FEDERAL COURT OF AUSTRALIA Healey v Commissioner of Taxation [2012] FCA 269 Citation: Healey v Commissioner of Taxation [2012] FCA 269 Parties: CARINA HEALEY v THE COMMISSIONER OF TAXATION OF THE COMMONWEALTH OF AUSTRALIA File number: WAD 188 of 2010 Judge: MCKERRACHER J Date of judgment: 23 March 2012 Catchwords: INCOME TAX – appeal from income tax assessment and administrative penalty for failure to lodge tax returns – applicant a beneficiary of a discretionary trust – assessment of share transactions concerning trustee of beneficiary trust and whether there was a capital gain – determination of relevant capital gains tax event – assessment of cost base of shares – whether parties dealt at arm's length in share acquisition – insufficient evidence adduced by applicant to support contention that parties did not deal at arm's length – whether fair and reasonable for administrative penalty to be remitted – whether fair and reasonable to remit administrative penalty due to history of late and non-lodgement history and public interest grounds STATUTORY INTERPRETATION – provision defining when capital gains tax event occurs – whether the term 'transfer' includes a conveyance by way of sale or confined to a conveyance by way of gift or settlement – consideration of usage of term throughout capital gains tax provisions and at common law – 'transfer' held to be construed broadly so as to include a conveyance by way of sale Words & phrases: 'transfer' Legislation: Income Assessment Act 1936 (Cth) ss 160M(3)(a), 160M(3A) Income Tax Assessment Act 1997 (Cth) 102-25, 104-5, 104-10, 104-55, 104-60, 109-5, 110-25, 112-20 Taxation Administration Act 1953 (Cth) 284-85(1), 284-90(1), 298-20, 14ZZO Cases cited: ACI Operations Pty Ltd v Berri Ltd (2005) 15 VR 312 Re A Debtor (No. 360 of 1951) [1952] 1 All ER 519 Australian Trade Commission v WA Meat Exports Pty Ltd (1987) 7 AAR 248 Braverus Maritime Inc v Port Kembla Coal Terminal Ltd (2005) 148 FCR 68 Case V22 (1988) 88 ATC 244 Coles Myer Ltd v Commissioner of State Revenue (Vic) [1998] 4 VR 728 Danmark Pty Ltd & Forestwood Pty Ltd v Federal Commissioner of Taxation (1944) 7 ATD 333 Dixon v Federal Commissioner of Taxation (2008) 167 FCR 287 Federal Commissioner of Taxation v Dalco (1990) 168 CLR 614 Federal Commissioner of Taxation v AXA Asia Pacific Holdings Ltd (2010) 189 FCR 204 Federal Commissioner of Taxation v Burness (2009) 77 ATR 61 Gathercole v Smith (1881) 17 Ch D 1 Granby Pty Ltd v Federal Commissioner of Taxation (1995) 129 ALR 503 Re Hains; Barnsdall v Commissioner of Taxation (1988) 81 ALR 173 Re Hobart Central Child Care Pty Ltd and Federal Commissioner of Taxation (2005) 60 ATR 1314 Re Hutson and Federal Commissioner of Taxation (2009) 74 ATR 965 Ireland v Hart [1902] 1 Ch 522 Nanney v Morgan (1887) 35 Ch D 603 National Bank of Australia v Falkingham [1902] AC 585 Re Player, Ex p Harvey, No 1 (1885) 54 LJ QB 533 Re Poole Shipping Co [1920] 1 Ch 251 Rangdon Pty Ltd v Federal Commissioner of Taxation (2006) 62 ATR 583 Spencer v Commonwealth (1907) 5 CLR 418 Trustee for the Estate of the late AW Furse No 5 Will Trust v Commissioner of Taxation (1990) 91 ATC 4007 Date of hearing: 12 October 2011 Place: Perth Division: GENERAL DIVISION Category: Catchwords Number of paragraphs: 154 Counsel for the Applicant: D Romano with G Finnane Solicitor for the Applicant: Wilson & Atkinson Counsel for the Respondent: JC Vaughan Solicitor for the Respondent: Jackson McDonald IN THE FEDERAL COURT OF AUSTRALIA WESTERN AUSTRALIA DISTRICT REGISTRY GENERAL DIVISION WAD 188 of 2010 ON APPEAL FROM THE COMMISSIONER OF TAXATION BETWEEN: CARINA HEALEY Applicant AND: THE COMMISSIONER OF TAXATION OF THE COMMONWEALTH OF AUSTRALIA Respondent JUDGE: MCKERRACHER J DATE OF ORDER: 23 MARCH 2012 WHERE MADE: PERTH THE COURT ORDERS THAT: 1. The appeal be dismissed. 2. The applicant do pay the costs of the respondent, to be taxed if not agreed. Note: Entry of orders is dealt with in Rule 39.32 of the Federal Court Rules 2011. IN THE FEDERAL COURT OF AUSTRALIA WESTERN AUSTRALIA DISTRICT REGISTRY GENERAL DIVISION WAD 188 of 2010 ON APPEAL FROM THE COMMISSIONER OF TAXATION BETWEEN: CARINA HEALEY Applicant AND: THE COMMISSIONER OF TAXATION OF THE COMMONWEALTH OF AUSTRALIA Respondent JUDGE: MCKERRACHER J DATE: 23 MARCH 2012 PLACE: PERTH REASONS FOR JUDGMENT INTRODUCTION AND OVERVIEW 1 The applicant (Ms Healey) appeals from the 17 March 2009 income tax assessment for her 2006 income year. She also challenges the respondent's (the Commissioner) 18 March 2009 administrative penalty assessment in respect of the same period. 2 The Commissioner contends Ms Healey is liable for capital gains tax (CGT) on substantial trust distributions declared in her favour. However, Ms Healey says she had no knowledge of the transactions said by the Commissioner to give rise to the liability and has never received the funds. Although Ms Healey asserts that she had no contemporaneous knowledge of the transactions concerned (and little, if any, subsequent knowledge), no steps have ever been taken by her to deny the efficacy of the transactions. While it may be an incidental factor for this appeal, Ms Healey does not appear to dispute the Commissioner's contention that there is no reason to prevent her from requiring the particular trustee to put her in funds for the income which has been distributed to her by way of trust resolution but not yet received. 3 The Commissioner's notice of assessment to Ms Healey for the 2006 income year was issued pursuant to s 167 of the Income Assessment Act 1936 (Cth) (ITAA 36). It was based on Ms Healey having a taxable income for 2006 of $15,754,189. That sum included a net capital gain amount of $14,190,500, at least notionally, distributed to her as beneficiary of The Esteem Trust. The appeal relates only to an assessed net capital gain sum of $14,190,500. Ms Healey has not challenged the balance of the 2006 assessment (an amount of $1,563,689 comprising salary and wages of $61,539, assessable non-primary production trust distribution of $1,463,208 and net rental income of $38,942). 4 Ms Healey seeks orders of the Court: 1. Allowing her objection to the extent of excising from her taxable income for the year ended 30 June 2006, the amount of $7,095,250; and 2. Allowing her objection to the extent of excising from her taxable income for the year ended 30 June 2006 and the year ended 30 June 2007, a shortfall penalty amount of $5,358,958.30. 5 The assessed capital gain arises from share transactions. The transactions involved are the acquisition by Newcode Pty Ltd (Newcode) of 1,199,654 shares in Jandakot Airport Holdings Pty Ltd (JAH) on trust for Esteem Holdings Pty Ltd (Esteem) as trustee of The Esteem Trust. Those shares, according to share transfer forms completed on 1 May 2004, were transferred by shareholders of JAH, namely, Allswan Holdings Pty Ltd (Allswan) (specifically 858,335 shares for $3 million) and Jayport Holdings Pty Ltd (Jayport) (specifically 341,320 shares for $1,318,750). On 2 November 2005, Newcode agreed to sell its 1,199,654 JAH shares, the subject of the 1 May 2004 transfer to Ascot Capital Fund No 1 Pty Ltd (Ascot) for $18,509,250. That sale was completed on 31 January 2006 with the result that Newcode obtained a $14,190,500 capital 'profit' on the sale of the JAH shares being the difference between the sale at $18,509,350 and purchase at $4,318,750. It is accepted that the net capital gain derived by Newcode (if there was any) was wholly attributable to Esteem as trustee of The Esteem Trust. 6 A key element of the parties' debate arises over the relevant date for the purpose of assessment, if any, of the capital gain. The May 2004 share transfers from Allswan and Jayport to Newcode were not registered until 9 December 2005, over 18 months after the completion of the transfer forms. This occurred after the annual general meeting on the previous day when JAH's majority shareholder, Hanscon Holdings Pty Ltd (Hanscon) waived its pre-emptive rights under Art 28 of JAH's Constitution permitting the transfers to be registered. Until this waiver, no registration was possible. 7 Subsequently, Esteem, on 23 June 2006, resolved that the trust income for the 2006 income year including any net capital gain be distributed to Ms Healey. Thus in its 2006 income tax return The Esteem Trust reported that it had derived assessable income for the 2006 income year that included a net capital gain on disposal of the 1,199,653 JAH shares. The whole of The Esteem Trust income for the 2006 income year, including the net capital gain, was distributed to Ms Healey. As noted (at [2]), at no time has Ms Healey ever disclaimed her entitlement to the income of The Esteem Trust for the 2006 income year. 8 The question arising under the appeal concerns the correct application of the GST provisions in Pt 31-1 of the Income Tax Assessment Act 1997 (Cth) (ITAA 97) to these facts and other disputed and undisputed facts set out below. It is common ground that Ms Healey has the burden of proving that the assessments are excessive pursuant to s 14ZZO of the Taxation Administration Act 1953 (Cth) (TAA 53) as discussed in numerous cases including Danmark Pty Ltd & Forestwood Pty Ltd v Federal Commissioner of Taxation (1944) 7 ATD 333 per Latham CJ and Federal Commissioner of Taxation v Dalco (1990) 168 CLR 614 (at 626) per Deane J who generally agreed with Brennan and Toohey JJ, as did Mason CJ, Dawson, Gaudron and McHugh JJ. KEY FACTS IN DETAIL 9 The following facts which are central to the dispute are established on the evidence or agreed. 10 Esteem was incorporated on 26 September 2003. From 26 September 2003 to February 2006, Ms Joanne de Hollander was the sole director and shareholder of Esteem. The Esteem Trust was created by a deed of settlement dated 26 September 2003. Between 26 September 2003 and February 2006, Esteem was the sole trustee of The Esteem Trust. 11 At relevant times to this appeal, The Esteem Trust was a discretionary trust in that, among other things, by cl 3 of the deed of settlement the trustee was empowered to allocate the income of the trust as between each of the beneficiaries in the manner the trustee determined. 12 At all material times, i.e., from 26 September 2003 to 30 June 2006 both Ms Healey and Ms de Hollander were beneficiaries of The Esteem Trust (each being a 'Specified Beneficiary' in the terms of item 6 of the schedule to the deed of settlement). 13 From September 2003 to February 2006, Mr Douglas Green was the sole director of JAH and JAH was the registered proprietor of land known as the Jandakot Airport. 14 JAH's Constitution: (1) (as noted above), restricted the transfer of shares in JAH unless certain rights of pre-emption had been exhausted or waived (art 28); (2) provided that a transferor of shares remained the holder of the shares until the transfer was registered and the name of the transferee was entered into JAH's register of members (art 29); 15 As at 1 March 2004 the entities registered as shareholders of JAH were: (1) Allswan – being the holder of 858,334 of 2,500,002 issued shares (34.33% of the issued share capital in JAH); (2) Hanscon – being the holder of 833,334 of 2,500,002 issued shares (33.33% of the issued share capital of JAH); (3) Jayport – being the holder of 808,334 of 2,500,002 issued shares (32.33% of the issued share capital of JAH). 16 The directors of Allswan between September 2003 and February 2006 were: (1) Ms de Hollander – for the whole of September 2003 to February 2006; and (2) Mr Rino Camari – from September 2003 to 28 May 2004. 