of $11 725 under the Management Agreement; (b) farm fees of $25 under the Farm Agreement; (c) interest of $1762.50 under the Loan Agreement; and (d) seed fees of $100 under the Farm Agreement. 23 In accordance with those Agreements, in the year ended 30 June 1994, the Lender paid the sum of $11 750 to the Manager on behalf of the applicant. (An issue raised by the respondent is whether this payment was part of a 'round robin', whereby this sum was 'merely' credited to the Manager in the Lender's books, and 'never became available for management of the Participants' farms'). 24 In his return for the year ended 30 June 1994 the applicant claimed as a deduction against his taxable income the amounts (a) – (c) referred to above, other than the seed fees. 25 In accordance with the same Agreements, in the year ended 30 June 1995, the applicant paid and/or incurred a liability to pay: (a) management fees of $1362.50 under the Management Agreement; (b) farm fees of $25 under the Farm Agreement; (c) interest expense of $1125 under the Loan Agreement; and (d) principal of $4250 under the Loan Agreement. 26 In accordance with the Agreements, in the year ended 30 June 1995 the Lender paid the sum of $1362.50 to the Manager on behalf of the applicant. 27 In his return for the year ended 30 June 1995 the applicant claimed as a deduction against his taxable income the (a)-(c) immediately above, other than the principal repayment. (This is not in issue.) 28 At all relevant times the applicant claims to have expected to derive income from his farm, exceeding the outgoings incurred. 29 In the years of income ended 30 June 1997, 1998, 1999, 2000 and 2001 the applicant derived income of $965.82, $497.29, $1540.77, $496.07 and $796.84 respectively from the sale of tea-tree oil from his farm. The applicant derived total income from the sale of tea-tree oil of $4296.79. 30 On 29 August 2000, the respondent issued the amended assessments of the applicant's taxable income for the years ended 30 June 1994 and 1995. The amended assessments issued in respect of the 1994 and 1995 years were both issued outside the four year time limit specified by s 170(2)(b)(ii) of the Act and the applicant contends they are not authorised under s 170 of the Act. deductibility of claimed losses and outgoings: s 51(1) 31 Part IVA of the Act can only apply to disallow deductions 'otherwise allowable' under s 51(1): s 177C(1). The respondent does not concede that the deductions were allowable. If they are not, Pt IVA cannot operate: Vincent v Commissioner of Taxation (2002) 124 FCR 350 at [95]. 32 The essence of the respondent's submission is that the expenses were not incurred in gaining or producing assessable income or necessarily incurred in carrying on a business for the purpose of gaining or producing such income, as s 51(1) requires. He submits this is the case because the purpose of the expenditure was otherwise; that is, to obtain a tax advantage. The contention is that although the amounts incurred as expenses were on their face applied in payment of the Project expenses, they were in reality directed to obtaining a tax benefit and not to the purpose of actually funding the Project. The submission is that the expenses were just coincidentally for the purpose of funding the Project and that, properly understood, they were for the non-deductible purpose of obtaining the tax benefits associated with them. The respondent contends that as the Project was funded by loan repayments and interest payments, the management fees did not in fact fund the Project. This position is contested by the applicant, as later reasons dealing with the application of Pt IVA will describe. 33 The respondent adopts that position basically for the reasons set out in an Australian Taxation Office ('ATO') Position Paper on the Project dated 1 December 1999. In the paper reference is made to a number of factors which also must receive attention in the application of Pt IVA. 34 The applicant came to the hearing on the assumption that the respondent was not challenging the proposition that the amounts in question were all allowable deductions under s 51(1). This was founded on the fact that the respondent is out of time for amending the assessment so as to disallow the claimed expenses under that sub-section and had not previously done so. The applicant points out that if the respondent is correct in this preliminary submission and the expenses are not allowable deductions, there is no scope for the application of Pt IVA on which the bulk of the respondent's case is based. The applicant also points to the relative paucity of submissions in support of this submission of the respondent. 35 From the nature of each of the payments the prima facie position arises that they are allowable deductions. I am not satisfied that position has been rebutted by the submissions for the respondent. In my view I must proceed on the basis that those amounts are allowable deductions. whether scheme to reduce income tax: part Iva Statutory provisions 36 Part IVA of the Act permits the respondent to cancel a tax benefit, including to disallow otherwise deductible expenditures, where there is a scheme in connection with which the taxpayer derives a benefit and, having regard to the eight criteria set out in s 177D(b), it can be concluded that the purpose of the person who entered into the scheme was to obtain a tax benefit. 37 The relevant sections in Pt IVA are as follows: '177A(1) In this Part, unless the contrary intention appears: … "scheme" means: (a) any agreement, arrangement, understanding, promise or undertaking, whether express or implied and whether or not enforceable, or intended to be enforceable, by legal proceedings; and (b) any scheme, plan, proposal, action, course of action or course of conduct; … 177C(1) Subject to this section, a reference in this Part to the obtaining by a taxpayer of a tax benefit in connection with a scheme shall be read as a reference to: … (b) a deduction being allowable to the taxpayer in relation to a year of income where the whole or a part of that deduction would not have been allowable, or might reasonably be expected not to have been allowable, to the taxpayer in relation to that year of income if the scheme had not been entered into or carried out; … and for the purposes of this Part, the amount of the tax benefit shall be taken to be: … (d) in a case to which paragraph (b) applies – the amount of the whole of the deduction or of the part of the deduction, as the case may be, referred to in that paragraph; … 177D This Part applies to any scheme that has been or is entered into after 27 May 1981, and to any scheme that has been or is carried out or commenced to be carried out after that date (other than a scheme that was entered into on or before that date), whether the scheme has been or is entered into or carried out in Australia or outside Australia or partly in Australia and partly outside 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). … 177F(1) 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: … (c) 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; …' approach to s 177d 38 It is not in dispute that the test established by s 177D is objective. That is, in concluding whether 'the purpose' of the applicant in entering into the Project was to obtain a tax benefit, the circumstances in the section have to be considered objectively and not with regard to the subjective purpose or state of mind of the applicant: Commissioner of Taxation (Cth) v Spotless Services Ltd (1996) 186 CLR 404 at 421-422; Eastern Nitrogen Ltd v Commissioner of Taxation (2001) 108 FCR 27 at [81]-[82] and [87]-[88] per Carr J with whom Sundberg J agreed; Commissioner of Taxation v Sleight [2004] FCAFC 94 at [67]. Consequently there is no inconsistency between a finding that the purpose of a person lay in the pursuit of commercial gain in the course of carrying on a business and a finding that the dominant purpose was to enable the relevant taxpayer to obtain a tax benefit: Spotless at [96]; Sleight at [67]. 39 In Spotless at 416 the majority of the High Court referred to 'the purpose' as a dominant purpose, being one 'which was the ruling, prevailing or most influential purpose': Sleight at [67] per Hill J with whom Hely J agreed. 40 In determining the applicant's purpose in this sense regard may be had to the evidence concerning not only the applicant but also a promoter or legal or accounting adviser: Vincent at [100]; Puzey v Federal Commissioner of Taxation (2002) 194 ALR 615at [105]; Sleight at [67]. 