FEDERAL COURT OF AUSTRALIA Drummond v Commissioner of Taxation [2005] FCA 1129 INCOME TAX - Appeal from Administrative Appeals Tribunal ('AAT') - where AAT affirmed Commissioner's decision to disallow deduction for expenditure allegedly incurred in managing tax affairs or complying with obligations imposed by Commonwealth law relating to tax affairs of an entity pursuant to s 25-5 of the Income Tax Assessment Act 1997 (Cth) - where expenditure the subject of claimed deduction purportedly for legal fees in consideration for tax advice - whether AAT ought to have conducted apportionment exercise in relation to fees deductible pursuant to s 25-5 and those fees outside the scope of that section when no evidence called on apportionment - appeal dismissed Administrative Appeals Tribunal Act (1975) (Cth) s 44 Fringe Benefits Tax Assessment Act 1986 (Cth) Income Tax Assessment Act 1936 (Cth) Income Tax Assessment Act 1997 (Cth) s 25-5 Superannuation Contributions Tax (Assessment and Collection) Act 1997 (Cth) Bartlett & Anor v Federal Commissioner of Taxation 2003 ATC 4962 applied Browne v Dunn (1893) 6 R 67 cited City Link Melbourne v Federal Commissioner of Taxation (2004) 211 ALR 207 applied Commissioner of Taxation v Glennan (1999) 90 FCR 538 applied Essenbourne Pty Ltd v Federal Commissioner of Taxation 2002 ATC 5201 cited Falcetta v Federal Commissioner of Taxation 2004 ATC 4514 applied Federal Commissioner of Taxation v Broken Hill Pty Co Ltd (2000) 179 ALR 593 applied Federal Commissioner of Taxation v Raptis (1989) 89 ATC 4994 cited Harris v Federal Commissioner of Taxation (2002) 125 FCR 46 cited Prebble v Federal Commissioner of Taxation (2003) 131 FCR 130 cited Re Ruddock (in his capacity as Minister for Immigration & Multicultural Affairs); Ex parte Applicant S154/2002 (2003) 201 ALR 437 cited Roads Corporation v Dacakis [1995] 2 VR 508 cited Ronpibon Tin NL v Federal Commissioner of Taxation (1949) 78 CLR 47 cited Tax Agents' Board of New South Wales v Martin (1997) 97 ATC 4192 cited Walstern Pty Ltd v Federal Commissioner of Taxation (2003) 138 FCR 1 cited PHILLIP DRUMMOND v COMMISSIONER OF TAXATION NSD 49 OF 2005 HELY J 16 AUGUST 2005 SYDNEY IN THE FEDERAL COURT OF AUSTRALIA NEW SOUTH WALES DISTRICT REGISTRY NSD 49 OF 2005 ON APPEAL FROM THE ADMINISTRATIVE APPEALS TRIBUNAL CONSTITUTED BY MR J BLOCK, DEPUTY PRESIDENT BETWEEN: PHILLIP DRUMMOND APPLICANT AND: COMMISSIONER OF TAXATION RESPONDENT JUDGE: HELY J DATE OF ORDER: 16 AUGUST 2005 WHERE MADE: SYDNEY THE COURT ORDERS THAT: 1. The appeal be dismissed with costs. Note: Settlement and entry of orders is dealt with in Order 36 of the Federal Court Rules. IN THE FEDERAL COURT OF AUSTRALIA NEW SOUTH WALES DISTRICT REGISTRY NSD 49 OF 2005 ON APPEAL FROM THE ADMINISTRATIVE APPEALS TRIBUNAL CONSTITUTED BY MR J BLOCK, DEPUTY PRESIDENT BETWEEN: PHILLIP DRUMMOND APPLICANT AND: COMMISSIONER OF TAXATION RESPONDENT JUDGE: HELY J DATE: 16 AUGUST 2005 PLACE: SYDNEY REASONS FOR JUDGMENT 1 In the taxpayer's income tax return for the year ended 30 June 1999 a deduction of $49,550 was claimed as 'Cost of managing tax affairs' under s 25-5 of the Income Tax Assessment Act 1997 ('the 1997 Act'). On 17 September 2003 the Commissioner issued a Notice of Amended Assessment which disallowed the deduction claimed. On 11 October 2003 the taxpayer lodged a Notice of Objection Against the Amended Assessment which was disallowed by the Commissioner, apparently on 5 December 2003. The taxpayer applied to the Administrative Appeals Tribunal ('the AAT') for a review of that objection decision, and on 16 December 2004 the AAT, constituted by Mr J Block, Deputy President, published its decision which affirmed the objection decision under review. The taxpayer appealed to this Court under s 44 of the Administrative Appeals Tribunal Act (1975) (Cth) ('the AAT Act') from the AAT's decision. The Chief Justice has determined pursuant to s 44(3)(b) of the AAT Act, that this appeal is appropriate for hearing by a single judge. Factual background 2 In December 1998 the taxpayer consulted Ms Dodd of Bentleys MRI, Chartered Accountants, who told him that if he was both an employee of a company and its controlling shareholder, he could make a contribution to a superannuation fund and claim a tax deduction for that contribution. She also told him that if the contribution was made to a non-complying superannuation fund then the amount of the contribution was unlimited. During the meeting Ms Dodd said that she could not provide advice to the taxpayer on the taxation consequences of making such a contribution to a non-complying superannuation fund, however, she knew of a solicitor, Mr Bonnell, who could provide this tax advice. Ms Dodd told the taxpayer that Mr Bonnell had obtained a ruling from the Australian Taxation Office that confirmed that the contribution to a non-complying superannuation fund was deductible, and that he had also obtained an opinion from Queens Counsel that confirmed that the contribution to such a superannuation fund was deductible. Ms Dodd told the taxpayer that Mr Bonnell would charge him at 10 per cent of the contribution to the superannuation fund. 3 In February 1999 the taxpayer had a further meeting with Ms Dodd. During that meeting they discussed the practicalities of setting up companies and a superannuation fund, so that the taxpayer could make a contribution to a non-complying superannuation fund. The taxpayer instructed Ms Dodd to set up a company for him to act as his employer and trustee of his superannuation fund. The taxpayer also instructed Ms Dodd to set up a unit trust that would be the investment vehicle for his superannuation fund. He paid Bentleys MRI approximately $2,500 for the costs of setting up the company and the unit trust. 4 At this meeting Ms Dodd showed the taxpayer a copy of the ruling which Mr Bonnell had received from the Australian Taxation Office, and he read that ruling. She also told him that Mr Bonnell would set up the superannuation fund and that he would charge the taxpayer $450 to set up the superannuation fund. The balance of the 10 per cent fee would be paid by the taxpayer for the tax advice given by Mr Bonnell. 