17 Ms de Hollander was also a shareholder in Allswan. 18 The directors of Jayport between September 2003 and February 2006 were: (1) Ms de Hollander – for the whole of that period; and (2) Mr Johannes Versteeg – also for the whole of that period. 19 The shareholders in Jayport were: (1) Ms de Hollander – the holder of 10 of 20 issued shares; and (2) Hanscon – the holder of 10 of 20 issued shares. 20 Newcode was incorporated on 2 October 2003. 21 The directors of Newcode between October 2003 and February 2006 were: (1) M/s Marilyn Sandford – from 2 October 2003 to 17 October 2003; (2) Mr Roger Davis – from 17 October 2003 to 18 October 2005; and (3) M/s Annette Kuhnert – from 18 October 2005 to February 2006. May 2004 22 With effect from 1 May 2004: (1) Jayport transferred to Hanscon 467,014 of Jayport's shares in the issued capital of JAH; and (2) the transfer was recorded in JAH's register of members. 23 As at 1 May 2004, and continuing to 9 December 2005, the entities registered as shareholders of JAH were: (1) Allswan – being the holder of 858,334 of 2,500,002 issued shares (34.33% of the issued capital in JAH); (2) Hanscon - being the holder of 1,300,348 of 2,500,002 issued shares (52.01% of the issued capital in JAH); and (3) Jayport – being the holder of 341,320 of 2,500,002 issued shares (13.65% of the issued capital in JAH). Dealings between May 2004 and December 2005 24 On or about 8 February 2005 JAH declared a franked dividend of 8 cents per share. JAH's 8 February 2005 franked dividend of 8 cents per share was paid to, among others, Allswan and Jayport. The Allswan/Jayport purchase transaction 25 On 1 May 2004, by a document headed 'Declaration of Trust', Newcode, by Mr Frank Chiera (Mr Chiera), agreed that: (1) Newcode would acquire 1,199,654 shares in JAH in Newcode's name; but (2) Newcode would acquire those 1,199,654 JAH shares for, and hold them on trust for, Esteem as trustee of The Esteem Trust. 26 On 1 May 2004, Allswan, by Ms de Hollander, and Newcode, by Mr Chiera, executed a document headed 'Standard Transfer Form' whereby, in consideration of a payment of $3 million by Newcode to Allswan, Allswan purported to transfer 858,334 shares in JAH to Newcode. 27 On 1 May 2004, Jayport, by Ms de Hollander, and Newcode, by Mr Chiera, executed a document headed 'Standard Transfer Form' whereby, in consideration of a payment of $1,318,750 by Newcode to Jayport, Jayport purported to transfer 341,320 shares in JAH to Newcode. 28 At an annual general meeting of the members of JAH held on 8 December 2005: (1) Hanscon, by Mr Versteeg, waived its pre-emptive rights under art 28 of JAH's Constitution to restrict the transfer of shares in JAH from Allswan and Jayport, as transferors, to Newcode; and (2) the members of JAH resolved that the transfer of shares in JAH from Allswan and Jayport, as transferors, to Newcode be processed. 29 With effect from 9 December 2005: (1) Allswan transferred to Newcode all of Allswan's 858,334 shares in the issued capital of JAH; (2) Jayport transferred to Newcode all of Jayport's 341,322 shares in the issued capital of JAH; and (3) those transfers were recorded in JAH's register of members. 30 As at 9 December 2005, and continuing to 31 January 2006, the entities registered as shareholders of JAH were: (1) Hanscon – being the holder of 1,300,348 of 2,500,002 issued shares (52.01% of the issued capital in JAH); and (2) Newcode – being the holder of 1,199,654 of 2,500,002 issued shares (47.99% of the issued capital in JAH). The Ascot sale transaction 31 On 2 November 2005, by an agreement headed 'Share Sale Agreement' (Ascot Sale Agreement) Hanscon and Newcode, as vendors, agreed to sell all of their shares in JAH to Ascot. 32 It was an express term of the Ascot Sale Agreement that: (1) Ascot would pay Newcode $18,509,250 (ex-Goods and Services Tax (GST)) for Newcode's 1,199,654 shares in the issued capital of JAH (cl 2.1 and cl 2.3); (2) Ascot would advance $2,300,000 to JAH (cl 2.4); and (3) the $2,300,000 was to be used by JAH to pay a dividend to Hanscon and Newcode in the amounts of $1,196,000 and $1,104,000 respectively (cl 2.4). 33 On or about 31 January 2006 there was completion under the Ascot Sale Agreement. Among other things, at completion under the Ascot Sale Agreement: (1) Newcode transferred to Ascot all of Newcode's 1,199,654 shares in the issued capital of JAH; (2) Ascot paid $18,509,250 to Newcode; and (3) JAH declared and paid a franked dividend of $1,196,000 to Hanscon and $1,104,000 to Newcode. Distribution of income by The Esteem Trust 34 On 23 June 2006 Esteem, by Ms de Hollander, resolved that the income of The Esteem Trust for the financial year ending 30 June 2006, including any net capital gain, be distributed to the specified beneficiary, Ms Healey. 2006 income tax return of The Esteem Trust 35 On 17 September 2008 Esteem lodged with the Commissioner an income tax return for The Esteem Trust for the year ending 30 June 2006. 36 By its income tax return for The Esteem Trust for the year ending 30 June 2006 Esteem reported that: (1) The Esteem Trust had derived assessable income for the year that included: (a) the $1,104,000 franked dividend paid by JAH to Newcode in relation to Newcode's 1,199,654 shares in the issued capital of JAH; (b) a net capital gain on the disposal of Newcode's 1,199,654 shares in the issued capital of JAH. It reported a net capital gain of $7,095,250 on the disposal of Newcode's 1,199,654 shares in the issued capital of JAH. The $7,095,250 was calculated as follows: Date Action No. Purchase ($) Sale ($) 01/05/2004 Acquired shares from Allswan 858,334 3,000,000 01/05/2004 Acquired Shares from Jayport 341,320 1,318,750 31/01/2006 Sold shares to Ascot -1,199,654 18,509,250 Capital Profit 14,190,500 18,509,250 18,509,250 Capital Gain 14,190,500 Less: 50% Discount 7,095,250 Taxable Capital Gain 7,095,250 (2) the whole of The Esteem Trust's income for the year, including the net capital gain on the disposal of Newcode's 1,199,654 shares in the issued capital of JAH, was distributed to Ms Healey. Ms Healey's income tax return and assessments 37 For a number of years, but including years in which she was only of school age, no income tax returns were lodged for Ms Healey. As at 23 September 1994 Ms Healey had failed to lodge income tax returns with the Commissioner for any of the years ended 30 June 1989, 30 June 1990, 30 June 1991, 30 June 1992 or 30 June 1993. On or about 23 September 1994 the Commissioner issued Ms Healey with a final notice to lodge her income tax returns for the years ended 30 June 1989, 30 June 1990, 30 June 1991, 30 June 1992 and 30 June 1993. As at 14 June 1996, Ms Healey had failed to lodge income tax returns with the Commissioner for any of the years ended 30 June 1994 or 30 June 1995. On about 14 June 1996 the Commissioner issued Ms Healey with a final notice to lodge her income tax returns for the years ended 30 June 1994 and 30 June 1995. As at 31 March 2003, Ms Healey had failed to lodge income tax returns with the Commissioner for any of the years ended 30 June 1998 or 30 June 1999. On or about 31 March 2003, the Commissioner issued Ms Healey with a final notice to lodge her income tax returns for the years ended 30 June 1998 and 30 June 1999. 38 Ms Healey has never lodged income tax returns with the Commissioner for any of the years ended 30 June 1996, 30 June 1998, 30 June 1999, 30 June 2006, 30 June 2007, 30 June 2008, 30 June 2009 or 30 June 2010. 39 Ms Healey's income tax returns for the years ended 30 June 1996, 30 June 1998, 30 June 1999, 30 June 2006, 30 June 2007 and 30 June 2008 were outstanding as at 21 May 2010. 40 On about 10 September 2004 a failure to lodge penalty was imposed on Ms Healey in relation to late lodgement of her income tax return for the year ended 30 June 2003. The income tax return was due on 14 May 2004 but was not lodged until about 9 July 2004. 41 The due date for lodgement of Ms Healey's income tax return for the year ended 30 June 2006 with the Commissioner was 29 June 2007. Ms Healey did not lodge any income tax return for the year ended 30 June 2006 with the Commissioner by its due date of 27 June 2007 or at all. The due date for lodgement of Ms Healey's income tax return for the year ended 30 June 2007 with the Commissioner was 31 October 2007. Ms Healey did not lodge any income tax return for the year ended 30 June 2007 with the Commissioner by its due date of 31 October 2007 or at all. 42 On 17 March 2009 the Commissioner issued a notice of assessment to Ms Healey for the year ending 30 June 2006 pursuant to s 167 of the ITAA 36 showing taxable income of $15,754,189 (including the net capital gain amount of $14,190,500 as distributed to Ms Healey as beneficiary of The Esteem Trust) and tax payable thereon of $7,388,018.83. On 17 March 2009 the Commissioner issued a notice of assessment to Ms Healey for the year ending 30 June 2007 pursuant to s 167 of the ITAA 36 showing taxable income of $78,864 and tax payable thereon of $19,395.60. 43 On 18 March 2009 the Commissioner issued a notice of assessment and liability to pay an administrative penalty to Ms Healey pursuant to s 298-30(1) of Sch 1 TAA 53 being $5,350,134.15 for the financial year ending 30 June 2006 and $8,824.15 for the financial year ending 30 June 2007. 44 By an objection dated 15 May 2009, Ms Healey objected to the notice of assessment dated 17 March 2009 in relation to the year ending 30 June 2006 and the notice of assessment and liability to pay an administrative penalty dated 18 March 2009. 45 By a notice of decision dated 21 May 2010 the Commissioner disallowed Ms Healey's objection in full. MATTERS IN ISSUE 46 Ms Healey contends but the Commissioner disputes the following facts and matters: (a) Save for the 'Standard Transfer Form' there was no agreement, oral or written, entered into between Allswan and Newcode imposing any legal rights or obligations on either party for the transfer of the 858,334 ordinary shares in JAH from Allswan to Newcode (added emphasis). (b) Save for the 'Standard Transfer Form' there was no agreement, oral or written, entered into between Jayport and Newcode imposing any legal rights or obligations on either party for the transfer of the 341,320 ordinary shares in JAH from Jayport to Newcode (added emphasis). (c) Newcode did not pay Allswan for 858,334 ordinary shares in JAH in cash or in any other manner. Rather, the obligation to discharge the consideration was through a series of book entries in a $3 million unsecured indebtedness from Newcode to Allswan. (d) Those book entries and relevant MYOB statements for Allswan for year ended 30 June 2004 have been produced in an affidavit of Mr Phillip Drummond Metcalf sworn 15 August 2011. (e) Newcode did not enter into an agreement, oral or written, with Allswan regarding the terms upon which the $3 million indebtedness was to be paid (added emphasis). (f) There was never an intention by Newcode or Allswan to enter into an agreement for the discharge of Newcode's obligations to pay the consideration. (g) Newcode did not pay Jayport for 341,320 ordinary shares in JAH in cash or in any other manner. Rather, the obligation to discharge the consideration was through a series of book entries resulting in a $1,318,750 unsecured indebtedness from Newcode to Jayport. (h) Newcode did not enter into an agreement, oral or written, with Jayport regarding the terms upon which the $1,318,750 indebtedness was to be paid (added emphasis). (i) There was never an intention by Newcode or Jayport to enter into an agreement for the discharge of Newcode's obligations to pay the consideration. (j) At all material times, i.e., from 26 September 2003 to February 2006, the relationship between Newcode, Allswan and Jayport was not at arm's length. (k) At all material times, i.e., from 1 May 2004 to 9 December 2005, Newcode, Allswan and Jayport did not deal at arm's length in connection with the acquisition by Newcode of the 1,199,654 shares in the issued share capital of JAH from Allswan and Jayport. (l) On 2 November 2005 and by the Ascot Sale Agreement it was agreed between Newcode and Ascot that the market value for the 1,199,654 shares in the issued share capital of JAH was $18,509,250. (m) The relationship between Ascot and Newcode was at arm's length. (n) Ascot and Newcode dealt at arm's length in connection with the acquisition by Ascot of the 1,199,654 shares in the issued share capital of JAH from Newcode. (o) The market value of the 1,199,654 shares in the issued share capital of JAH at 9 December 2005 is no less than $18,509,250 (the Market Value). (p) The consideration provided for in both the 'Standard Transfer Forms' was less than the Market Value. 