41 In determining the purpose from that evidence regard must be had to each and every one of the matters referred to in s 177D(b) and it is the evaluation of them alone and in combination which leads to a conclusion: Peabody v Federal Commissioner of Taxation (1993) 40 FCR 531 at 543 per Hill J (with whom Ryan and Cooper JJ agreed); Sleight at [67]. However, in applying the section 'it is important not to elide the question posed by Part IVA, namely, what was the dominant purpose of a relevant party in entering into the transaction (or scheme), with the inquiry, would the transaction (or scheme) have been entered into "but for" the tax benefit?': Eastern Nitrogen at [20] per Lee J. the scheme 42 It is common ground that the making and implementation of the Prospectus (including a supplementary prospectus dated 22 June 1994), the Principal Agreement, the Farm Agreement, the Management Agreement and the Loan Agreement and the Investment Deed constituted a scheme within the meaning of s 177A(1) of the Act. 43 Nevertheless the respondent's contentions formulate alternative schemes in the following terms: '25. Alternatively, there was a scheme comprised of:- A. the terms of the Application Form by which participants, including the Calders elected to pay in advance annual management fees totaling $26,175 in the 1994 and 1995 income years; B. the terms of the Farm Agreement by which participants, including the Calders were obliged to pay in advance farm fees totaling $100 in the 1994 and 1995 income years; C. the terms of the Loan Agreement by which participants, including the Calders:- (i) borrowed the initial prepayments under the Management and Farm Agreements of $223,500 in 1994 and $2,775 in 1995; (ii) made interest prepayments of $3,525 in 1994 and $2,250 in 1995; (iii) were obliged, on or before 1 October 1994, to make the principal repayment to the lender of $8,500 per farm; (iv) satisfied the remaining obligations under the Loan Agreement from the gross income of the project after the deduction of the farm fees and then the management fees and the interest in each year; D. Entries in the books of account of the manager, the lender and the landowner by which the lender's obligation to remit the principal sum in satisfaction of the participants' obligations under the Management and Farm Agreements, including the Calders, was effected without any actual exchanged of funds. 26. Further alternatively, there was a scheme comprised of:- A. the terms of the Loan Agreement by which participants, including the Calders:- (i) borrowed the initial prepayments under the Management and Farm Agreements of $23,500 in 1994 and $2,775 in 1995; (ii) made interest prepayments of $3,525 in 1994 and $2,250 in 1995; (iii) were obliged, on or before 1 October 1994, to make the principal repayment to the lender of $8,500 per farm; (iv) satisfied the remaining obligations under the Loan Agreement from the gross income of the project after the deduction of the farm fees and then the management fees and interest in each year; B. entries in the books of account of the manager, the lender and the landowner by which the lender's obligation to remit the principal sum in satisfaction of the participants' obligations under the Management and Farm Agreements, including the Calders, was effected without any actual exchange of funds.' 44 The applicant concedes it is possible to frame these alternative schemes but denies that he can be said to have obtained in connection with either of them tax benefits in the amounts of $13 512 and $2513 for years ending 30 June 1994 and 1995 respectively. In relation to the scheme identified in [25] of the respondent's contentions, the applicant submits that as a consequence of the limitation of the scheme to the 1994 and 1995 years, the applicant did not derive a profit against which to give him an entitlement to a deduction under s 51(1) of the Act, so that no tax benefit would be obtained pursuant to s 177C of the Act: Fletcher v Federal Commissioner of Taxation (1991) 173 CLR 1. In relation to the scheme identified in [26] of the respondent's contentions, the applicant submits that as this scheme is limited to the Loan Agreement, allowable deductions would be confined to interest payments as all other deductions are incurred under the Management Agreement and the Farm Agreement. To exclude them is said to result in no nexus between the incurring of interest under the Loan Agreement and the derivation of assessable income. Again there would be no allowable deductions and tax benefit. Alternatively, if there were such a nexus under the narrower scheme (which is denied), the only tax benefit obtained in connection with the scheme is the allowable deduction claimed for interest. 45 The respondent's answer to these submissions is by way of a general submission in its closing written submissions to the effect that the deductions were obtained in connection with the scheme and the alternative schemes. That does not answer the applicant's above submissions. However, in order to cover all eventualities, I would consider the alternative schemes should it prove necessary to do so. TAX BENEFIT 46 It is further agreed that in the premises, in the respective years ended 30 June 1994 and 30 June 1995, the applicant obtained in connection with the scheme tax benefits within the meaning of s 177C(1) and s 177D(a) of the Act in the amounts of $13 512 and $2513. 47 In [29] of the respondent's contentions an alternative tax benefit was identified in the following terms: '29. Alternatively, in the premises, for the income year ended 30 June 1994 the amount of the tax benefit obtained by the Applicant in connection with each of the alternative schemes is, in the proper exercise of the Respondent's discretion under section 177F(1) the difference between the respective amounts claimed by him as deductions in the income years ended 30 June, 1994 and 30 June, 1995 and the Applicant's share of the amount of the case payments the Calders were required to make to the project, calculated as follows:- 1994 $11,750 (1/2 x $27,025 - $3,525) 1995 ($2,862) (1/2 x $5,025 - $10,750) $8,888 The applicant contends that this alternative has not been supported by the respondent. It is said that as the respondent has not (by virtue of failing to issue a Notice of Assessment within the four year time limit) contended that the interest is not deductible nor that the payments required under the Project Agreement were not deductible, then the tax benefit is the whole amount incurred by the applicant in the respective years of income. It is argued that there is no evidence that but for the scheme the applicant would have invested only the cash component into the Project and such an alternative scheme has not been identified by the respondent. 48 The applicant's submissions being unanswered in terms, the submissions on the alternative tax benefit should only be considered should the respondent's contentions on the scheme not succeed. THE MANNER IN WHICH THE SCHEME WAS ENTERED INTO OR CARRIED OUT: s 177d(b)(i) Applicant's personal circumstances 49 The applicant also relies on the fact that prior to entering into the Project he was a retiree and having recently acquired funds from the sale of an asset, sought to increase and diversify his portfolio so as to provide an additional retirement income stream for he and his wife. 50 Further, it is contended by the applicant that he already had some knowledge and interest in tea-tree oil and carefully considered the commercial merit of the Project, including the sharing of risk and economics of scale, prior to participating in the Project. He also considered the actual progress being made on Main Camp Projects No. 1 and 2 which were proceeding in accordance with the Prospectus for each of those Projects. 51 These circumstances favour a commercial purpose in the investment. Joint character of investment 52 The applicant relies on the fact that he and his wife jointly invested in the Project as a factor pointing objectively to taxation benefits not being the dominant purpose for such investment. It is said the evidence of the respondent's witness, Mr Langridge, confirms the evidence of both the applicant and his wife that from a taxation viewpoint the maximum tax benefits both immediate and long term would have been obtained by the whole investment being made by the applicant's wife. It is submitted this evidence clearly points to the prevailing and most influential purpose of the applicant and his wife investing in the Project being other than tax avoidance, namely for the earning of income from tea-tree oil production. 53 It is submitted by the respondent that it is not material that the applicant and his wife took these steps jointly when a greater tax benefit would have been available from the Project to the applicant's wife alone. It is argued the only conclusion that may be drawn from that is that the applicant and his wife did not structure their investment for a maximum tax benefit. It is said it does not mean that they did not have the dominant purpose, viewed objectively and by reference to all circumstances, of obtaining a tax benefit. 