5 It appears that the company which Ms Dodd 'set up' for the taxpayer to act as his employer and trustee of his superannuation fund was P. Drummond Pty Ltd. According to accounts prepared by Bentleys MRI as at 30 June 1999, P. Drummond Pty Ltd was incorporated on 3 March 1999 and the Drummond Investments Unit Trust was established on 3 March 1999. P. Drummond Pty Ltd is described in the compilation report to those accounts as trustee for the Drummond Investments Unit Trust but in an undated agreement that appears to speak as about this time, 'Phil Drummond' is referred to as the trustee. In par 22 of the AAT's reasons for decision it referred to the taxpayer as being the trustee of the Unit Trust. 6 On 22 March 1999, and without any prior meeting or telephone attendance with Mr Bonnell, the taxpayer received a folder from Mr Bonnell which contained the following: (a) a letter dated 22 March 1999 from David Bonnell & Associates to the taxpayer ('the costs letter'); (b) a letter dated 22 March 1999 from David Bonnell & Associates to the taxpayer ('the advice letter'); (c) a pro-forma trust deed and rules for the fund dated 22 March 1999; (d) pro-forma minutes to establish the fund and admit Phil Drummond to membership of that fund dated 22 March 1999; (e) two invoices from David Bonnell & Associates, each dated 22 March 1999; (f) a pro-forma loan facility agreement ('the loan agreement') between Karen Drummond (the wife of the taxpayer) and the taxpayer as trustee for the Drummond Investment Unit Trust; and (g) a pro-forma deed of contribution for the superannuation fund. 7 On or about 24 March 1999: (a) the loan agreement was executed; (b) the deed of contribution was executed; (c) at a meeting of directors of P. Drummond Pty Ltd it was resolved that the company as trustee of the fund accept a contribution from Phil Drummond in the form of a promissory note payable by Phil Drummond on demand in the sum of $500,000; (d) the taxpayer signed a promissory note promising to pay on demand to P. Drummond Pty Ltd as trustee for the P. Drummond Superannuation Fund or order the sum of $500,000 (with interest); (e) the trustee of the Fund then endorsed the promissory note in favour of the Drummond Investment Unit Trust by way of subscription for 500,000 $1 'C' class units in the Unit Trust; and (f) the Drummond Investment Unit Trust then endorsed the promissory note in favour of Mrs Drummond by way of a loan of $500,000 to her pursuant to the loan agreement. 8 The net effect of these transactions was that the taxpayer was treated as having made a contribution of $500,000 to the superannuation fund, which the superannuation fund applied in taking up 500,000 $1 'C' class units in the Drummond Investment Unit Trust which that Trust on-lent to Mrs Drummond. I was informed by counsel that the taxpayer later abandoned any claim to a tax deduction in respect of his contribution to the fund in the light of the decisions of the Full Court in Harris v Federal Commissioner of Taxation (2002) 125 FCR 46 and Prebble v Federal Commissioner of Taxation (2003) 131 FCR 30. Thus the Notice of Objection was confined to a claim for the allowance of a deduction pursuant to s 25-5 of the 1997 Act for legal fees allegedly for tax advice in relation to the taxation consequences of making the contribution to the fund. The costs letter and the invoices 9 The costs letter sets out the terms of the engagement of Mr Bonnell as the taxpayer's solicitor. It describes the nature of the work to be undertaken by Mr Bonnell and the charges to be made by him for that work as follows: 'Work to be carried out The work that you have instructed us to carry out on your behalf involves establishing an investment and contribution plan includingpreparation of a superannuation trust deed and associated minutes and other additional services required to implement the contribution plan. (emphasis added) … Our Charges As agreed, our costs in this matter is 10 percent (10%) of the amount of your contribution. All and any future contributions undertaken directly or indirectly in accordance with our advice, procedures and documentation at any future time will be required to be implemented through David Bonnell & Associates on the same terms and conditions including a fee structure of 10 percent (10%) of the contribution. I will provide two invoices. The first invoice will be for $450.00, our usual costs for providing basic superannuation plan documentation and this will not be deductible. The balance of our fee will be charged for tax advice and will be wholly deductible.' (emphasis added) 10 The two invoices issued by David Bonnell & Associates to the taxpayer are as follows: ' ACCOUNT THE P. DRUMMOND SUPERANNUATION FUND TO Our costs for establishing the P. Drummond Superannuation Fund $450 ____ TOTAL $450 ACCOUNT TAX ADVICE TO Our costs for tax advice $49,550.00 _________ TOTAL $49,550.00' 11 There was some evidence that $450 was a standard charge for provision for a superannuation fund deed. The AAT regarded this as being of limited relevance because the evidence was that Mr Bonnell prepared much more than the superannuation fund deed. 12 The AAT noted that under the heading 'Work to be carried out' in the costs letter, there was no reference to tax advice. The work to be done was described as 'establishing an investment and contribution plan', including work to be done to 'implement the contribution plan'. The fee was a straight 10 per cent of the amount of the contribution – the fee was not calculated on a time basis. The advice letter 13 The AAT found that the advice letter did not contain any tax advice referable to the taxpayer. No other communication was put forward by the taxpayer as the provision of 'tax advice'. The AAT found that all the advice letter contained was: (a) a report on the 'questions