47 I will revert to address those disputed facts under the heading 'Consideration'. Suffice it to say for the present that I do not consider that Ms Healey has discharged the onus on her, in an appeal of this nature, to prove these matters. Ms Healey had no personal knowledge of these facts. Other than giving evidence herself, no other witnesses were called who would have been expected to give evidence which could throw light upon or establish these facts. No explanation was given for the failure of such witnesses to give evidence. Rather, as will be discussed, the course taken was to contend that inferences should be drawn (or facts proven) from various business records. As will be discussed, the facts were not established. Mr Metcalf's affidavit with some primary documents was accepted into evidence. He was not cross-examined. There was an explanation for his absence. However, it was also accepted that Mr Metcalf had no direct knowledge of any of the circumstances surrounding the transactions, the subject of consideration. 48 Ms Healey gave some brief evidence by affidavit. She was cross-examined and I discuss the cross-examination below. In her affidavit she explained that since about 2000 the Commissioner has been investigating various entities and taxpayers related to her and her family resulting in uncertainty for her as to what her correct tax position should be. Her evidence was that due to the ongoing investigations and to avoid making a false statement to the Commissioner for the 2006 and 2007 income tax years, she did not lodge a tax return as she believed it was desirable to declare her tax position correctly. She went on to discuss the correspondence which was exchanged principally on that topic. She said that she disagreed with the statement in a position paper prepared by the Commissioner to the effect that she had received a distribution of an amount of trust income from The Esteem Trust for the year ended 30 June 2006 and therefore was entitled to that income and should pay tax on it. She spelt out that she has never received any of the income as alleged. She also swore that she was not aware at the time but now knows that she is included in the class of beneficiaries of The Esteem Trust. She also gave evidence that she was not involved in, nor was she a party to, the transaction resulting in The Esteem Trust deriving the income for that year or in the decision to distribute capital profits to her. THE LEGISLATIVE PROVISIONS 49 A capital gain or capital loss is the difference between the cost to acquire an asset and the sum received on its disposal. CGT came into effect on 20 September 1985. Assets acquired since that date are subject to the CGT provisions within the ITAA 97 unless specifically excluded. CGT applies not only to tangible assets such as real estate but also to intangible assets such as business goodwill or the sale of shares. There are many exemptions within personal assets and business assets. 50 Despite being written in a style that is intended to be easy to digest, the CGT provisions are still extensive and complex. It is necessary to refer verbatim only to a handful of the provisions in this appeal but the general context in which those provisions appear is also relevant. 51 Division 102 ITAA 97 is the starting point for the giving of guidance as to whether or not there has been a net capital gain or a net capital loss for an income year together with making the point that certain concessions may operate. It spells out that assessable income includes net capital gain and describes the ways in which a capital gain might be made. It can only be made (s 102-20) if, and only if, a CGT event happens. The gain or loss is made at the time of the event. Section 104-5 then provides the full list of possible CGT events. This general provision spell out that most CGT events provide for calculating a capital gain by comparing two differing amounts (s 102-22). It makes the point that a capital gain sold on, for example, a private sale of a car will be disregarded but will still be a CGT event A1 which I will describe further below. Section 102-30 sets out extensive exceptions and modifications. 52 Section 102-25 provides as follows: 102-25 Order of application of CGT events (1) Work out if a CGT event (except CGT events D1 and H2) happens to your situation. If more than one event can happen, the one you use is the one that is the most specific to your situation. (2) However, there are 3 exceptions: one for CGT event J2, one for CGT event K5 and one for CGT event K12. (2A) If the circumstances that gave rise to CGT event J2 constitute another CGT event, CGT event J2 applies in addition to the other event. Example: CGT event J2 happens because a replacement asset for a small business roll-over under Subdivision 152-E becomes your trading stock (in circumstances where CGT event K4 happens). Both CGT events apply. (2B) CGT event K5 happens if CGT event A1, C2 or E8 happens. CGT event K5 applies in addition to the other event. (2C) If: (a) CGT events happen for which you make capital gains or capital losses; and (b) the capital gains or losses are taken into account in working out a foreign hybrid net capital loss amount; and (c) the foreign hybrid net capital loss amount is itself taken into account in determining that CGT event K12 happens; CGT event K12 applies in addition to the other CGT events. (3) If no CGT event (except CGT events D1 and H2) happens: (a) work out if CGT event D1 happens and use that event if it does; and (b) if it does not, work out if CGT event H2 happens and use that event if it does. Note: The full list of CGT events is in section 104-5. 53 Division 103 sets out general rules applicable to the capital gains and capital loss provisions. Section 103-10(2) spells out that the capital gain provisions apply to a taxpayer if he or she is entitled to receive money or other property and Div 104 sets out the CGT events. It sets out all of the CGT events for which a capital gain or loss can be made indicating how one works out whether a gain or loss for each event has occurred and, importantly, the time of each event. It contains exceptions for gains and losses for many events and some cost base adjustment rules. By s 104-5 and in relation to CGT event AI and CGT event E2, it provides as follows: 104-5 Summary of the CGT events CGT events Event number and description Time of event is: Capital gain is: Capital loss is: A1 Disposal of a CGT asset [See section 104-10] when disposal contract is entered into or, if none, when entity stops being asset's owner capital proceeds from disposal less asset's cost base asset's reduced cost base less capital proceeds … E2 Transferring a CGT asset to a trust [See section 104-60] when asset transferred capital proceeds from transfer less asset's cost base asset's reduced cost base less capital proceeds 54 Those details are then fleshed out by subsequent sections including ss 104-10, 104-55 and 104-60 which provide as follows: 104-10 Disposal of a CGT asset: CGT event A1 (1) CGT event A1 happens if you dispose of a CGT asset. (2) You dispose of a CGT asset if a change of ownership occurs from you to another entity, whether because of some act or event or by operation of law. However, a change of ownership does not occur if you stop being the legal owner of the asset but continue to be its beneficial owner. Note: A change in the trustee of a trust does not constitute a change in the entity that is the trustee of the trust (see subsection 960-100(2)). This means that CGT event A1 will not happen merely because of a change in the trustee. (3) The time of the event is: (a) when you enter into the contract for the disposal; or (b) if there is no contract—when the change of ownership occurs. Example: In June 1999 you enter into a contract to sell land. The contract is settled in October 1999. You make a capital gain of $50,000. The gain is made in the 1998-99 income year (the year you entered into the contract) and not the 1999-2000 income year (the year that settlement takes place). Note 1: If the contract falls through before completion, this event does not happen because no change in ownership occurs. Note 2: If the asset was compulsorily acquired from you: see subsection (6). (4) You make a capital gain if the capital proceeds from the disposal are more than the asset's cost base. You make a capital loss if those capital proceeds are less than the asset's reduced cost base. Exceptions (5) A capital gain or capital loss you make is disregarded if: (a) you acquired the asset before 20 September 1985; or (b) for a lease that you granted: (i) it was granted before that day; or (ii) if it has been renewed or extended—the start of the last renewal or extension occurred before that day. Note 1: You can make a gain if you dispose of shares in a company, or an interest in a trust, that you acquired before that day: see CGT event K6. Note 2: A capital gain or loss you make because you assign a right under or in relation to a general insurance policy you held with an HIH company to the Commonwealth, the trustee of the HIH Trust or a prescribed entity is also disregarded: see section 322-15. Note 3: A capital gain or loss made by a demerging entity from CGT event A1 happening as a result of a demerger is also disregarded: see section 125-155. Note 4: A capital gain or loss you make because of section 16AI of the Banking Act 1959 is disregarded: see section 253-10 of this Act. Section 16AI of the Banking Act 1959: (a) reduces your right to be paid an amount by an ADI in connection with an account to the extent of your entitlement under Division 2AA of Part II of that Act to be paid an amount by APRA; and (b) provides that, to the extent of the reduction, the right becomes a right of APRA. Note 5: A capital gain or loss you make because, under section 62ZZL of the Insurance Act 1973, you dispose of a CGT asset consisting of your rights against a general insurance company to APRA is disregarded: see section 322-30 of this Act. Compulsory acquisition (6) If the asset was acquired from you by an entity under a power of compulsory acquisition conferred by an Australian law or a foreign law, the time of the event is the earliest of: (a) when you received compensation from the entity; or (b) when the entity became the