54 I agree with this submission of the respondent. This factor is therefore neutral. Payments by the applicant 55 It is said the applicant did not rely on his tax refund to make his initial cash payments to the Project. He made payments totalling approximately $1862 in June 1994 well before his tax return was lodged for the 1994 income tax year. Reference is made to the evidence of Mr Langridge acknowledging that the view expressed by him as to the suitability of the investment for the applicant was made without actually knowing the applicant's 'investment risk profile'. 56 Further objective evidence of the applicant's intention to obtain an additional retirement income stream for himself and his wife and so to obtain commercial returns is said by the applicant to be evidenced by voluntary levy payments of $250 in January 2001 and $250 in April 2001 that he made to the Trustee to carry out the 2001 harvest. 57 These factors favour a finding, not relevant here, that the applicant had a subjective purpose of seeking commercial returns. They do not objectively support that the applicant did not enter the scheme for the purpose of obtaining a tax benefit in connection with it as his dominant purpose. These factors are therefore neutral. Contents of the Prospectus 58 The applicant submits that the Prospectus did not over-emphasise the tax effectiveness of the Project. The promoter was obliged under the former Ch 5C of the Corporations Law to lead investors to expect the tax benefits associated with the Project. ASIC release PF92 provided that: 'The management company covenants not to issue a Prospectus in relation to the undertaking unless the Prospectus leads investors to expect tax benefits by way of allowable deductions under the Tax Assessment Act 1936 in relation to all or part of the subscription moneys and the management company has reasonable grounds to expect that such deductions will be allowed.' This requirement, alerting prospective investors to the potential taxation benefits arising from the Project, was also a provision of the Investment Deed which governed the Project. Clause 26.23 relevantly provided that: '26.23 Covenants By The Manager The Manager covenants not to issue a prospectus in relation to the undertaking unless the prospectus leads investors to expect tax benefits by way of allowable deduction under the Income Tax Assessment Act 1936 in relation to all or a part of the subscription moneys and the Manager has reasonable grounds to expect that such deductions will be allowed.' Therefore it is contended by the applicant that on any objective analysis, read as a whole, the Prospectus emphasised the commercial aspects of the Project above any other aspects. 59 In its introductory section the Prospectus stated that 'complementing the aim for profits, an investor may in the early years receive tax advantages as more fully set out in this prospectus.' Under the heading 'Basic Information' it stated 'the Trustee does not guarantee in any way the returns on or repayment of the investment or the performance of the Project and makes no representation in relation to income tax consequences of participation in the Project'. After addressing taxation and cashflow aspects of the Project for the first two years, the Prospectus includes a report by a firm of chartered accountants on taxation implications. Under a heading 'How to Invest in Project No. 3' relating to the loan option, it stated: 'YOU IMMEDIATELY SPEND THE LOAN PROCEEDS by prepaying management fees and farm fees for year 1. The full amount paid for management fees and farm fees is a business expense to gain future income and should therefore be an immediate taxation deduction available to offset non farm taxable income. The germinated seeds, purchased separately are a capital expense and therefore not likely to be deductible.' Then follows the statement: 'A CASH SAVING equal to 48.4% of deductible expenses is liberated through tax savings to a Farmer who is paying tax at the highest personal rate and who is able to offset all the expenditure against taxable income.' 60 Later, when considering questions and answers, the Prospectus addresses whether there would be tax advantages. Reference is made to the report of the chartered accountants and the section on tax aspects, to which is added the comment that the impact of deductible expenditure will vary with each individual circumstances and specific advice should be sought from a taxation advisor. In relation to a question of what control an investor would have over the business, it was stated that proprietors were encouraged to visit the farm as often as possible and the cost associated with such a visit may be a deductible expense. 61 The Prospectus comprised the following parts in addition to tax information: a supplementary prospectus; information on tea-tree oil; plantation and income illustrations; reports from agricultural and marketing consultants and an investigating accountant; provisions of the various documents and advice on applying and investing in the Project. In Sleight in the Full Court at [72] Hill J, with Hely J agreeing, described the lengthy prospectus there at issue as one occupying some pages but one which could not be said to have been giving any overemphasis to tax. In my view, that description applies equally to the prospectus here in issue. The contents of the Prospectus are therefore a neutral factor. Pooling 62 The respondent contends the Project was the third of at least four projects by which participants were offered the opportunity to engage in growing tea-trees for the production of tea-tree oil on the Main Camp property. For each project, new companies were formed to contract with participants. Each project represented a new planting of tea-trees. Each project is said to have been conducted as part of the overall Main Camp plantation without reference to individual participants. It is submitted the projects and the Main Camp plantation as a whole could not be conducted any other way. The Calders' farm was in respect to 10 000 trees planted at a density of 28 000 trees per hectare. The Project comprised of 1472.5 farms of 10 000 trees. By the time No. 3 Project was planted, the Main Camp plantation comprised millions and millions of trees. 63 The applicant argues that due to the pooling of his tea-tree oil with those of other participants in the Project, it would not be a relevant consideration for the applicant or any other Farmer in the Project to consider the precise location of their farm on the Project land. 64 In support of these submissions on pooling, the applicant says his arrangements in that respect are similar to those of the taxpayer in Commissioner of Taxation v Cooke [2004] FCAFC 75. In Cooke, at [61], the location of the taxpayer's property was ascertainable only by computer records but that did not result in an application of Pt IVA. It is submitted that pooling the applicant's oil with that of other investors was a sensible business arrangement, as was found to be the case in Cooke, and also by Carr J in Sleight at [176]-[179]. Hill J did not differ from that view. 65 In Basic Information in the Prospectus it is stated that the trees will be harvested and processed by the Manager on behalf of the Farmer to produce the tea-tree oil. It is also stated that the Farmer would commence business by entering into a Farm Agreement and by engaging the Manager under the terms of the Management Agreement. In the Farm Agreement it was provided in cl 2.1 that the Farmer agreed to accept from the Land Owner the right to farm tea-trees on the Farm either personally by his servants or agents or by independent contractor. However, in the Investment Deed in cl 2.2 it was provided that each Farmer and the Trustee shall appoint the Manager to establish and manage that Farmer's project by carrying out the Manager's functions, convenants and duties and exercising the Manager's powers. Reading these agreements together shows that despite the provision in the Farm Agreement, the scheme in issue here did not offer to the applicant the option to farm alone. Therefore it cannot be said here that if the applicant might at any time have wanted to farm the blocks otherwise than through the services of the Manager, he might have been expected to have had an interest in the blocks: Sleight at [79] per Hill J with Hely J agreeing. 