of law on which the Commissioner has given a ruling' to Mr Bonnell in his personal capacity as a taxpayer; (b) a 'summary of the opinion' provided by F L Harrison QC and M L Robertson of counsel in relation to the application of Part IVA to the arrangement the subject of the ruling; and (c) some observations regarding the nature of a superannuation fund. Although the letter is addressed to the taxpayer and is described as providing him with a letter of advice as to the taxation consequences of making a contribution to a non-complying superannuation fund there is no reference to the transactions entered into two days afterwards under which the $500,000 contribution was effected by a promissory note. 14 The AAT found that if, contrary to its preferred position, the advice letter did contain some advice regarding the tax consequences of the arrangement which the taxpayer was to enter into, that advice was negligible. The AAT found that in reality, what the fee was paid for was the establishment of a superannuation fund as indicated by the description of the 'work to be carried out' in the engagement letter. 15 The AAT also found that a significant part of the advice letter related to the Superannuation Contributions Tax (Assessment and Collection) Act 1997 and the Fringe Benefits Tax Assessment Act 1986 (approximately five pages out of a total of a little over ten pages). The definition of 'tax' under the 1997 Act as in force at the relevant time was such that matters falling under these Commonwealth laws could not be 'tax affairs' for the purposes of s 25-5(1)(b) of the 1997 Act. Insofar as the fee of $49,550 related to advice given to the taxpayer in connection with those laws, the payment was not within s 25-5(1)(b). Apportionment 16 The AAT's factual conclusions were that the consideration was not paid for tax advice, or if some part of the consideration was for tax advice, the taxpayer did not establish the part which was so attributable. The AAT found, as a fact, that Mr Bonnell not only prepared the deed for the Superannuation Fund, but also the Deed of Contribution, the promissory note, the loan agreement and various minutes. Some part of the relevant amount must have been paid for those services. But, in the AAT's view, there was no evidence of any kind which would permit the AAT to apportion the fee as between those services and other services which might conceivably fall within s 25-5 of the 1997 Act. 17 No evidence as to an apportionment was called even though significant parts of the advice letter related to Commonwealth laws outside the scope of the 'tax affairs' of the taxpayer as another entity. The AAT's conclusions 18 The AAT noted that the Commissioner did not contend that Part IVA of the Income Tax Assessment Act 1936 (Cth) ('the 1936 Act') applied, or that the scheme in question was a sham. 19 The AAT summarised its conclusions as follows: (a) the consideration was not paid for tax advice; (b) if it could be said that some part of the consideration was for tax advice it was incumbent on the taxpayer to establish the part attributable; he did not do so, and thus did not discharge the onus on him; (c) s 25-5(1)(b) of the 1997 Act was not relevant in respect of a structure which will come into place in consequence of the relevant services; moreover that subsection was not relevant because the definition of 'tax' then relevant did not extend to superannuation contributions tax or to fringe benefits tax; and (d) furthermore the expenditure was on capital account and the second sentence contained in s 25-5(4) of the 1997 Act did not assist the taxpayer. The legislation The 1936 Act 20 Before 1 July 1989, s 69 of the 1936 Act gave taxpayers a deduction for the cost of fees incurred in relation to the preparation of their income tax returns. The section was amended with effect from that date to provide that expenditure (other than expenditure of a capital nature) to the extent to which the expenditure was in respect of a tax-related matter, was an allowable deduction for the year of income in which the expenditure is incurred. A tax-related matter was defined in s 69(2) as referring to: '(a) the management or administration of income tax affairs of the taxpayer; or (b) compliance with an obligation imposed on the taxpayer by a law of the Commonwealth, insofar as that obligation relates to the income tax affairs of another taxpayer;' other than an offence-related matter (as defined). Section 69(3) provided that expenditure incurred by the taxpayer in respect of a tax-related matter was not to be taken to be expenditure of a capital nature only because the income tax affairs concerned relate to matters of a capital nature. Fees for professional advice were deductible under s 69(1) only if the advice was given by a recognised professional tax adviser: s 69(4). 21 The Explanatory Memorandum for the Bill which became Act No 20 of 1990 and which substituted the new s 69 included the following: 'By paragraph (a) of new subsection (2) expenditure for which a deduction will be allowable under subsection (1) will be expenditure incurred by a taxpayer in meeting obligations imposed on the taxpayer by Australian income tax laws. Allowable expenditure will include costs associated with the preparation of an income tax return, in disputing an assessment or determination of the Commissioner of Taxation (e.g., Administrative Appeals Tribunal filing fees), attending to an Tax Office audit and tax planning. Another example of tax-related expenditure covered by paragraph (a) are costs incurred by a taxpayer, who is seeking an extension of time to pay an outstanding tax debt, for the preparation of financial statements that demonstrate that the taxpayer is unable to pay the debt on time.' (emphasis added) '… New subsection 69(3) provides that, for the purposes of section 69, expenditure that is incurred by a taxpayer in relation to a tax-related matter will not be taken to be expenditure of a capital nature only because the income tax affairs to which the expenditure relates are of a capital nature. Subsection 69(1) (refer to the earlier notes on that subsection) does not allow a deduction for tax-related expenditure that is of a capital nature. But for proposed subsection 69(3), a taxpayer would not be entitled to a deduction for fees for professional advice concerning the application of the capital gains tax provisions of the Principal Act in relation to an asset held by the taxpayer, or the cost of disputing whether expenditure associated with the establishment of a new business is an allowable deduction.' 