asset's owner; or (c) when the entity entered it under that power; or (d) when the entity took possession under that power. Note: You may be able to choose a roll-over if an asset is compulsorily acquired: see Subdivision 124-B. (7) CGT event A1 does not happen if the disposal of the asset was done: (a) to provide or redeem a security; or (b) because of the vesting of the asset in a trustee under the Bankruptcy Act 1966 or under a similar foreign law; or (c) because of the vesting of the asset in a liquidator of a company, or the holder of a similar office under a foreign law. 104-55 Creating a trust over a CGT asset: CGT event E1 (1) CGT event E1 happens if you create a trust over a CGT asset by declaration or settlement. Note: A change in the trustee of a trust does not constitute a change in the entity that is the trustee of the trust (see subsection 960-100(2)). This means that CGT event E1 will not happen merely because of a change in the trustee. (2) The time of the event is when the trust over the asset is created. (3) You make a capital gain if the capital proceeds from the creation are more than the asset's cost base. You make a capital loss if those capital proceeds are less than the asset's reduced cost base. Cost base rule (4) If you are the trustee of the trust and no beneficiary is absolutely entitled to the asset as against you (disregarding any legal disability), the first element of the asset's cost base and reduced cost base in your hands is its market value when the trust is created. Exceptions (5) CGT event E1 does not happen if you are the sole beneficiary of the trust and: (a) you are absolutely entitled to the asset as against the trustee (disregarding any legal disability); and (b) the trust is not a unit trust. (6) A capital gain or capital loss you make is disregarded if you acquired the asset before 20 September 1985. 104-60 Transferring a CGT asset to a trust: CGT event E2 (1) CGT event E2 happens if you transfer a CGT asset to an existing trust. Note: A change in the trustee of a trust does not constitute a change in the entity that is the trustee of the trust (see subsection 960-100(2)). This means that CGT event E2 will not happen merely because of a change in the trustee. (2) The time of the event is when the asset is transferred. (3) You make a capital gain if the capital proceeds from the transfer are more than the asset's cost base. You make a capital loss if those capital proceeds are less than the asset's reduced cost base. (4) If you are the trustee of the trust and no beneficiary is absolutely entitled to the asset as against you (disregarding any legal disability), the first element of the asset's cost base and reduced cost base in your hands is its market value when the asset is transferred. Exceptions (5) CGT event E2 does not happen if you are the sole beneficiary of the trust and: (a) you are absolutely entitled to the asset as against the trustee (disregarding any legal disability); and (b) the trust is not a unit trust. (6) A capital gain or capital loss you make is disregarded if you acquired the asset before 20 September 1985. 55 Section 109-5 and the table to which it refers provides as follows to timing for the CGT events listed in s 104-5: 109-5 General acquisition rules (1) In general, you acquire a CGT asset when you become its owner. In this case, the time when you acquire the asset is when you become its owner. (2) This table sets out specific rules for the circumstances in which, and the time at which, you acquire a CGT asset as a result of a CGT event happening. Note: The full list of CGT events is in section 104 5. Acquisition rules (CGT events) Event Number In these circumstances: You acquire the asset at this time: A1 (case 1) An entity disposes of a CGT asset to you (except where you compulsorily acquire it) when the disposal contract is entered into or, if none, when the entity stops being the asset's owner A1 (case 2) You compulsorily acquire a CGT asset from another entity the earliest of:(a) when you paid compensation to the entity; or(b) when you became the asset's owner; or(c) when you entered the asset under the power of compulsory acquisition; or(d) when you took possession of it under that power … E2 An entity transfers a CGT asset to a trust and you are the trustee when the asset is transferred … 56 Division 110 is directed to the calculation of the cost base and the reduced cost base of a CGT asset. It directs attention to Div 112 which lists each situation that may result in a modification to the general rules and explains the detailed provisions for each situation. Generally speaking, in relation to the cost base, the rule is provided for by s 110-25 which, relevantly to this appeal, provides as follows: 110-25 General rules about cost base (1) The cost base of a CGT asset consists of 5 elements. Note 1: You need to keep records of each element: see Division 121. Note 2: The cost base is reduced by net input tax credits: see section 103-30. Note 3: An amount that makes up all or part of an element of the cost base of an asset may be determined under section 230-505, if the amount is provided for acquiring a thing, and you start or cease to have a Division 230 financial arrangement as consideration for the acquisition of the thing. 5 elements of the cost base (2) The first element is the total of: (a) the money you paid, or are required to pay, in respect of acquiring it; and (b) the market value of any other property you gave, or are required to give, in respect of acquiring it (worked out as at the time of the acquisition). Note 1: There are special rules for working out when you are required to pay money or give other property: see section 103-15. Note 2: This element is replaced with another amount in many situations: see Division 112. 57 By s 112-5(2) it is explained that modifications may replace the first element (what is paid for a CGT asset) of the cost base and the reduced cost base of an asset. By s 112-20 there is a market value substitution rule which is set out as follows: 112-20 Market value substitution rule (1) The first element of your cost base and reduced cost base of a CGT asset you acquire from another entity is its market value (at the time of acquisition) if: (a) you did not incur expenditure to acquire it, except where your acquisition of the asset resulted from: (i) CGT event D1 happening; or (ii) another entity doing something that did not constitute a CGT event happening; or (b) some or all of the expenditure you incurred to acquire it cannot be valued; or (c) you did not deal at arm's length with the other entity in connection with the acquisition. The expenditure can include giving property: see section 103-5. (2) Despite paragraph (1)(c), if: (a) you did not deal at arm's length with the other entity; and (b) your acquisition of the CGT asset resulted from another entity doing something that did not constitute a CGT event happening; the market value is substituted only if what you paid to acquire the CGT asset was more than its market value (at the time of acquisition). The payment can include giving property: see section 103-5. … 58 By s 115, there are important discount provisions which, in light of the conclusion I have reached, need not be considered at any length. 59 As will be seen, part of the argument for Ms Healey is that certain of the transactions were not at arm's length, an expression which means, according to s 995-1 ITAA 97 'in determining where the parties deal at arm's length consider any connection between them and any other relevant circumstance'. ISSUES ARISING FOR DETERMINATION ON THE APPEAL 60 The issues for determination by the Court are: 1. Which CGT event applies to Newcode's acquisition of the 1,199,654 JAH shares? Is it CGT event A1 or CGT event E2? That question turns on the proper construction of 'transfer' where it is found in s 104-60(1) ITAA 97; 2. The second question is what was the amount of the cost base for those JAH shares? If CGT event A1 applies, then the cost base would be $4,318,750. However, if CGT event E2 applies, the question will be whether Ms Healey has met the burden of proof as to the contentions that: (a) Newcode did not 'deal at arm's length' with Allswan and Jayport in acquiring the JAH shares; and (b) As at 9 December 2005, the true market value of the JAH shares was $18,509,250. If CGT event E2 applies and if both sub-issues are resolved in favour of Ms Healey, the cost base would also be $18,509,250; 3. Has the Commissioner incorrectly assessed the administrative penalty?; 4. Has the Commissioner incorrectly refused to remit the administrative penalty; and 5. Assuming that CGT event A1 is an applicable CGT event, whether on disposal of the 1,199,654 JAH shares there was a discount capital gain within Div 115 ITAA 97? 61 The Commissioner accepts that if CGT event A1 is the applicable CGT event, the net capital gain on the disposal of the 1,199,654 JAH shares would be $7,095,250 rather than $14,190,500 as there would be a 50% discount under s 115. In those circumstances, it is accepted that the Court should remit the matter to the Commissioner with directions to vary the 2006 assessment and administrative penalty. That is not the conclusion I reached nor is it the position advanced by the parties. CONSIDERATION Which CGT event applies? 62 For determination as to which CGT event applies to Newcode's acquisition of the JAH shares, there are two possibilities, possibly three. The first is CGT event A1 on disposal of a CGT asset which occurs 'if you dispose of a CGT asset', pursuant to s 104-10(1) ITAA 97 on the one hand, or, CGT event E2 – transferring a CGT asset to a trust which occurs 'if you transfer a CGT asset to an existing trust' per s 104-60(1) ITAA 97. The reference to 'you' (not a particularly common feature of legislative drafting) refers here to the disposer or the transferor, so in the context of Allswan and Jayport as transferors of the JAH shares rather than Newcode as the transferee. It will be recalled that the concept of the 'CGT event' is defined by reference to actual events which may themselves result in a capital gain or loss: 104-5 Summary of the CGT events CGT events Event number and description Time of event is: Capital gain is: Capital loss is: A1 Disposal of a CGT asset [See section 104-10] when disposal contract is entered into or, if none, when entity stops being asset's owner capital proceeds from disposal less asset's cost base asset's reduced cost base less capital proceeds … E2 Transferring a CGT asset to a trust [See section 104-60] when asset transferred capital proceeds from transfer less asset's cost base asset's reduced cost base less capital proceeds … 63 The 'general acquisition rules' in s 109-5 ITAA 97 deal with how and when a person acquires a CGT asset as a result of a CGT event. It is significant from s 102-25(1) ITAA 97 that if more than one event can happen, 'the one you use is the one that is the most specific to your situation'. 