66 Given the reasoning in Cooke and in Sleight in the Full Court relied upon by the applicant, I do not consider the fact of pooling alone can support an objective finding of a tax benefit purpose. It is equally explicable as a business arrangement. The factor of pooling is therefore neutral. Structure of the investment 67 The respondent submits that the Project may have had an overall commercial outcome but crucial to the application of Pt IVA are those features by which the Project was structured to secure tax benefits. Those features might, themselves, be found to comprise an alternative (narrower) scheme as follows: (a) the terms of the Farm Agreement by which project participants, including the Calders were obliged to prepay Farm Fees of $50 for each of Years 1 and 2 of the Project; (b) The terms of the application form by which project participants, including the Calders, elected to prepay management fees in the amount of $23 450 in the 1994 year and $2725 in the 1995 year pursuant to the Management Agreement; (c) The terms of the Loan Agreement by which project participants, including the Calders: (i) borrowed the whole of the Farm Fees and Management Fees to be prepaid by them in respect of Years 1 and 2 of the Project ('principal sum'); (ii) prepaid interest of $3525 in the 1994 year and $2250 in the 1995 year; (iii) were obliged to make a principal repayment of $8500 on 1 October 1994; (iv) authorised the Manager to pay to the Lender all other monies owing thereunder by direct deduction from the income of the participant's farm without recourse to the participant. (d) entries in the books of account of the Lender, the Trustee, and the Landowner by which the Lender's obligations to remit principal sums in satisfaction of participants' obligations under the Farm Agreement and the Management Agreement, including the Calder's, was effected without any actual exchange of funds. 68 It is submitted the Farm Fees and Management Fees to be prepaid in the 1994 and 1995 years had no purpose except to enable project participants, including the Calders, to obtain tax deductions. Those fees were borrowed. The loan was effected without any actual exchange of funds and so afforded no commercial benefit of providing funds for the carrying out of the Project. However, the tax savings secured by the deductions were more than enough to fund the only payments required of participants, including the Calders, as explained in the Prospectus. Accordingly, participation in the Project was without risk to the participant whose only obligations to make payments to the Project were funded from tax savings. 69 The respondent contends that when the pursuit of the wider commercial objective of the Project includes features which have no purpose except to secure tax benefits in the form of the claimed deductions, those features invite the conclusion that the scheme was entered into or carried out by the applicant or some other person for the dominant purpose of obtaining tax benefits: see Federal Commissioner of Taxation v Hart (2004) 206 ALR 207 per Gleeson CJ and McHugh J at [6], [10]-[12] and [16]-[18]; Gummow and Hayne JJ at [52], [68] and [71] and Callinan J at [76] and [93]-[96], Spotless at 415 and 416 and Commissioner of Taxation v Consolidated Press Holdings Ltd (2001) 207 CLR 235 at [96]. 70 In relation to the self-funding character of the Project, the respondent argues that the Project was, necessarily, carried out using cash payments made by participants and must have been intended to be so. The Project companies had common directors and owners. Accordingly it is said by the respondent: (a) they knew funds would never be advanced for farm fees and management fees; (b) and so intended to raise the capital for the Project by creating obligations which would secure for participants tax savings sufficient to fund the cash payments required of them. The respondent contends that the acceptance by the applicant of the limited recourse Loan Agreement, had the consequence that the cash payments in 1994 and 1995 years were the only cash payments required of participants. 71 The applicant contends the Project had been established, operated and managed by the Manager during its life in a professional, commercial and businesslike manner – (as evidence of Mr McClymont and Mr Hayer is said to establish) – and in accordance with the Investment Deed. Since there is now no contention that the Management Fees were 'excessive', nor any contention that the required work was not fully carried out, it is said to be a fair inference that the fees were paid to the Manager. 72 The applicant argues, contrary to the respondent's contention, that the Manager did receive the 1994 and 1995 Management Fees in full, albeit not on 30 June 1994, but during the period 1994 – 1995, when the first two years of management services were to be provided. Therefore, it is argued for the applicant that, compared to the taxpayers in Cooke in relation to the tax deductions claimed, the cash outlay required by the applicant to invest in the Project was substantial. It is contended that the evidence does not establish (as the respondent claims) that the only funds available for the Project came from the 'actual payments' made by the applicant. 73 In relation to the limited recourse loan, the applicant submits he chose it to protect himself from incurring liabilities during retirement. He states the limited recourse loan was a commercially sensible option in his circumstances, just as it was for the taxpayers in Cooke. There at [92]-[94] the applicants received a guaranteed return which the primary judge found prudently protected their investment at least to the extent of the after-tax portion. 74 In the face of the evidence of Mr McClymont that it would cost approximately $1.75 million over three years for an investor who wished to participate in the business of growing tea-tree oil for sale to participate on a 'stand-alone' basis, the applicant contends an investment in the Project was therefore the only commercially viable alternative for an investor like him who was seeking an additional retirement income stream and who wished to participate in the business of growing tea-tree oil without having to make a substantial million dollar investment. Therefore he argues there is no evidence that there was any other feasible alternative available to an investor such as him who wished to invest in tea-tree oil production. He says there is no 'alternative postulate' identified (cf. the use of that test in Hart at [66] by Gummow and Hayne JJ and at [94] by Callinan J). However, entry into the Loan Agreement was optional, although only one of the investor Farmers did not enter into it. 75 In my opinion, the scheme was so structured as to significantly self-fund the financial obligation of the applicant to the Project. I regard it as also of significance that the scheme provided to the applicant an immediate tax deduction and later deductions of sufficiency to generate tax savings to generally cover the cash required from him and so without risk to his own funds. That feature suggests an importance in the tax consequences of the investment rather than the commercial outcomes. 76 Likewise I accept the respondent's submission that the manner in which the scheme was structured is such as to favour an objective conclusion that the applicant as a taxpayer has entered into the scheme for the purpose of enabling him to obtain a tax benefit. The structure therefore supports a finding of a tax benefit purpose. Passivity of investment 77 The respondent submits that for participants, entry into and carrying out of the scheme required limited activity over the first 13 months of the Project. It is said that all the applicant and his wife did was to: (a) complete a principal agreement contained in the Prospectus; (b) complete an application form contained in the Prospectus; (c) remit to the Trustee the amount of $3725; (d) pay $8500 on 1 October 1994; and (e) pay $2250 on 30 June 1995. The applicant and his wife retained no record of the above. 78 By the above steps, it is submitted that the applicant and his wife: (a) incurred obligations for Farm Fees and Management Fees totalling $26 275; (b) borrowed the whole of those Farm Fees and Management Fees; (c) ensured that they had no further liability for repayment of the principal sum under the Loan Agreement or interest on it other than out of the income of their business; and (d) appointed the Manager to grow tea-trees for the production of oil on the Main Camp property. 79 The applicant claimed by way of deductions in the 1994 and 1995 years amounts equal to half of the obligations of he and his wife. As the 'Taxation and Cashflow Aspects of Year 1 and 2' section of the Prospectus makes clear, the immediate tax deduction of $27 025 and the further deductions at 30 June 1995 were more than enough to generate tax savings to cover the $14 475 of the participant's personal cash required in the first 13 months of the Project. In the result, the participant could enter into, and by reason of the limited recourse nature of the loan, carry out the Project without risking his or her own funds. Therefore it is submitted that the fact that the applicant did not rely on the consequent tax refund in order to enter into the Project is not to the point. 