22 In par 46 of the AAT's decision, after referring to the paragraphs in the Explanatory Memorandum quoted above, it is stated: 'The explanatory memorandum then indicates that a deduction will be allowed in respect of capital expenditure, but only where the advice relates to the then existing affairs of a taxpayer.' However, counsel were not able to refer me to anything in the Explanatory Memorandum to that effect. Section 25-5 of the 1997 Act 23 Section 25-5 provides relevantly as follows: '(1) You can deduct expenditure you incur to the extent that it is for: (a) managing your *tax affairs; or (b) complying with an obligation imposed on you by a *Commonwealth law, insofar as that obligation relates to the *tax affairs of an entity; … (2) You cannot deduct under subsection (1): … (e) a fee or commission for advice about the operation of a Commonwealth law relating to taxation, unless that advice is provided by a recognised tax adviser. (3) You cannot deduct expenditure under subsection (1) to the extent that a provision of this Act (except section 8-1) expressly prevents or limits your deducting it under section 8-1 (about general deductions). It does not matter whether the provision specifically refers to section 8-1. (4) You cannot deduct capital expenditure under subsection (1). However, for this purpose, expenditure is not capital expenditure merely because the tax affairs concerned relate to matter of a capital nature. Example: Under this section, you can deduct expenditure you incur in applying for a private ruling on whether you can depreciate an item of property. …' 24 The presence of an asterisk appearing at the start of a term in s 25-5(1) indicates that it is a defined term: see s 2-10 of the 1997 Act. During the year ended 30 June 1999 the expression 'tax affairs' was not defined in the 1997 Act but the term 'tax' was defined in s 995-1 of the 1997 Act namely: 'tax means (a) income tax imposed by the Income Tax Act 1986, as assessed under this Act; or (b) income tax imposed as such by any other Act, as assessed under this Act.' The expression 'this Act' is defined in s 995-1 to include the Income Tax Assessment Act 1936 and hence 'tax' extended to income tax assessed under the 1936 Act. 25 The only reported decision concerning s 25-5 is Bartlett & Anor v Federal Commissioner of Taxation 2003 ATC 4962 ('Bartlett'), affirmed on appeal: Falcetta v Federal Commissioner of Taxation 2004 ATC 4514 ('Falcetta'). 26 In Falcetta the Full Court endorsed the views expressed by Hill J in Bartlett that s 25-5 of the 1997 Act is an expression in slightly different language of what had been enacted by s 69 of the 1936 Act. The expression 'tax affairs' as used in s 69 of the 1936 Act should not be limited to the income tax affairs of a taxpayer in the strict sense of the tax which is the subject of assessment under s 166 of the 1936 Act. The Full Court also held (at [32]) that the items listed in s 25-5(1) in respect of which a deduction may be claimed in the event they constitute expenditure incurred by the taxpayer are not limited to advice and extend to management and compliance. It is not only expenditure in relation to 'advice' that may come within the provisions of s 25-5(1). The taxpayer's submissions 27 The taxpayer attacks in his written submissions the following findings made by the AAT as being legally erroneous: (a) that the amount of $49,550 was not paid for tax advice; (b) that the amount of $49,550 was not paid wholly for tax advice; (c) that the expenditure of $49,550 was incurred, in part, in relation to advice about legal matters other than 'tax affairs'; (d) that s 25-5(1)(b) of the 1997 Act was not applicable; and (e) that the expenditure of $49,550 was 'capital expenditure' which was not deductible pursuant to s 25-5(4). 28 Those findings, or at least those referred to in (a) and (b) above are findings of fact. However, the taxpayer submits that there was no evidence to support those conclusions, which were conclusions to which no reasonable person could have arrived. Reliance was placed on the following statement by Gummow J in Federal Commissioner of Taxation v Raptis (1989) 89 ATC 4994 at 4996: '… the Tribunal will have made an error of law if there was no evidence to support a conclusion of fact, if the only true conclusion which the Tribunal, properly instructed as to law, could have reached is contrary to that it did reach, or if its decision otherwise was perverse.' (citations omitted) 29 It was common ground before the AAT that the sum of $450 paid to Mr Bonnell for establishing the P. Drummond Superannuation Fund was not deductible under s 25-5 of the 1997 Act. Counsel for the taxpayer accepted in his submissions that a legal fee incurred in respect of the implementation of a transaction is not within the expression 'expenditure … for managing your tax affairs', even if as a result of the implementation of the transaction what would otherwise be the taxpayer's taxation liability is reduced. However, it was contended that the position is otherwise if the legal fee is for the provision of advice from a recognised tax adviser (which Mr Bonnell was) about the tax consequences of entering into such a transaction, as s 25-5(2)(e) of the 1997 Act expressly recognises. After all, the explanatory memorandum described expenditure on 'tax planning' as being within the section. 