64 The relevance of this issue to the appeal is this: Applying CGT event A1, Newcode acquired the JAH shares when the disposal contract was entered into (pursuant to s 109-5(2) ITAA 97). The date for this purpose was 1 May 2004. It follows, therefore, that the JAH shares were held for at least 12 months and thus the 50% discount capital gain rule would apply. On the other hand, if CGT event E2 is appropriate, Newcode acquired the JAH shares when the JAH shares were 'transferred' as a result of s 109-5(2) ITAA 97. This date was 9 December 2005 and, accordingly, if CGT event E2 was a relevant event, there would be no discount capital gain under s 115 ITAA 97. On the other hand, the cost base for the JAH shares may differ depending on whether the transaction is CGT event A1 or CGT event E2. In this regard, Ms Healey relies on the market value substitution rule under s 112-20(1)(c) ITAA 97 which, it will be recalled, provides as follows: 112-20 Market value substitution rule (1) The first element of your cost base and reduced cost base of a CGT asset you acquire from another entity is its market value (at the time of acquisition) if: … (c) you did not deal at arm's length with the other entity in connection with the acquisition. 65 Ms Healey contends that as at 9 December 2005, the true cost base for the JAH shares was the same as the subsequent capital proceeds such that there was no capital gain on the eventual sale of the JAH shares to Ascot. Was there a transfer? 66 The correct approach to the issue of which CGT event applies requires a conclusion to be reached as to the proper meaning of the term 'transfer' in s 104-60(1) ITAA 97. Whether CGT event E2 applies depends in part on the issue of statutory construction as to the meaning of the word 'transfer' in s 104-60(1) ITAA 97 (see above). Does 'transfer' include a conveyance by way of sale or is it confined to a conveyance by way of gift or settlement? 67 Section 104-60(1) ITAA 97 uses the concept of 'transfer' as opposed to the more common CGT provision reference to the concept of 'disposal'. This usage raises the question of whether 'transfer' is intended to bear a meaning different from 'dispose' in the context of s 104-60(1). No guidance to this question appears to have been given in the Explanatory Memorandum to the Tax Law Improvement Bill (No 2) 1997 (Cth). Nor, until now, has the Court been required to consider the specific question in the context of CGT provisions. 68 The term 'transfer' has been seen as being one of broad import. For example, in Gathercole v Smith (1881) 17 Ch D 1 (at 7), 'transfer' was said to be 'one of the widest terms' that can be used. It has been used in many contexts, including for an unregistered 'assignment or transfer' of book debts: see National Bank of Australia v Falkingham [1902] AC 585. A gift of money was a 'transfer of property' within s 47(3) of the Bankruptcy Act 1883 (UK) (s 52) (Re Player, Ex p Harvey, No 1 (1885) 54 LJ QB 533 (see Bankruptcy Act 1914 (s 59 and s 42(4)). A conveyance of shares in consideration of natural love and affection was a 'transfer' within ss 14, 15 and 16 of the Companies Clauses Consolidation Act 1845 (UK) (s 16), and was not a 'transmission' within s 18 and s 19 (Copeland v North Eastern Railway 6E and B 277; see also Nanney v Morgan 35 (1887) Ch D 603, 604). In relation to a transfer of shares, it has related to a legal title to shares (Ireland v Hart [1902] 1 Ch 522). A transfer of shares in a company was held not to include a letter signed by a shareholder abandoning his rights to bonus shares in favour of a nominee: see Re Poole Shipping Co [1920] 1 Ch 251. 69 The Commissioner points to the fact that the term 'transfer' is not a term of art, it does not have a technical meaning. The Commissioner suggests that in common legal parlance it may encompass every legal means by which existing property may be passed from one person to another: Coles Myer Ltd v Commissioner of State Revenue (Vic) [1998] 4 VR 728 (at 739-740). On this basis, the Commissioner submits that there was a transfer of the JAH shares within the meaning of s 104-60(1) ITAA 97. 70 The words of a statutory provision are to be read in the context of the statute as a whole and in their legal and historical context. 71 These three principles are well established: 1. Regard is to be had to the aim and purpose of the provision and the legislation as a whole as well as established canons of legal construction. 2. Regard may be had to any inconvenience or improbability of result of any given construction. Inconvenience or improbability of result may assist the Court to reach an available alternative construction reasonably open and more clearly conforming with the legislative intent otherwise discovered. 3. Fundamental to the task is the giving of close attention to the text and structure of the relevant provisions as the words used by Parliament. See Braverus Maritime Inc v Port Kembla Coal Terminal Ltd (2005) 148 FCR 68 (at [36]), the Full Court (Tamberlin, Mansfield and Allsop JJ). 72 To develop these points in a little more detail, CGT event E2, and its reference to 'transfer', is immediately after CGT event E1. CGT event E1 is concerned with creating a trust over a CGT asset. Section 104-55(1) ITAA 97 provides: CGT event E1 happens if you create a trust over a CGT asset by declaration or settlement. Note: A change in the trustee of a trust does not constitute a change in the entity that is the trustee of the trust (see subsection 960-100(2)). This means that CGT event E1 will not happen merely because of a change in the trustee.' 73 The term 'transfer' in s 104-60(1) ITAA is undefined. However, the term is used in other parts of the CGT provisions in Pt 3-1 ITAA 97. For example: 1. section 100-33 and subdiv 124-A: asset transfers because of marriage or relationship breakdown; 2. section 100-65: referring to records of 'receipts of purchase or transfer' (which suggests that transfer is something other than purchase); 3. section 102-30 (item 7) subdiv 170-B – transfers of surplus of net capital loss between companies in the same wholly owned group; 4. section 109-60 (item 14 and 14B) – transfer of share or right on demutualisation; 5. section 109-60 (item 15) – CGT asset transferred to or from life insurance company's complying superannuation/FHSA asset pool; 6. section 109-60 (item 16) – CGT asset transferred to or from segregated exempt assets of a life insurance company; 7. section 112-54A – transfer of assets between certain trusts; 8. section 112-95 – transfer of tax losses and net capital losses within wholly-owned groups of companies; 9. section 118-42 – transfer of stratum units; 10. section 118-45 – referring to capital gains or losses from 'the sale, transfer or assignment' of rights to mine (which suggests that transfer is something other than a sale). 74 There are also numerous references to 'transfer' in connection with roll-over relief (subdiv 112-D). The term 'transfer' has been seen as being one of broad import. This lends support to the statement in Gathercole v Smith (at 7) that 'transfer' was 'one of the widest terms that can be used'. 75 The breadth of variety of usage of 'transfer' in the CGT provisions supports the historical approach that 'transfer' is a word of wide import, not to be given a narrow construction unless the context so requires. 76 There is also some support, in my view, for the broader meaning of 'transfer' in the history of the legislation. The CGT provisions in Pts 3-1 to 3-3 of the ITAA 97 were inserted into the ITAA 97 by the Tax Law Improvement Act (No 1) 1998 (Cth). The relevant Bill to that Act, the Tax Law Improvement Bill (No 2) 1997 (Cth) (later re-named the Tax Law Improvement Bill (No 1) 1998 (Cth)), made provision for ss 104-10, 104-55 and 104-60 ITAA 97 essentially in their current form. 77 The amendments were part of the Tax Law Improvement Project. Accordingly, they were designed to make general improvements in structure, presentation and readability. Other than where indicated, there was no express intention to make specific changes to the operation of the law. 78 The Second Reading Speech in relation to the Tax Law Improvement Bill (No 1) 1998 (Cth) confirmed that the provisions were a plain language rewrite. As to the CGT provisions the Minister stated: From its inception in 1985, the CGT provisions have been compromised by the unnecessarily complex approach that was taken to their presentation and expression. The aim of CGT is to tax as income gains made on the disposal of assets and on the receipt of certain capital amounts. Although CGT applies to many transactions that do not involve the disposal of assets, the existing law squeezes them into its uneasy structure by treating each of them as though they did involve such a disposal. This has left a complex and extremely confusing system of artificial deeming provisions that can confound even experienced professional advisers. The rewrite does away with this 'deeming approach' and replaces it with statements which directly describe in clear words the transactions that come within the coverage of CGT. The key to the rewrite is the breaking up of the law to identify each 'CGT event'. The concept of disposal is to be limited to where there actually is a change in ownership of an asset from one person to another. Other kinds of transactions that can give rise to a CGT liability are brought together so that the reader can be confident that all circumstances that can give rise to a capital gain or loss are comprehensively listed. By bringing together in a coherent way material that is scattered throughout the old law and by doing away with unnecessary text, the rewrite supports a more readily gained understanding by taxpayers of the CGT consequences of their decisions.' (Emphasis added) 79 The Explanatory Memorandum to the Tax Law Improvement Bill (No 1) 1998 (Cth) does not deal with CGT event E2 in any detail. Relevantly, the provisions applicable to CGT events A1, E1 and E2 were not mentioned in the section of the Explanatory Memorandum which explained changes that had been introduced to the ITAA 36 (see Part B to Ch 2.4). Accordingly, it appears that the new provisions were not intended to effect any change in the law. 80 The 'finding table' in Ch 10 to the Explanatory Memorandum confirmed that the relevant equivalents as between the ITAA 36 and the ITAA 97 were: ITAA 97 ITAA 36 104-10(1) 160L(1) 104-10(2) 160M(1), (1A), (2) 104-10(3) 160U(3), (4) 104-55(1) 160M(3)(a) 104-55(2) 160U(4) 104-55(4) 160Z(1) 104-55(5) 160M(4A), (4B) 104-60(1) 160M(3A) 104-60(2) 160U(4) 104-60(4) 160M(3A), 160L(1)(b) 104-60(5) Unspecified 81 Accordingly: 1. the statutory predecessor to s 104-55(1) ITAA 97 (i.e. CGT event E1) was s 160M(3)(a) ITAA 36; and 2. the statutory predecessor to s 104-60(1) ITAA 97 (i.e. CGT event E2) was s 160M(3A) ITAA 36. 82 The CGT provisions in the ITAA 36 did not always contain the statutory predecessors to s 104-55(1) and s 104-60(1) ITAA 97. 83 The relevant provisions were introduced by s 29 of the Taxation Laws Amendment Act (No 2) 1994 (Cth). 84 Section 29 of that Act provided: The object of this Subdivision is to clarify the capital gains tax provisions of the Principal Act in relation to the creation of trusts and the conversion of trusts into unit trusts. 85 A substituted s 160M(3)(a) and a new s 160M(3A) were inserted into the ITAA 36 by s 30 of the Act. 86 By s 160M(3)(a) as amended there was deemed to be a change in the ownership of an asset in the case of: (A) the creation of a trust, by declaration or settlement, over the asset, [with some exceptions] … (Emphasis added) 87 By s 160M(3A) as amended: For the purposes of paragraph (3)(a), the transfer of an asset to a trust is taken to be the creation, by settlement, of a trust over the asset. (Emphasis added) 88 This suggests that where there is no more than the creation of a trust by way of settlement (including the transfer of an asset to the trust), that will be deemed to be a change in ownership of the asset for CGT provisions. In that context a transfer is deemed to be a settlement but this does not mean that a 'transfer' is confined to a settlement and cannot include a sale. 89 The proper construction of the term 'transfer' in s 104-60(1) ITAA 97 and encompasses a conveyance by way of sale. It follows that CGT event E2 applies. If there was a transfer, was CGT event E2 the more appropriate? 