80 Additionally it is contended that after the first 13 months, the Project was to be carried out without further disturbance to the participant: (a) Pursuant to the Loan Agreement: (i) a Borrower, including the applicant, authorised, and the Lender agreed, to remit the principal sum to the Trustee to be applied in satisfaction of the borrower's obligations under the Farm Agreement and the Management Agreement (cl 8.5); (ii) the balance of the principal sum and interest was to be repaid to the Lender by direct deduction from the income of cultivating, harvesting and processing the tea-trees to produce tea-tree oil on the Borrower's farm (cl 4.4); (iii) the Calders authorised the Manager to pay to the Lender $250 plus 50 per cent of the gross income of the borrower's farm less all farm fees, management fees and charges and interest (cl 4.4 and cl 4.5); (iv) should the income be insufficient to pay the principal sum and interest by the expiration of 8 years then the term of the loan was to be extended until the principal sum and interest was paid from such income but in any event for no longer than 15 years from 30 June 1994 at which time the agreement would be at an end and the Borrower's obligations to repay any outstanding principal and interest would cease (cl 7.3); (v) the Borrower authorised the Manager to apply so much of net income received in the years 9 and 15 of the Project as the Manager might deem reasonable in payment of any principal remaining outstanding at the end of 8 years over and above the amount the Borrower otherwise authorised the Manager to pay the Lender (cl 4.6); (vi) otherwise, the Borrower had no other liability for payment of the balance of the principal sum or interest other than out of the income (cl 7.3); (b) Pursuant to the Management Agreement: (ii) the Manager undertook all the day to day activities of land preparation, seedling selection, planting and cultivating tea-trees on a participant's farm, including the applicant's, as well as harvesting, processing, selling and distributing tea-tree oil (cl 5 and cl 6); (iii) the Manager could pool oil produced from a Farmer's trees, including the applicant's, with that produced from other trees and with the oil from other projects in which event the proceeds of sale of oil would be divided pro rata (cl 6.12); (iv) from the year commencing 30 June 1996, management fees would be paid out of and only out of gross income of a participant's farm, including the applicant's, with no recourse to the participant (cl 7.2); (v) the participant, including the applicant, authorised the Manager to pay farm fees out of the gross income from his farm prior to payment of management fees (cl 9.1); (c) Pursuant to the Farm Agreement: (i) the Land Owner would supply the Project participant, including the applicant, with 10 000 germinated tea-tree seeds as provided in the Principal Agreement (cl 5.4); (ii) the Land Owner would procure the design and survey of the Project participant's farm, including the applicant's, and record its position, notifying the Project participant only at his or her request (cl 5.5); (iii) farm fees in years 3 – 15 would be paid out of the gross income of the tea-trees, including the applicant's, prior to the payment of management fees. If any year the gross income was not sufficient to pay the farm fees for that year such fees could be paid out of the gross income in any subsequent year (cl 4.2). 81 In these circumstances it is argued the applicant did nothing more than was required of him. He was content to receive: (a) Project financial statements showing little more than opening and closing stock figures; (b) reports about the conduct of the Main Camp plantation as a whole; (c) annual financial statements which informed him of the income and charges made against it but did not inform him of how those amounts were allocated by reference to sales of oil, at what price, the yields obtained or from where. 82 The applicant contends that, as a consequence of the pooling arrangements for a project of this type, it was not necessary or desirable for him, the Manager or the Trustee to keep individual records of the day to day expenditure, management, maintenance, cultivation or harvesting of his or any other individual grower's farm. He submits it would have been unbusinesslike and commercially nonsensical for such records to have been kept or maintained by him, the Trustee or the Manager. 83 Therefore it is submitted that being a 'passive investor' may be relevant to the question of 'carrying on a business', and is sometimes used as a basis for the ATO to claim that expenditure is capital and not an allowable deduction, but it is not relevant to the question of 'dominant tax purpose'. 84 In relation to contentions by the respondent that the applicant was no more than a 'passive investor' in a project controlled and managed by others, it is argued that if by that it is meant that the applicant was not carrying on a business, such a submission carries with it the conclusion that the claimed deductions were on a capital account and not allowable, in which case Pt IVA would not apply. 85 In relation to the physical participation of the applicant, it is submitted that is not relevant. The applicant's position is similar to that of the taxpayer in Cooke. It is said not to be indicative of a 'dominant purpose' of obtaining a tax benefit. 86 The fact that the scheme only required limited activity from the applicant over the first 13 months is in my view a neutral factor, as is the absence of the maintenance of records by him. These matters are as consistent with the applicant having a commercial purpose to be effected by the Manager as having a purpose of acquiring tax benefits. Round robin arrangements 87 Concerning the alleged round robin arrangements the applicant was unaware of them and nor was it ever put to him that he was aware. Therefore it is contended by the applicant that his circumstances are very similar to those of the taxpayer in Cooke, where the Full Court at [88] noted that the trial judge accepted the taxpayers' assertion that they knew nothing about the round robin transactions and that those transactions could not be part of a scheme to which they were a party. At [100] it accepted that finding. 88 In any event, it is submitted, there is nothing either sinister or uncommercial about a so-call 'round robin', nor does it follow that if there were a 'round robin' the funds never become 'available for use'. It is submitted it does not mean that the funds will not be available for the contractor to do the work, as required. No 'actual cash' was, as at 30 June, involved in this transaction, but it does not mean that, as required for the work, it would not have been available. 89 It is argued by the respondent that the Project was carried out without the benefit of funds in the amount of the deductible Farm Fees and Management Fees. Advances to be made in respect of those amounts were never made with actual cash but by 'round robin' type transactions effected by accounting entries in the books and bank statements of the promoter companies. 90 The respondent also submits that the round robin assumes a character here which it did not have in the circumstances at issue in Sleight. That is said to be because it reinforces and throws into sharper relief the fact that the fees payable under the Investment Deed were a mathematic integer designed to attract tax benefits for the amount required. 91 It is clear that the applicant was unaware of the round robin transactions. However, as was said by Hill J in Sleight at [77], round robins can be a feature of many tax avoidance schemes and so point to a purpose of such a character. He also accepted that it cannot be said that the round robin strongly points to such a purpose. Here the presence of the round robin arrangement does not decisively point to a tax benefit purpose but does not support a conclusion of a commercial purpose. It supports only a conclusion that it mildly supports a tax benefit purpose. the form and substance of the scheme: s 177D(b)(ii) 92 The applicant contends under this item that the substance and form of the arrangements were the same. None was a sham, nor is that alleged. It is said the arrangements entered into were neither complex nor artificial, but similar to other managed investment scheme projects carried on for commercial gain in the tea-tree oil industry. All of the Project Agreements were entered into at arm's length. It is submitted it could not be said that the substance of the arrangement was any different from the form, namely a commercial arrangement to farm and harvest tea-tree oil for a profit. 93 The respondent contends that in form: (a) the participant obtained rights to an area of land on the Main Camp property sufficient for growing 10 000 tea-trees and harvesting them for oil; (b) the participant engaged a manager for the farm; (c) the participant incurred deductible Farm Fees and Management Fees in respect of the rights to the land the management services engaged; (d) payment of deductible Farm Fees and Management Fees was made by way of loan; (e) the participant was to make prepayments of interest in respect of the loan and one payment of principal. Otherwise, loan repayments were to be made from proceeds of the farm after deduction of Farm Fees, Management Fees and interest. 