30 I did not understand counsel for the Commissioner to dispute this contention in principle. Rather, he submitted that on the facts of this case, as the AAT found, the fee of $49,550 was paid for an end product – to 'buy into' the scheme – rather than for managing the taxpayer's tax affairs or complying with any relevant tax obligation. 31 The taxpayer's case before the AAT was based on the simple proposition that if it could be shown that the advice letter contained advice concerning taxation, it followed that the sum of $49,550 was deductible under s 25-5 because that was the agreed fee for provision of tax advice. 32 Whether the AAT erred in its finding that the fee of $49,550 was not paid for tax advice, and if so whether that error has the result that there is a question of law on which an appeal lies to this Court, are questions of some difficulty and it is convenient to consider first, as counsel for the respondent did in his submissions, questions of apportionment on the assumption that at least some part of the fee related to the provision of tax advice because the result of that consideration is sufficient to require the dismissal of the appeal. Problems with apportionment First aspect 33 The taxpayer's case before the AAT was conducted on an 'all or nothing' basis, as it was submitted that the expenditure of $49,550 was wholly permitted expenditure under s 25-5(1)(a) and (b), and there was no basis for apportionment. The taxpayer's case was that the $49,550 did not serve multiple purposes, and that the apportionment issues with which Hill J grappled in Bartlett did not arise in the present case. As earlier noted, the Deputy President recorded that the taxpayer did not make any attempt to establish that there was some part of the sum of $49,550 which could constitute a charge for managing the taxpayer's tax affairs if the entire sum did not satisfy that description. 34 None of the grounds in the Notice of Appeal to this Court complain of any error on the part of the AAT in failing to undertake an apportionment exercise. There is no reference in the Notice of Appeal to the apportionment issue at all. But in the course of oral submissions, the taxpayer's counsel complained of a failure on the part of the AAT to 'roll up its sleeves', as Hill J had done in Bartlett, and conduct an apportionment exercise, even though nobody asked it to do so, or provided any evidence which would enable such an exercise to be undertaken. It was not for the AAT to make out the taxpayer's case. As a general rule there is no error of law if the AAT fails to address issues of fact and law not the subject of argument before the Tribunal: Commissioner of Taxation v Glennan (1999) 90 FCR 538 at [82]. 35 In order to understand why the taxpayer's counsel changed tack in his oral submissions, it is necessary to return to the advice letter in some greater detail. The letter recorded a ruling which the Commissioner had given to Mr Bonnell in another matter on five questions. Those questions, and the Commissioner's response are as follows: '1. Will the contribution to the Fund be deductible to the taxpayer under s 82AAE of the Income Tax Assessment Act 1936? Yes, a contribution to a non-complying superannuation fund made by the taxpayer having a controlling interest in a private company will be deductible to that taxpayer under s.82AAE of the Income Tax Assessment Act, 1936. 2. Will the contribution be assessable to tax in the hands of the Fund? No, a contribution made within the circumstances outlined in question 1 will not be assessable to tax in the hands of the non-complying superannuation fund as a taxable contribution under paragraph 274(1)(a) of the Income Tax Assessment Act, 1936 or any other provision of the Income Tax Assessment Act 1936 or the Income Tax Assessment Act, 1997. Note that the potential application of Part IVA has not been considered. 3. Will the contribution be a surchargeable contribution under section 8 of the Superannuation Contributions Tax (Assessment and Collection) Act 1997 and if so would it be subject to tax under that Act? No, a contribution made within the circumstances outlined in question 1 will not be a surchargeable contribution under section 8 of the Superannuation Contributions Tax (Assessment and Collection) Act 1997. 4. Will a contribution made within the circumstances outlined in Question 1 be a fringe benefit under the Fringe Benefits Tax Assessment Act, 1986? Yes, a contribution made within the circumstances outlined in question 1 will give rise to a fringe benefit under the Fringe Benefits Tax Assessment Act, 1986. 5. Will a contribution outlined in Question 1, assuming that it is an external period residual fringe benefit under s 51 of the Fringe Benefits Tax Assessment Act 1986, have a taxable value of nil since the value of the recipients contribution will offset the value of the recipients current benefit? Yes, the fringe benefits arising from a contribution made within the circumstances outlined in question 1 will have a taxable value of nil.' 36 The letter then went on to state the reasons for those answers, and concluded with a consideration of the potential operation of Part IVA and some general observations as to the nature of a superannuation fund. 37 The taxpayer contended that the 'advice' contained in the advice letter concerning the Superannuation Contributions Tax (Assessment and Collection) Act and the Fringe Benefits Assessment Act (ie questions 3, 4 and 5) fell within s 25-5(1)(b) of the 1997 Act because the taxpayer was the public officer of P. Drummond Pty Ltd. However, the AAT held that the definition of 'tax' in the form which it stood at the relevant time was such that matters arising under those Commonwealth laws could not be 'tax affairs' for the purposes of s 25-5(1)(b) of the 1997 Act, and insofar as the fee of $49,550 related to advice given to the taxpayer in respect of those Commonwealth laws, the payment was not within s 25-5(1)(b). 