90 CGT event E2 is specifically directed to trusts. Secondly, in this very specific context, the disposal or transfer was not complete by virtue of Art 29 until, in December, rights of pre-exemption were waived (see [13]). What was the cost base of the JAH shares? 91 This is the second issue on the appeal. 92 Ms Healey contends that, if CGT event E2 applies (as I have concluded it does), the general rule in s 110-25(2)(a) ITAA 97 is affected by the 'market value substitution rule' in s 112-20(1)(c) ITAA 36. She also argues that the market value of the JAH shares at the relevant time was $18,509,250 – meaning that the cost base of the JAH shares was the same as their eventual capital proceeds and there was accordingly no net capital gain. 93 It is also necessary for Ms Healey to prove that Newcode did not 'deal at arm's length' in acquiring the JAH shares. Section 112-20(1)(c) ITAA 97 provides: (1) The first element of your cost base and reduced cost base of a CGT asset you acquire from another entity is its market value (at the time of acquisition) if: … (c) you did not deal at arm's length with the other entity in connection with the acquisition. 94 By s 995(1) ITAA 97 it is provided that in determining whether parties deal at arm's length, one must consider any connection between them and any other relevant circumstance. 95 The parties accept that the authorities establish these principles: 1. Whether the parties dealt at arm's length is a question of fact: Trustee for the Estate of the late AW Furse No 5 Will Trust v Commissioner of Taxation (1990) 91 ATC 4007 (at 4017); Granby Pty Ltd v Federal Commissioner of Taxation (1995) 129 ALR 503 (at 507); Commissioner of Taxation v AXA Asia Pacific Holdings Ltd (2010) 189 FCR 204 (at [106]). 2. There is a distinction between dealing at arm's length and an arm's length relationship: ACI Operations Pty Ltd v Berri Ltd (2005) 15 VR 312 (at [224]). Whether the parties did not deal at arm's length is not to be decided by answering whether the parties were not in an arm's length relationship. The fact that the parties are themselves not at arm's length does not mean that they have not, in respect of a particular dealing, dealt with each other at arm's length: Re Hains; Barnsdall v Commissioner of Taxation (1988) 81 ALR 173 (at 177); Trustee for the Estate of the late AW Furse No 5 Will Trust (at 4014-4015). 3. Whether the parties dealt at arm's length involves an analysis of the manner in which the parties to a transaction conducted themselves in forming that transaction: Granby (at 506). 4. At issue is whether the parties have acted separately and independently in forming their bargain: Granby (at 507); ACI Operations Pty Ltd (at [226]) (did the parties apply 'independent separate wills'); AXA Pacific Holdings Ltd (at [105]). There should be an assessment of whether the parties dealt with each other as arm's length parties would be expected to behave so that the outcome is a matter of real bargaining: Trustee for the Estate of the late AW Furse No 5 Will Trust (at 4015); Granby (at 506 and 507); AXA Pacific Holdings Ltd (at [105]). 5. It is relevant to consider the nature of any relationship between the parties: Trustee for the Estate of the late AW Furse No 5 Will Trust (at 4015); Granby (at 506). 6. If the parties are not at arm's length the inference may be drawn that they did not deal with each other at arm's length: Granby (at 506); ACI Operations Pty Ltd (at [225]). 96 The identity of the guiding minds and will of the transacting corporations may be relevant considerations. At the relevant time the officers of the contracting entities were: 1. in the case of Newcode, a Mr Davis (until 18 October 2005) and a M/s Kuhnert (from 18 October 2005). (Mr Davis was also the sole shareholder in Newcode); 2. in the case of Allswan, Ms de Hollander (for the whole period) and Mr Rino Camari (until 28 May 2004). (Ms de Hollander was a shareholder in Allswan); 3. in the case of Jayport, Ms de Hollander and Mr Versteeg (for the whole period). (The shares in Jayport were held 50:50 as between Ms de Hollander and Hanscon). 97 Newcode was acting as trustee for Esteem as trustee of The Esteem Trust. Ms de Hollander was the sole director and shareholder of Esteem. However, the transacting parties, i.e. Newcode/Allswan and Newcode/Jayport had different officers. 98 Accordingly, on its face there was no self-dealing. There was no commonality as between the officers of Newcode (as acquirer) and Allswan and Jayport (as seller). 99 The relevant entities also had different directing minds so far as the acquisition of the JAH shares was concerned. The directing minds of the relevant entities were: 1. in the case of Newcode, Mr Chiera. It was Mr Chiera who signed the share transfers. (Mr Chiera also signed the declaration of trust on behalf of Newcode); and 2. in the case of Allswan and Jayport, Ms de Hollander; she signed the share transfers. 100 Again, there was no commonality as between the directing minds of Newcode (as acquirer) and Allswan and Jayport (as seller). 101 In ACI Operations Pty Ltd, Dodds-Streeton J held (at [223]) that the authorities indicated that: an arm's length relationship is that of strangers, or parties who are unaffected by existing mutual duties, liabilities, obligations, cross ownership of assets, or identity of interests which present a capacity in either party to influence or control the other, or an inducement to serve that common interest, which might operate to modify the terms on which strangers would deal. 102 Further, her Honour went on to say (at [225-[226]) (footnotes omitted): 225 Where the parties are not in an arm's length relationship, it is recognised that the inference may be drawn that they did not deal with each other at arm's length. It may further be inferred that the resultant transaction is not arm's length. 226 Related parties may nevertheless, in some circumstances, demonstrate a dealing which displaces the inference based on their relationship. They may engage in the disinterested bargaining characteristic of strangers, applying independent separate wills. The circumstances of the impugned transaction may be such that, despite the parties' connection or common interest, the interposition of some independent process (such as the sale of shares on the stock exchange) ensures that the transaction itself is arm's length, in the sense that it could equally have been concluded by unrelated parties, consulting their own self-interest and uninfluenced by any particular association or interest in common. 103 Hill J noted in Trustee for the estate of the late AW Furse No 5 Will Trust (at [4015]): What is required in determining whether parties dealt with each other in respect of a particular dealing at arm's length is an assessment whether in respect of that dealing they dealt with each other at arm's length as arm length parties would normally do, so that the outcome of their dealing is a matter of real bargaining. 104 Ms Healey says that the only conclusion open is that the relationship between Newcode, Allswan and Jayport was not at arm's length and critically that they did not deal at arm's length in connection with the acquisition by Newcode of the JAH shares from Allswan and Jayport. She points to the fact that Ms de Hollander was: the sole director and shareholder of Esteem; a beneficiary of The Esteem Trust; a director and shareholder of Allswan; and a director and shareholder of Jayport. 105 Newcode acquired the JAH Shares for, and held them on trust for, Esteem as trustee for The Esteem Trust. 106 Ms Healey argues that Ms de Hollander was an 'associate' of each of Jayport, Allswan and Esteem as trustee of the Esteem Trust within the meaning of that term in s 318 of the ITAA 36 and that Jayport, Allswan, Newcode and Esteem were 'connected entities' within the meaning of that term in s 995-1 of the ITAA 97. 107 Ms Healey also sought to argue that as at 13 March 2009, the Commissioner adopted the position that Jayport and Newcode were 'connected entities per the definition of s 995-1 of the ITAA 97 in that they are associates per the definition in s 318 of the ITAA 36'. At 13 March 2009, the Commissioner adopted the position that 'the acquisition of the JAH shares [by Newcode] was from associate companies Allswan Holdings Pty Ltd (Allswan) and Jayport Holdings Pty Ltd (Jayport)'. 108 In the Commissioner's notice of decision dated 21 May 2010 the Commissioner stated: in the present case, one of the identified beneficiaries of the Esteem Trust was a director and shareholder of each of Allswan, Jayport and Esteem Holdings during the period December 2003 to 30 June 2006. It was the beneficiary, in her capacity as the sole director of Esteem Holdings, who directed that the proceeds from the sale of the JAH shares be distributed to Ms Healey [the Applicant] on 23 June 2006. This individual had the necessary connection with all related parties in the JAH share transaction and an influential role in the distribution of the capital proceeds to be regarded as an associate. It is on this basis that the Commissioner considers that the transferor and transferee were connected and that therefore CGT event E2 is the more specific event in the circumstances. 109 Ms Healey argues that given that Newcode, Allswan and Jayport were not in an arm's length relationship, there is a strong inference to be drawn that they did not deal with each other at arm's length when Newcode acquired the JAH Shares: Granby (at [17]); ACI Operations Pty Ltd per Dodds-Streeton J (at [225]); AXA Asia Pacific Holdings Ltd per Dowsett J (at [26]). 110 Ms Healey also contends (as noted at [47]) that the following facts further support that Newcode, Allswan and Jayport did not deal at arm's length in connection with the acquisition by Newcode of the JAH Shares from Allswan and Jayport: The acts of Newcode (as trustee of The Esteem Trust), Allswan and Jayport were performed under the effective direction of Ms de Hollander. Save for the 'Standard Transfer Form' there was no agreement, oral or written, entered into between Allswan and Newcode imposing any legal rights or obligations on either party for the transfer of the 858,334 ordinary shares in JAH from Allswan to Newcode. Save for the 'Standard Transfer Form' there was no agreement, oral or written, entered into between Jayport and Newcode imposing any legal rights or obligations on either party for the transfer of the 341,320 ordinary shares in JAH from Jayport to Newcode. Newcode did not pay Allswan for 858,334 ordinary shares in JAH in cash or in any other manner, rather the obligation to discharge the consideration was through a series of book entries resulting in a $3,000,000.00 unsecured indebtedness from Newcode to Allswan. Newcode did not enter into an agreement, oral or written, with Allswan regarding the terms upon which the $3,000,000.00 indebtedness was to be paid. Newcode did not pay Jayport for 341,320 ordinary shares in JAH in cash or in any other manner, rather the obligation to discharge the consideration was through a series of book entries resulting in a $1,318,750.00 unsecured indebtedness from Newcode to Jayport. Newcode did not enter into an agreement, oral or written, with Jayport regarding the terms upon which the $1,318,750.00 indebtedness was to be paid. 111 As will be noted, with the exception of the first point, I do not consider these facts to have been proven. I do not consider that it is open to Ms Healey to support her contended finding that the parties did not deal at arm's length simply by reference to hearsay observations adopted by the Commissioner in 2009 audit reports of the companies. I would not regard those observations by the Commissioner in audit reports as being materially contemporaneous facts relevant to the Court's assessment of the parties' dealings as they were evidenced by contemporaneous events in 2004 and 2005. I declined to permit reliance upon case statements made by the Australian Taxation Office (ATO) as constituting admissions which could satisfy Ms Healey's burden of proof: see for example Rangdon Pty Ltd v Federal Commissioner of Taxation (2006) 62 ATR 583 (at [11], [12], [14], [15] and [25-[29]). 