94 The respondent contends that as to substance the Farm Fees and Management Fees played no role in the Project except to generate tax savings. He argues the effect of the 'round robin' type transactions referred to above was that the only funding available for the carrying out of the Project came from the payments made by participants in reduction of the loan and not from the fees they were charged. The tax savings generated by the deductible fees participants were charged created the funding for their actual cash payments. 95 The respondent, as to substance, also argues the participant was merely a passive investor purchasing, by his or her cash payments, a share of the Main Camp business of growing and harvesting tea-trees for oil: (a) cl 6.12 of the Management Agreements enabled the Manager to pool oil produced from a Farmer's trees with that produced from other Farmers' trees and with the oil from other projects and divide the proceeds pro rata between the Farmers; (b) most of the proceed of the participants' farms were retained by the Main Camp group from the gross income of the farms by way of payments in the following order: (i) Farms Fees, after Years 1 and 2; (ii) Management Fees, after Years 1 and 2. These comprised $2725 plus $12.50 per kilogram of oil produced (increasing at an increment equal to the Consumer Price Index of Sydney). The amount of $12.50 per kilogram represented approximately 19.5 per cent of the initial price projected for the sale of oil ($63.50 per kilogram). It was payable in respect of oil produced rather than oil sold. The proportion of the variable management fee to the price of oil would increase to the extent that the Project's projections on price were not met; (iii) interest on the loan; (iv) principal repayments on the loan. The Calders apparently elected Loan Option 2 for the repayment of principal on their loan. Accordingly, the Main Camp group retained a further $250 plus 50 per cent of the remaining balance of the gross income from their farm. Reduction of outstanding principal was slower by this option resulting in higher overall charges to the Calders, and other participants who made the same election. 96 Unlike the position in Sleight, the applicant did not have the option to farm alone. The Loan Agreement was optional. Nevertheless, it can be said of the present scheme (as it was said by the Full Court in Sleight of the scheme there in issue) that the form was one designed to increase the taxation deductions available to an investor. On the other hand, the substance was one in which the applicant as the investor was a passive investor. It can be said here as it was said in Sleight at [82] that the particular shape the investment took was fashioned in a way that would maximise the tax deductions. They were geared up by the Loan Agreement with up-front payments and the loan allowing the prepayment of the management fee and the deduction which emanated from that. The loan was to be repaid out of the investor's profit share on the limited recourse basis of 50 per cent so that the substance was that the investor was to receive only a lesser share of profit over the term of the Loan Agreement. 'But for' the tax deductions, the form the investment might be expected to take would relate more to the substance of what happened. This points to a tax benefit purpose. time and length of scheme: s 177D(b)(iii) 97 The applicant contends he had a pre-existing knowledge and interest in tea-tree oil and carefully considered the commercial merit of the Project prior to participating. He says his participation in the Project did not result from a 'flurry of activity' on the last day of June 1994 but was well before that date. Evidence of this can be seen by the letters from the Manager to the applicant dated 18 June 1994 recording the applicant's payment for the purchase of seed pursuant to the Farm Agreement and payment of the initial interest pursuant to the Loan Agreement. He argues this is to be contrasted with Cooke where the taxpayer entered into the scheme on the eighth last day of the income year. 98 As to the length of the Project, the applicant points to an ongoing commercial operation over a 15 year period. It is said this is not a case of a scheme which starts and finishes in the year of income once the deduction is availed of. It is said that both in form and in substance it contemplated an activity over 15 years before the agreements terminate and the farm reverts to the Project Manager. The term of 15 years was the case in Cooke. The difficulties experienced by the Project, set out in the respondent's submissions, are said to be totally irrelevant to the determination of dominant purpose. Mr McClymont's and Mr Hayer's evidence shows, it is contended, that the Project was soundly run, but a number of factors caused unexpected delays in both establishing and harvesting the plantation. 99 The respondent's submissions refer to the following factors. The Prospectus was dated 20 April 1994. The Calders entered the Project in June 1994. By letter dated 18 June 1994, the Manager confirmed: (a) receipt of the Calders' executed Principal Agreement and annexed Farm, Management and Loan Agreements; (b) receipt of all Farm Fees, Management Fees and interest; (c) the loan from the Lender to the Calders of $23 500. 'Round robin' type transactions reflecting the loans of the Farm Fees and Management Fees to participants, including the Calders, were carried out on 30 June 1994 and 30 June 1995. Planting of the Project was to be completed by March 1995, within the first 13 months of the Project's commencement. In fact, it was not completed until 1996. Replanting of some 46 hectares of the No. 3 plantation was considered in 1996 and later reassessed to 32 hectares. In October 1998 as part of an ongoing program a further 35 hectares on block 3B were to be replanted in addition to the areas previously replanted. The Project was to continue until 2015 when the plantation reverted to the Land Owner. Proceeds from the harvest of oil were projected to become first available in the 1997 year. 100 The respondent's submissions state that in fact: (a) the first distribution of the proceeds of sale of oil in the Project was made in November 1997; (b) there was one further distribution in October 1998; (c) in the 1998 financial year the proceeds did not cover Farm and Management Fees and did not do so thereafter. The fees were not accrued as shortfalls but were forgiven; (d) in August 1998 and September 2000 the Lender waived interest; (e) in November 2000 a proposal was made to the participants to terminate the Project early on 31 December 2000 and for the Lender to release each Borrower from their obligation under the Loan Agreement. This proposal was not followed through. Instead the participants were invited to pay a levy to enable the harvest to proceed early in 2001. The Calders paid this levy. It is not known whether the harvest went ahead or was completed. (f) on 12 December 2002 the Trustee was placed in liquidation. Consequently and pursuant to the terms of the Investment Deed(cl 17.3), the Manager requested the Trustee to retire. No replacement trustee was found. Pursuant to cl 13.2 of the Investment Deed the Manager terminated the Project on 2 May 2003 and the Calders/participants ceased to have any interest/investment in the Project. 101 The applicant sold his interest in his yacht in March 1994. His evidence was at trial was that he received the money from the sale probably in April 1994. In May and June 1994 he looked for investments. In June 1994 he purchased shares in six public companies. He invested in Main Camp because he wanted a high risk venture. On 18 June 1994 he received a receipt evidencing that he had paid money to enter the scheme. The round robins occurred on 30 June 1994. I consider that the time of entry into the scheme in these circumstances marginally favours a tax benefit purpose. 102 Concerning the length of the scheme, it was not one which started and finished in the year of income once a deduction had been availed of. Rather it was a scheme contemplating an activity over 15 years before the Management Agreements terminated and the farms reverted to the Land Owner. I consider this marginally supports a commercial purpose in entry into the scheme. result in relation to the act that, apart from part iva, would be achieved by the scheme: s 177D(b)(iv) 103 The applicant and respondent are in common agreement that but for Pt IVA, the result of the scheme was that the applicant obtained: (a) in the 1994 years, a deduction of $13 512, being half of the loss incurred jointly by himself and his wife, in respect of Farm Fees, Management Fees and interest; (b) in the 1995 year, a deduction of $2513, being half of the loss incurred jointly by himself and his wife, in respect of Farm Fees, Management Fees and interest. 