38 Although the taxpayer's written submissions challenged that finding (see in particular par 27(c) above), the challenge was withdrawn in oral submissions. The taxpayer ultimately accepted that the AAT's decision in this respect was correct. The taxpayer accepted that it was and is necessary for the AAT to effect an apportionment of the amount of $49,550 because the fee paid included advice on matters outside the scope of the taxpayer's 'tax affairs' or the 'tax affairs' of an entity. That concession is contrary to the way in which the taxpayer conducted his case before the AAT, and initially in this Court, and as earlier noted, no evidence was called on apportionment. 39 Counsel for the taxpayer submitted that it was 'understandable' that no submissions were put, or evidence called, on the issue of apportionment by reason of the advice letter relating to matters outside the scope of relevant 'tax affairs', because this particular point did not emerge until the respondent filed submissions on 13 December 2004, after the conclusion of the hearing on 6 December 2004. 40 The respondent's written outline of submissions handed to the AAT on 6 December 2004 make the point (in par 32) that if the advice letter contained tax advice, it was not limited to advice falling within s 25-5(1)(a) or (b). The point was also made (in par 30) that there was no evidence which would permit the AAT to apportion the fee between services within s 25-5, and those which are outside the scope of the section. The respondent's submissions given to the AAT on 13 December 2004, by leave, contain some further elaboration on this point which was accepted by the AAT. No objection was raised to the lodging of these submissions in response to further submissions lodged by the taxpayer on 9 December 2004, nor was any application made to adduce further evidence. The taxpayer simply persisted in the course which he had chartered of not calling evidence on apportionment. 41 In these circumstances, it would be entirely inappropriate for the matter to be remitted to the AAT to undertake an apportionment exercise, when the proceedings before the AAT were conducted by the taxpayer upon the basis that no apportionment was necessary, and when the AAT did not commit any error in not addressing that question beyond noting that the taxpayer did not make any attempt to establish facts which would enable an apportionment to occur. Second aspect 42 The AAT found that in addition to preparing the deed for the Superannuation Fund, Mr Bonnell also prepared the Deed of Contribution, the promissory note and various minutes. The taxpayer accepts that this is so. The AAT went on to hold that some part of the $49,550 must have been paid for those services, which are outside the scope of s 25-5 of the 1997 Act, but there was no evidence of any kind before the AAT which would permit it to apportion the fee. 43 The taxpayer contends that there was no evidence before the AAT to support its finding that some part of the relevant amount must have been paid for those services, and that its factual finding in that respect was not open to it on the unchallenged evidence. 44 The AAT found that $450 is a standard charge for the provision of a Superannuation Fund Deed. But Mr Bonnell prepared much more than that. These findings were open to the AAT. It was open to the AAT to infer that Mr Bonnell was paid for all of the services which he provided to the taxpayer, hence unless the fee for the preparation of these additional documents was included in the $450 (which the AAT found it was not), some part of the $49,550 was referable to the provision of those services. 45 The label ('tax advice') utilised by Mr Bonnell to describe the payment is not conclusive: Federal Commissioner of Taxation v Broken Hill Pty Co Ltd (2001) 179 ALR 593 at [36]. Hence no error of law has been shown in the AAT's conclusion that some part of the fee must have been referable to the additional work. The absence of an allegation of 'sham' did not preclude the AAT from coming to the conclusion which it did. The AAT was entitled to have regard to the factual matrix in order to determine what the payment was for: City Link Melbourne v Federal Commissioner of Taxation (2004) 211 ALR 207 at [46]. Consequence of apportionment problems 46 The onus is upon the taxpayer to show that the assessment under appeal is excessive, and the extent to which it is excessive: Bartlett at [70]. As part of the $49,550 is now conceded as being referable to advice on questions outside the scope of s 25-5 of the 1997 Act, and as at least part of that sum was unimpeachably found by the AAT to be outside the scope of the section, the failure of the taxpayer to adduce evidence as to apportionment (which would involve the making of findings of fact: Ronpibon Tin NL v Federal Commissioner of Taxation (1949) 78 CLR 47 at 60) leads to the conclusion that the appeal should be dismissed, whatever view may be taken as to the other questions. Nonetheless it is desirable that I should address them. The AAT's finding that the amount of $49,550 was not paid for tax advice 47 The taxpayer's written submissions asserted that the proposition that the advice letter contained no tax advice relating to his own circumstances was not put to him in cross-examination, contrary to the rule in Browne v Dunn (1893) 6 R 67. In oral submissions this point was not pressed in the light of the decision of the High Court in Re Ruddock (in his capacity as Minister for Immigration & Multicultural Affairs); Ex parte Applicant S154/2002 (2003) 201 ALR 437 at [55] et seq which suggests that the rule in Browne v Dunn (supra) has no application to inquisitorial proceedings, although there may be room for doubt as to whether proceedings in the AAT bear that character: Tax Agents' Board of New South Wales v Martin (1997) ATC 4192 at 4200. 