112 Ms Healey also sought to rely upon evidence contained in an affidavit of Mr Metcalf, her accountant and, more specifically, documentary evidence contained in that affidavit. However, it is common ground and beyond dispute that Mr Metcalf, who introduces the documentary evidence, has no personal knowledge of the events concerned. His first involvement was in March 2008, well beyond the date of the transactions under consideration. 113 In my view there is a real difficulty with Ms Healey's argument that the parties were not at arm's length. There was just insufficient evidence on which a conclusion is capable of being reached one way or the other. It is not permissible to speculate as to these matters. Nor is there any basis for a view to be formed that evidence which may have assisted Ms Healey in proving this point was unavailable to her. The lack of evidence as to the parties' relationships, dealings and motivations in entering into the transaction precludes any sound finding on the balance of probabilities as to the true nature of the relationship between the relevant parties. 114 The identities of the officers and members of the corporate entities reveal different individuals in control. It is known that the transacting parties, that is, Newcode/Allswan and Newcode/Jayport had different officers. There is no commonality between the officers of Newcode as acquirer and Allswan and Jayport as seller. There were also different directing minds and wills so far as the acquisition of the JAH shares were concerned. Mr Chiera signed the share transfers. Neither Mr Davis, Mr Chiera nor Ms de Hollander were called to give any evidence to support the contention of the absence of an arm's length transaction. 115 The Commissioner submits, and I accept, that the fact that an inference may be drawn does not mean that it must be drawn. Granby is an example of a case where no inference was drawn, and the parties were found to have transacted at arm's length, because there was no evidence that: (1) the parties acted in concert with an ulterior motive; or (2) one party accepted dictation or instruction from the other to the exclusion of the exercise of independent minds (at 507). 116 In the present instance, beyond documents and Australian Securities and Investments Commission (ASIC) searches Ms Healey adduced no evidence as to the dealings between Allswan and Jayport, on the one hand, and Newcode, on the other, whereby Newcode acquired the JAH shares. 117 The Commissioner also relies on the fact that there are two different prices on the two tranches. Newcode purchased Allswan shares at $3.4951 per share and Newcode purchased Jayport shares at $3.8637 per share which, it is contended, suggests a bargaining process. There would be no need for different prices unless there had been a bargaining process and the application of independent and separate wills having regard to differing circumstances and desires. For my part, I do not place weight on this submission. The parties' agreement to different prices on the two tranches is a neutral factor. It is a process which could occur whether the parties were at arm's length or were not at arm's length. 118 The other factor which the Commissioner relies on is the fact that Hanscon waived its pre-emptive rights in relation to Newcode's acquisition of the JAH shares. For the Commissioner, it is argued that in a normal commercial environment one would expect that if, due to the lack of a real bargaining process the price struck was at a significant undervalue, Hanscon would be expected to have exercised its pre-emptive rights to snap up a bargain as it were. I am more inclined to accept this submission for the Commissioner. There is no other explanation advanced or evidence called to throw light on why Hanscon might not exercise its pre-emptive rights. 119 On this key topic on which Ms Healey bears the onus, there was a general paucity of evidence as to the parties' relationships, dealings and motivations in entering into the transaction. No sound finding can be made on the balance of probabilities as to the true nature of the relationship between the relevant parties. The absence of evidence is particularly significant when it is noted that it was Ms de Hollander who entered the arrangement for the disposal or transfer of the shares from Allswan and Jayport to Newcode. Further, it was Ms de Hollander who was a director and member of Esteem. Additionally, it was Ms de Hollander who signed the resolution that distributed the income to Ms Healey. Ms de Hollander who is well known to Ms Healey and is someone with whom she has had previous property dealings, someone who she has known for 18 years, who would be capable of giving direct evidence in all these matters has not been called to give evidence. 120 Ms Healey has not proved that the dealing was not at arm's length. 121 The second question on this topic is whether Ms Healey established that the JAH shares had a market value of $18,509,250 as at 9 December 2005. This issue only arises if a conclusion is reached that Newcode, Allswan and Jayport did not deal at arm's length in connection with the acquisition by Newcode of the JAH shares from Allswan and Jayport. As indicated in the previous discussion, I am unable to be satisfied that Ms Healey has discharged the onus of proving that the relevant transactions were not at arm's length. 122 Nevertheless, if that conclusion is wrong and for completeness, I will deal with the market value question. The well established definition of market value comes from Isaacs J in Spencer v Commonwealth (1907) 5 CLR 418 (at 441) where his Honour states: To arrive at the value of the land at that date, we have, as I conceive, to suppose it sold then, not by means of a forced sale, but by voluntary bargaining between the plaintiff and a purchaser, willing to trade, but neither of them so anxious to do so that he would overlook any ordinary business consideration. We must further suppose both to be perfectly acquainted with the land, and cognizant of all circumstances which might affect its value, either advantageously or prejudicially, including its situation, character, quality, proximity to conveniences or inconveniences, its surrounding features, the then present demand for land, and the likelihood, as then appearing to persons best capable of forming an opinion, of a rise or fall for what reason soever in the amount which one would otherwise be willing to fix as the value of the property. 123 Ms Healey points to the fact that the ATO on their website refers to an acceptable arm's length value as possibly being 'one based on recent arm's length commercial transactions involving the unlisted shares'. See also Australian Trade Commission v WA Meat Exports Pty Ltd (1987) 7 AAR 248 (per Beaumont, Wilcox and Burchett JJ (at [13]). 124 The contention for Ms Healey is that the market value of the JAH shares as at 2 November 2005 was the price at which they were ultimately sold, namely, $18,509,250 on the basis that Ascot is an unrelated party to Newcode, that Ascot and Newcode agreed by the Ascot sale agreement of that date that Ascot would pay Newcode that sum for Newcode's JAH shares, that Ascot and Newcode dealt at arm's length in connection with the acquisition by Ascot of the JAH shares from Newcode and the Commissioner has treated the Ascot sales agreement as an arm's length transaction, accepting the $18,509,250 paid by Ascot for Newcode's JAH shares as being market value. 125 It follows, according to Ms Healey, that one should treat the Ascot/Newcode transaction as being a contemporaneous arm's length commercial transaction involving the JAH shares which would therefore fix their value as being no less than $18,509,250. 126 Ms Healey contends that as she has established that the capital value of the shares as at 9 December 2005 was no less that $18,509,250, there was no capital gain on their sale. As a result The Esteem Trust did not derive a net capital gain in the amount of $14,190,500 within the meaning of s 102-5(1) ITAA 97 for the year ended 30 June 2006. 127 There is a conspicuous absence of any expert evidence adduced by Ms Healey to support the argument that the market value of the shares as at 9 December 2005 was $18,509,250. The best evidence relied upon by Ms Healey is the transaction concerning Ascot and the submission that I should infer the capital value from the Ascot transaction. 128 Once again, Ms Healey adduced no expert evidence as to the market value of the JAH shares as at 9 December 2005. Rather, she sought to satisfy her burden of proof by inferring market value based on the sale price to Ascot. Again, other than as to limited documents, Ms Healey adduced no evidence as to the dealings between Ascot and Newcode whereby Newcode sold the JAH shares. 129 In the absence of any expert evidence or evidence as to the parties' dealings, it would be unsafe to conclude, on the balance of probabilities, that the market value of the JAH shares as at 9 December 2005 was $18,509,250. 130 To use the language of Isaacs J in Spencer (at 441), in the absence of evidence as to the parties' dealings it cannot safely be assumed that: (1) the sale was by 'voluntary bargaining' and not a 'forced sale'; (2) the parties were 'willing to trade' but neither 'so anxious' that they would overlook an ordinary business consideration; and (3) the parties (particularly Ascot) were perfectly acquainted and cognisant of all circumstances which might affect value. 131 There was no evidence at all in relation to the dealings between Ascot and Newcode. There is no basis on which I could safely conclude on the balance of probabilities that the market value of the JAH shares as at 9 December 2005 was $18,509,250 especially when one has regard to the fact that Hanscon was receiving a different price for its JAH shares than the price being received by Newcode. As to this, the total price of $43,500,000 was split 57.45%:42.55% between Hanscon and Newcode. This is reflected in cl 2.3 of the shares sale agreement (Mr Metcalf's affidavit of 15 August 2011 at 126). At this time, Hanscon held 1,300,348 shares and therefore its shares were priced at $19.2185 per share. The same mathematics in relation to Newcode shares indicates a price at $15.4288 per share. This marked difference in actual price specifically at the time of the events concerned does not add weight to the argument that the price received by Newcode was the market price. Rather, it asks more questions that it answers. In addition, also unexplained, is sch 5 of the share sale agreement under which JAH was to pay dividends to Hanscon and Newcode prior to completion, suggesting that Hanscon was to be receiving even more consideration arising from the commercial transactions than the already favourable price per share. Again, while I draw no strong conclusions one way or the other about this, it is necessary only to observe that the disparity in dealings does not add weight to the contention that the price received for the Newcode parcel was market value. 