104 The applicant's claimed deductions of $16 025 exceeded the requirements of his personal cash, namely $7238. This points to taxation as a dominant purpose. CHANGE IN THE FINANCIAL POSITION OF THE TAXPAYER FROM THE SCHEME: s 177D(b)(v) 105 This paragraph of s 177D requires the Court to have regard to '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'. It is clear that the applicant's financial position will no longer be effected by the Project as it went into liquidation in 2002. Therefore the Project has resulted in a failure of significant commercial return and will not result in any further return to the applicant. 106 The respondent submits that the paragraph also requires the Court to look at its application at the time the applicant entered the Project, the point being in particular to find whether the commercial benefits were certain or uncertain as against the certainty of tax benefits incorporated in the scheme. 107 The Prospectus told the applicant that he could expect in respect of a single farm a return on investment of 19.2 per cent, whether or not he took no loan or took loan repayment option 1 or 2. One farm was to consist of 10 000 trees. The Prospectus identified as marketing risk factors being the possibility of price fluctuation and oversupply. It stated that it was anticipated that selling prices for oil may be a little erratic as the impacts of increased production and developing demand are likely to move at differing rates at different times over the term of the Project. The tables on which return on investment predictions were based utlilised a selling price of $60.50 per kg escalating at an assumed inflation rate of 5 per cent per annum thereafter. 108 The applicant contends (subjectively) he reasonably expected to make a substantial profit from the Project. This did not eventuate, on his argument, due entirely to a fall in the tea-tree oil prices and despite the additional voluntary payments he made to the Trustee to carry out the 2001 harvests. Also he argues that the projected average profit of 19.2 per cent per annum is very similar to the forecasted return in Cooke's case referred to by Carr J in Sleight's case at [245]. 109 The respondent starts from the position that as a result of their entry into the Project, the Calders obtained an immediate improvement in their after-tax cashflow. Their net cash inflow was to come, not from earnings from growing tea-trees for oil, but from tax savings. As explained by the Prospectus, this financial result arose because the Calder's claimed deductions (totalling $32 050) far exceeded the requirements of the Calder's personal cash for the scheme ($14 475). 110 However, the respondent asserts that beyond the net cash inflows generated by the large up-front tax deductions, the Project represented a very poor investment on any properly objective view. He contends that even accepting the assumptions made about price and yield in the Prospectus, the Project had nothing to recommend it beyond the fact that entry could be made utilising the tax savings and without further risk to the participant. 111 For these views the respondent relies upon the report annexed to the affidavit of Mr Langridge. In that report Mr Langridge stated in relation to the projected return on investment of 19.2 per cent the first two years had been ignored and when they were taken into account the average return was reduced to 15.9 per cent. Additionally he stated that the inclusion of the inflationary increases at 5 per cent per annum had the effect of increasing the average return from 9.7 per cent to 19.2 per cent. If the error in relation to the first two years was taken into account, the average return was calculated at 7.6 per cent. 112 Mr Langridge's evidence was also that, accepting the yield and price assumptions made by the Prospectus and the inflationary increases built into the projections, the best a participant in the scheme could hope for from the Project was a before tax return of 8.91 per cent (on Loan Option 2). He said the higher after tax return was the consequence of the tax effects of the participant's loan. He regarded the before tax return as wholly inadequate for the high risk nature of the investment. If the inflationary factor was excluded, he considered the projected 'return' on the Project to be negative. The applicant contends that a major flaw in the approach on this is Mr Langridge's assumption of no price increase over 15 years, the exclusion of the so-called 'inflationary factor'. 113 The respondent relies on the Langridge report in the following specific respects. First, he contends the income projections in the Prospectus were misleading. He says they excluded the participant's cash outflows of $3725 in 1994 and $10 750 in 1995 for prepaid interest, seeds, and capital repayment in respect of the Loan Options. The applicant contends that the respondent's reliance on net cash flow does not assist because the projection in the Prospectus does not purport to show net cash flow. Rather it shows a 'cash distribution' figure which he accepted as correct. 114 Second, the respondent relies on the Langridge report for the proposition that the income projections in the Prospectus purported to express a percentage return on investment without any conceptual basis. However, the applicant points to Mr Langridge's evidence as actually being to the effect that the calculation, in apparently ignoring the first two years of the 15 year period, was 'conceptually incorrect.' Further Mr Langridge had testified that 'return on investment' is widely used as a basis for considering investments. Additionally reliance is placed by the applicant on the use of that test by Carr J in Sleight at [245] and by Hill J at [111]. 115 Third, the respondent contends the return referred to in the Prospectus was distorted by the inclusion of annual 5 per cent inflationary figures as was the exclusion from the calculation of negative income in the 1995 and 1996 years. The applicant argues that this statement is fundamentally flawed, being based on the unfounded conjecture that prices would not increase, either at the 5 per cent per annum forecast or at all. Mr Langridge agreed that his speculation that prices might fall was conjecture. Therefore the applicant contends this is not an assumption or conjecture which any reasonable investor reading the Prospectus would have made. Further, it is submitted that no objective assessment, based on the material in the Prospectus, could conclude (as the respondent urges) that the likely return without tax benefits was so poor that an investment in the Project must be 'tax driven', as Mr Langridge maintained. 116 The respondent accepts that Main Camp was a large, professional operator which recognised the need for marketing and was active in pursuing new markets. Hence it maintained a premium price but one which was affected by overall price falls. Nevertheless the respondent submits that it was unlikely the income projections would be met, for a number of reasons. First they assumed constant growth in both yield and price without provision for any fluctuation as might be expected in any agricultural project. Second, they were based on assumptions about yield which were at the high end of expectations when plantation farming of tea-trees was in its infancy with a vast amount unknown. Third, they were based upon assumptions about price which ignored the risk of an oversupply of tea-tree oil in the near future. Accordingly, the projected growth in prices depended upon the establishment of new markets of tea-tree oil. 117 The applicant argues that there was no assumed constant growth in yield and the projected increase in price was supported by the expert's reports, excess of demand over supply, the 10 per cent (compounding) increase over the previous six years and the generally positive outlook for markets reflected in the Prospectus. The projected price increase of 5 per cent was within the average price increase for agricultural products. Experience shows, as Mr Langridge was forced to concede during trial, that prices do generally increase. Given the information in the Prospectus, an ordinary investor, such as the applicant, would reasonably conclude 5 per cent was achievable and even conservative. Regarding the yield forecast, the applicant maintains that while their witness Mr McClymont agreed it was at the "high end of expectations" there was nothing in the Prospectus or anything known to the applicant to suggest the forecast yields could not be achieved. 118 The respondent submits that the evidence of the applicant's expert witness, Mr McClymont is at odds with the above and his support of the Prospectus projections about yield and price ought not to be accepted. Mr McClymont dismissed the risk of an oversupply of tea-tree oil affecting future prices because of marketing work being done and he indicated that the expansion of international markets was critical. The respondent contends that Mr McClymont does not understand these markets or have knowledge of their requirements and thus is not qualified to express a view about future prices for tea-tree oil. The applicant maintains that Mr McClymont, as an expert, considers that the statement in the Prospectus as to yield, prices and markets was correct and the forecasts reasonable. He contends Mr Langridge disagrees solely due to his flawed and selective analysis of the Prospectus. 