48 Instead it was submitted that failure to put this matter to the taxpayer resulted in a denial of natural justice although any unfairness resulting from the failure to put this question was not identified. It was put to the taxpayer in cross-examination, and he agreed, that he understood that the ruling referred to in the advice letter was a private ruling which Mr Bonnell had obtained about his own tax affairs, and that there was no other document which he received from Mr Bonnell which contains any tax advice. 49 The character of the advice letter is to be determined by a consideration of its terms. The taxpayer's opinion as to whether the advice letter contained advice relating to his own circumstances is irrelevant. No unfairness has been shown to arise from the failure on the part of counsel for the Commissioner to put an irrelevant question to the taxpayer in cross-examination. It was always part of the Commissioner's case that the advice letter related to Mr Bonnell's affairs, rather than to those of the taxpayer. 50 Then it was said that the AAT's finding in this respect was perverse having regard to the uncontradicted evidence. It was submitted that no other conclusion could be drawn from that evidence than that the advice letter was given to the taxpayer for the purpose of providing him with taxation advice relevant to his own circumstances. 51 But it must be remembered that the issue which the AAT had to determine was whether the expenditure of $49,550 was for managing the taxpayer's tax affairs, or complying with an obligation imposed by a Commonwealth law in relation to the tax affairs relating to an entity. The AAT was thus required to determine what the fee was for. If the fee was paid to establish and implement a superannuation fund and contribution plan – a capital structure – then either it would be outside the scope of s 25-5 of the 1997 Act as not involving management of the taxpayer's tax affairs, or it would be within the exclusion established by s 25-5(4) as an enduring advantage is secured for the taxpayer by a once and for all payment. However, if and insofar as the fee was charged for advice from a recognised tax adviser as to the operation of Commonwealth tax laws in relation to such a structure, the s 25-5 deduction would be available. 52 The costs letter stated that the work to be carried out was the establishment of an investment and contribution plan, and that is the work which Mr Bonnell in fact performed for the taxpayer. The taxpayer's uncontradicted evidence was, however, that he instructed Mr Bonnell both to set up the fund, and to provide advice as to the taxation consequences of making a contribution to a non-complying fund. The costs letter referred to the fee being charged for tax advice. It would be irrational to assume that the taxpayer would have gone ahead with the establishment of the superannuation fund and contribution plan had he not received advice as to its tax effectiveness. 53 The advice letter addresses that question, although it may be thought that it does so in an incomplete or unsatisfactory way, as it substantially reproduces a ruling and advices given to Mr Bonnell in relation to his own affairs, rather than being tailored to the taxpayer's circumstances where the 'contribution' is provided by a promissory note in association with near circular, and non arms-length transactions. 54 Nonetheless I accept the taxpayer's submission that the AAT erred in concluding that no tax advice was provided by Mr Bonnell to the taxpayer, as all of the evidence points to the fact that Mr Bonnell advised the taxpayer that if he implemented the structure which Mr Bonnell had devised and established for him, then he would be entitled to a deduction for his 'contribution'. However imperfectly, the advice letter confirmed that this was so. 55 An appeal only lies to this Court from a decision of the AAT on a question of law. There is no error of law merely in making a wrong finding of fact. The AAT drew an inference from the undisputed facts as to the terms of Mr Bonnell's retainer and the contents of the advice letter that Mr Bonnell did not provide tax advice for the taxpayer. An inference will be open to challenge as being erroneous in law if it is not reasonably open on the facts: Roads Corporation v Dacakis [1995] 2 VR 508 at 520. 56 The inference which the AAT drew as to the absence of any legal advice for the taxpayer is one which was not reasonably open on the uncontested primary facts, hence the AAT's finding in this respect involved an error of law. 57 But this conclusion does not avail the taxpayer, because although it may have been open to the taxpayer to show that part of the $49,550 was referable to the management of his tax affairs, he did not seek to do so. The AAT's finding that the amount of $49,550 was not paid wholly for tax advice 58 This issue has been addressed above. In [32] of its reasons the AAT correctly asked itself what the fee of $49,550 was for. Whilst I disagree with the AAT's conclusion that the advice letter did not contain any tax advice referable to the taxpayer, it was open to the AAT to find that the allocation of all except $450 of the commission was to enable the taxpayer a deduction for a fee which at least included the cost of establishment of the investment and contribution plan which was not deductible. The AAT's finding that the expenditure of $49,550 was incurred, in part, in relation to advice about legal matters other than 'tax affairs' 59 Ultimately, counsel for the taxpayer accepted that the AAT correctly found that the advice letter addressed legal matters other than 'tax affairs' and that apportionment was and is required. If, notwithstanding that concession, there is intended to be a residual submission that, from a practical business point of view, the $49,550 was solely referable to the obtaining of advice as to the deductibility of the taxpayer's contribution to the Superannuation Fund, that submission should be rejected. From a practical and business point of view the $49,550 was expended in order to obtain all of the services which Mr Bonnell provided to the taxpayer other than the drafting of the Superannuation Trust Deed. The