119 The respondent also contends that Mr McClymont lacks the independence a Court should expect from an expert witness as he refused to entertain or accept any alternative view put to him. To support this contention, the respondent states that Mr McClymont staunchly defended views favourable to the applicant and Main Camp and had been close to Main Camp projects both throughout their life and failure. Accordingly, it is submitted that the respondent's witness, Mr Langridge, who is not involved in the tea-tree oil industry, would make an objective business appraisal of the material presented by the Prospectus and the future outlook for prices. It is Mr Langridge's opinion that there was likely to be a downward pressure on prices. 120 In his third affidavit Mr McClymont highlighted the importance of Main Camp's research and development and marketing program. In his capacity as the Queensland representative of the Australian Rural Group he advised a number of tea-tree farmers on marketing. He did so because he regarded as important the creation and security of future demand. He agreed in cross-examination that the existing markets in 1997 could not support the supply of tea-tree oil. He accepted that in 1994 an oversupply of tea-tree oil was predictable if there were no marketing to obtain new markets. However, he disagreed with the statement by Mr Langridge in his report that the export market for tea-tree oil was unknown and poorly developed as at April 1994. In his opinion, the major export market for such oil was the United States, although he did not have knowledge of the approval processes there or the time taken by them. He agreed that these factors and the launch of new tea-tree oil products meant that there were a lot of things that needed to come together if the price was going to be kept up. Because of his view that marketing was being planned, he did not accept that projections made in 1994 took no account of oversupply or the challenges involved in obtaining new markets on which the maintenance of price was dependent. 121 In re-examination Mr Clymont said he was aware that as at April 1994 tea-tree oil was being marketed into the United States and it was that on which he based his belief there was the potential to keep that going and to increase the sales. He testified to the sales of oil to 30 June 1994 being at $65 a kilo, in excess of the farm gate price of $56. An Agtrans report addressing new uses for tea-tree oil was referred to him and he agreed that Main Camp captured additional margins from selling primarily directly to manufacturers. He considered the statement by the Agricultural Consultant Mr Argent that Main Camp was able to maintain price levels up to 40 per cent above the ruling farmgate prices to be correct. Other Agtrans reports were put to him which evidenced a foundation for his views on marketing in the United States. 122 The contentions and evidence on these issues are said to be relevant to that portion of s 177D(b)(v) which requires attention to the financial position of the taxpayer that may reasonably be expected to result from the scheme. It is apparent that the applicant was subjectively influenced by the forecasts of return on investment in the Prospectus. The respondent contends he should have seen the lack of commerciality in the investment through analysis of the scheme. In particular it is said against the applicant that he should have seen the commercial opportunities of the scheme did not exist or were vastly overstated because of (1) errors in calculation, (2) the role of tax savings in the projections and (3) wrong assumptions concerning future price and inflation. Even if the applicant had appreciated factor (1), that does not have the outcome that it could be said the applicant could only have reasonably expected tax benefits from the scheme. This is because Mr Langridge's evidence supports the view that there would still have been a return of between 7.6 per cent to 8.91 per cent. As to factor (3), I agree with the submission by the applicant that at the time the applicant made his investment it could not reasonably have been expected that he would have discounted entirely the possibility of any price increase and that the rate of 5 per cent was a reasonable expectation in the circumstances. Were it relevant, these factors would support a finding that the subjective purpose of the applicant lay in the pursuit of commercial gain in the course of carrying on a business. 123 However, as to factor (2) Mr Langridge's evidence was that the Project relied upon the tax deductibility and effect of the initial payments and the gearing up provided by the loan to show any rate of return. In those circumstances it cannot be objectively found that the dominant purpose of the applicant's entry into the scheme was to enable the applicant to make a commercial investment: the tax benefit was the key to the commerciality of the investment. 124 Accordingly I consider that at the time of the applicant's entry into the scheme the objective fact was that the dominant purpose of such entry was to obtain the tax benefit. Without that benefit, the commerciality would have been very substantially endangered. In Cooke the projected returns were in excess of 20 per cent per annum from the first year. That is not the case here when the projected returns are considered in the light of the expert evidence. CHANGE IN THE FINANCIAL POSITION OF ANY PERSON WITH ANY CONNECTION TO THE TAXPAYER FROM THE SCHEME: s 177(b)(vi) 125 The applicant submits that the Manager stood to profit from the receipt of management and farm fees from him and other investors over the life of the Project. The Manager also stood to acquire a fully developed and profitable tea-tree plantation at the completion of the Project. The applicant also submits that the promoter's dominant purpose was to profit from the development, management and operation of the Project as in Vincent. 126 The respondent submits that the Project companies had a business connection with the applicant and that he was a participant in their project. Through the Project the Land Owner and Manager obtained funds for the development of the Project by giving investors access to tax savings which were paid to the Lender in return for a small share of the profits of the Main Camp plantation. 127 Given what was said in Sleight at [89] per Hill J with Hely J agreeing, the fact that the promoter companies made money out of the scheme is not to the point because they would hardly be entities having any real connection of a business nature with the applicant as that expression is used in paragraph (vi). 128 I consider this factor to be neutral. ANY OTHER CONSEQUENCE FOR THE TAXPAYER OR PERSON referred to in subparagraph (vi) FROM THE SCHEME: s 177d(b)(vii) and nature of ANY connection between taxpayer and any person referred to in subparagraph (vi): s 177d(b)(viii) 129 The applicant submits that these factors are not applicable and he is at arm's length from the Manager and all other project entities.. 130 The respondent submits that with regard to these factors it is significant that there are no other consequences to the participant owing to the effects of the tax benefits and the non-recourse loan, even the circumstances of the Project being terminated. 131 These factors are neutral. CONCLUSION ON THE APPLICATION OF PART iVA 132 I have weighed each of the above factors individually and cumulatively. In my view the manner in which the scheme was entered into and structured, the presence of round robin arrangements, the nature of its form in contrast with its substance, the timing of the entry into the scheme, the result in relation to the Act apart from Pt IVA, the change in the financial position of the applicant and the character of what he may reasonably now have been expected to have in mind at the time of entry, are all consistent with the applicant objectively being seen to have a dominant purpose of obtaining a tax benefit. Accordingly I consider the application by way of 'appeal' should be dismissed. I certify that the preceding one hundred and thirty-two (132) numbered paragraphs are a true copy of the Reasons for Judgment herein of the Honourable Justice Nicholson. Associate: Dated: 1 July 2005 Counsel for the Applicant: M McCusker QC and F Wilson Solicitor for the Applicant: Wilson & Atkinson Counsel for the Respondent: H Symon SC and LB Price Solicitor for the Respondent: Australian Government Solicitor Date of Hearing: 5, 6, 7 and 8 October 2004 Date of Judgment: 1 July 2005