AAT's finding that s 25-5(1)(b) of the 1997 Act was not applicable 60 Question 2 in the advice letter sought advice as to whether the contribution will be taxable in the hands of the Superannuation Fund. The taxpayer was the public officer of P. Drummond Pty Ltd which was the trustee of the Fund. 61 The AAT correctly found that questions 3, 4 and 5 of the advice letter addressed a number of potential obligations arising under other Commonwealth laws in relation to the Superannuation Fund which were outside the scope of 'tax affairs'. But question 2 did relate to the tax affairs of P. Drummond Pty Ltd and the Superannuation Fund. Thus a case could have been put to the AAT that part of the $49,550 fee was apportionable to advice relating to the tax affairs of P. Drummond Pty Ltd and the Superannuation Fund, and was deductible under s 25-5(1)(b) of the 1997 Act, provided the AAT was satisfied that the relevant expenditure was incurred by the taxpayer in complying with an obligation imposed on him in relation to the tax affairs of the Superannuation Fund. 62 The Superannuation Fund was established on 22 or 24 March 1999. The advice letter was given to the taxpayer on 22 March 1999. By 24 March 1999 the taxpayer was the public officer of P. Drummond Pty Ltd, but there was no evidence that he held that position at the time of the advice letter, nor any reference in the advice letter to any obligations which the taxpayer might have in that capacity. The AAT dealt with s 25-5(1)(b) of the 1997 Act in par 47 of its reasons as follows: '47. Mr Catt contended at some length that there was room for an argument as to the application of section 25-5(1)(b) of the 1997 Act; he referred in particular to the fact that under this sub-paragraph a deduction is available in respect of compliance with an obligation imposed on a taxpayer in so far as that obligation relates to the tax affairs of an entity. Mr Catt argued in particular that the Taxpayer is the public officer of the Drummond Company and as such would be obliged to ensure that the Drummond Company complies with its taxation obligations. It must be remembered that the Superannuation Fund, the Unit Trust, and the Drummond Company came into existence in order to implement the scheme. In my view the subclause is couched in terms which clearly relate to the ongoing or current affairs of an existing entity but not to an entity which will be brought into existence thereafter. There are however more cogent reasons why the subsection does not apply in this case; they are set out in clause 48 below.' (emphasis added) In par 48 of its reasons, the AAT dealt with and rejected the claim that the advice letter, insofar as it related to the Superannuation Contributions Tax (Assessment and Collections) Act 1997 (Cth) and the Fringe Benefits Tax Assessment Act 1986 (Cth), fell within s 25-5(1)(b), but the rejection of that claim had no bearing on the advice given in response to question 2. In Bartlett at [81] Hill J said: '… Advice on how a new company should comply with its tax obligations (whether income tax as such or group tax or prescribed payments deductions) would likewise be deductible …' It is unclear what the AAT was intending to convey in the sentence emphasised above. Nothing was put before the AAT to show that any part of the expenditure was for complying with any obligations imposed on the taxpayer as public officer beyond the bare fact that at some point in time he held that position. 63 It is unnecessary to pursue this question further, because on no view of the matter could a resolution of the question in the taxpayer's favour sustain a deduction of $49,550. The AAT's finding that the expenditure of $49,550 was 'capital expenditure' which was not deductible pursuant to s 25-5(4) 64 If the sum of $49,550 was expended in its entirety for establishing the 'structure' of the investment and contribution plan then the expenditure would not be for the management of the taxpayer's tax affairs, and would in any event be capital expenditure, and thus not deductible under s 25-5(4): see Essenbourne Pty Ltd v Federal Commissioner of Taxation 2002 ATC 5201 at [34] and [35]; Walstern Pty Ltd v Federal Commissioner of Taxation (2003) 138 FCR 1 at [76] – [80]. 65 It is clear from [43] of the AAT's reasons that its characterisation of the expenditure as being 'for' the establishment of a superannuation fund was the foundation for its conclusion that the expenditure was of a capital nature. 66 The AAT said, in relation to s 25-5(4): '46. The explanatory memorandum then indicates that a deduction will be allowed in respect of capital expenditure but only where the advice relates to the then existing affairs of a taxpayer. In this case, of course, we are concerned with something entirely new and so that the "merely" proviso cannot apply.' 67 I am, with respect, unclear as to what the AAT was intending to convey by this paragraph. Having regard to its finding that the fee was paid for the establishment of the fund, the AAT did not deal with the question whether a fee paid for advice as to the taxation consequences of establishing such a fund would be capital expenditure, and it does seem that expenditure of that type would fall within s 25-5(4). But again it is unnecessary to pursue this question further, because even if I am correct in my conclusion that the commission charge was partly referable to tax advice, the taxpayer did not lay the evidentiary foundation for an apportionment. Conclusion 68 The appeal should be dismissed with costs. I certify that the preceding sixty-eight (68) numbered paragraphs are a true copy of the Reasons for Judgment herein of the Honourable Justice Hely. Associate: Dated: 16 August 2005 Counsel for the Applicant: Mr B Sullivan SC, Mr C Catt Solicitor for the Applicant: Bonnell Rowntree Counsel for the Respondent: Mr J de Wijn QC, Mr M Richmond Solicitor for the Respondent: Australian Government Solicitor Date of Hearing: 15 June 2005 Date of Judgment: 16 August 2005