132 In relation to all these matters and all of the facts and circumstances surrounding the transaction, there is a distinct paucity of evidence on which to draw and from which an inference consistent with the argument advanced by Ms Healey might safely be drawn. 133 It is not open to make a finding as to the market value of Newcode's JAH shares based solely on inference by reason of the sale price to Ascot. Accordingly, Ms Healey has not satisfied her burden of proof in establishing that the market value of Newcode's JAH shares at the relevant time was $18,509,250. Assessment of administrative penalty 134 I do not understand it to be seriously argued for Ms Healey that if her arguments on the first two primary issues were not accepted, that the administrative penalty was incorrectly assessed. 135 In any event, it is clear that I have rejected the first two arguments. In relation to the administrative penalty, the Commissioner assessed the penalty as being a liability arising under s 284-75(3) in sch 1 to the TAA 53 which provides that the taxpayer will be liable to an administrative penalty if he or she fails to give a return notice or other document to the Commissioner by the date is required and the document is necessary for the Commissioner to determine a tax related liability accurately and the Commissioner determines the tax related liability without the assistance of that document. 136 It is difficult to see that there is any basis for arguing that the assessment of the administrative penalty was incorrect having regard to the conclusions reached by the Commissioner. Specifically, it is not in dispute that: 1. The due dates for lodgement of Ms Healey's income tax returns for the 2006 and 2007 income years were 29 June 2007 and 31 October 2007 respectively. 2. Ms Healey did not lodge any income tax returns for the 2006 and 2007 income years whether by their due dates or at all. 3. The 2006 and 2007 assessments were issued pursuant to s 167 ITAA 36. (Section 167 ITAA 36 is the provision permitting the Commissioner to make an assessment where a taxpayer makes default in lodging a return.) 4. Between mid-September 2008 and mid-March 2009 the Commissioner made numerous requests that Ms Healey complete and lodge her income tax returns for the 2006 and 2007 income years. 5. There are other occasions when Ms Healey has failed to lodge an income tax return. 137 Shortly put, Ms Healey failed to lodge her income tax returns for the 2006 and 2007 years. Those returns were clearly necessary for the Commissioner to determine her income tax for those years accurately. The Commissioner had to determine the tax related liabilities without the assistance of the returns. The computation of the administrative penalty is highly mathematical. It falls to be calculated by the methodology provided for under s 284-85(1) and s 284-90 (item 7) in sch 1 to the TAA 53 which provide as follows: 284-85 Amount of penalty (1) Work out the base penalty amount under section 284 90. If the base penalty amount is not increased under section 284 220 or reduced under section 284 225, this is the amount of the penalty. … 284-90 Base penalty amount (1) The base penalty amount under this Subdivision is worked out using this table and section 284 224 if relevant: … Base penalty amount Item In this situation: The base penalty amount is: ... 7 You are liable to an administrative penalty under subsection 284-75(3) 75% of the tax-related liability concerned' 138 I do not understand the computation to be in dispute. Remission of the administrative penalty 139 Ms Healey argues that if, which is denied, an administrative penalty should have been imposed, it should also have been remitted. The discretion to remit in whole or in part is described in subs 298-20 of sch 1 to the TAA 53 and provides as follows: 298-20 Remission of penalty (1) The Commissioner may remit all or a part of the penalty. (2) If the Commissioner decides: (a) not to remit the penalty; or (b) to remit only part of the penalty; the Commissioner must give written notice of the decision and the reasons for the decision to the entity. Note: Section 25D of the Acts Interpretation Act 1901 sets out rules about the contents of a statement of reasons. (3) If: (a) the Commissioner refuses to any extent to remit an amount of penalty; and (b) the amount of penalty payable after the refusal is more than 2 penalty units; and Note: See section 4AA of the Crimes Act 1914 for the current value of a penalty unit. (c) the entity is dissatisfied with the decision; the entity may object against the decision in the manner set out in Part IVC. 140 Ms Healey relies upon para 26 and para 32 of Ch 98 of the published ATO Receivables Policy stating that full remission of failure to lodge penalty will be granted where the taxpayer or tax agent can establish that circumstances beyond their control exist which reasonably impacted on their ability to lodge the document on time. The Policy goes on to say that even where those circumstances do and exist, it may still be appropriate for the Commissioner to remit the failure to lodge penalty in full or in part where it would be fair and reasonable to do so. 141 Ms Healey draws upon a decision of the Administrative Appeals Tribunal (Case V22 (1988) 88 ATC 244), where, dealing with obligations of a beneficiary, the Tribunal pointed out that if there was anyone in the circumstances of that appeal answerable for any loss there may have been to the revenue, it ought to have been the trustee who failed to make the beneficiaries aware of their status, entitlements and fiscal responsibilities. Similarly, in a taxation ruling (No.IT2651), the Commissioner observed that the taxpayer in that case did not know that they derived assessable income and could not have been reasonably expected to know that they had derived assessable income such that their behaviour was entirely without fault. 142 Ms Healey relies, in particular, on the following facts in support of the contention that any failure on her part was beyond her control and without fault: 1. Ms Healey never received the distribution of income as alleged to have been distributed to her from The Esteem Trust in the amounts alleged or at all; 2. Ms Healey was not involved in, nor was she a party to the transaction resulting in The Esteem Trust deriving the income for the 2006 year; 3. Ms Healey was not involved in, nor was she a party to the transaction which resulted in the income of The Esteem Trust being distributed to her; 4. Ms Healey did not understand the particulars of her taxable income in the 2006 assessment and 2007 assessment by reason of the facts that: (a) She was unaware at the time that she was included in the class of beneficiaries in The Esteem Trust; and (b) She had no control over the distribution of the net income of The Esteem Trust alleged to have been distributed to her as a beneficiary of the Trust in the amounts alleged or at all. 143 It is contended for Ms Healey, by reason of the ongoing investigations into the various entities and taxpayers related to her and her family, that she was uncertain as to what the correct tax position was for herself and failed to lodge her income tax returns for the 2006 and 2007 years as she did not want to make false statements to the Commissioner and believed it was desirable that she should get her tax position correct. The documents evidencing the transaction being the sale of the shares were not available to her at any time. 144 Ms Healey further argues that it is fair and reasonable in those circumstances for the additional tax by way of shortfall penalty to be remitted to nil or some lesser amount under s 298-20 of Sch 1 of the TAA 53. 145 The Commissioner, however, points to the fact that it would not be 'fair and reasonable' for remission of the penalty to apply because Ms Healey has a history of late and non-lodgement. Ms Healey says that this is quite unrealistic as the Commissioner has failed to take into account when considering her alleged late and non-lodgement history she was child for much of the period. Her date of birth is 14 January 1978 and she was at school and was aged between 11 and 17 years in the period from 1989 to 1995. At no time did she believe she was required to lodge and income tax return for those years. In the income tax year ended 30 June 1996, she was travelling overseas and did not derive the level of income which would require her to lodge any income tax return. As to the income tax years ended 30 June 1998 to 30 June 1999, Ms Healey did not derive the level of income which would require her to lodge an income tax return. In other years, 1997, 2000, 2001, 2002, 2003, 2004, 2005, Ms Healey did lodge income tax returns. 146 For the income tax years ended 30 June 2008 to 30 June 2010, Ms Healey's evidence was that she did not believe it was appropriate to lodge the returns for these years while the issues relating to the 2006 and 2007 years remained unresolved. 147 In my view, Case V22 is of very limited assistance (if any) to Ms Healey. It is not a case dealing with remission. In that case, the late lodgement additional tax assessment was set aside as the Tribunal found as a matter of fact that the relevant returns were lodged on time. Indeed, the passages on which she relies do not concern a late lodgement penalty but rather a penalty for omitting to disclose income in a return. 148 The appropriate question is whether it is proper to have regard to particular circumstances of a taxpayer in order to consider whether there is a 'harsh outcome' such that all or part of the penalty should be remitted: Dixon v Federal Commissioner of Taxation (2008) 167 FCR 287 per Spender, Ryan and Emmett JJ. It would seem that there are a balance of considerations required. On the one hand, there is the question of whether or not there is a 'harsh outcome' (Dixon (at [20] and [26])) together with circumstances which might mitigate the taxpayer's behaviour in some way (Re Hobart Central Child Care Pty Ltd and Federal Commissioner of Taxation (2005) 60 ATR 1314 (at [205]), Re Hutson and Federal Commissioner of Taxation (2009) 74 ATR 965 (at [121]). On the other hand, as Gordon J observed in Federal Commissioner of Taxation v Burness (2009) 77 ATR 61 in relation to the statutory predecessor of s 298-20 where the discretion is unconfined by any explicit conditions or factors it is necessary for it to be exercised 'within boundaries created by the subject matter, scope and purpose of the statute and of the particular provision of which the discretion is conferred' (see [16]-[17]). 149 In this regard, the Commissioner submits, and I accept, that the administrative penalty concerned is imposed for operation of law for the effective operation of the taxation system. There is a public interest in taxpayers lodging an income tax return by the due date. Statutory administrative penalty for non-compliance furthers that public interest and serves as a deterrent and performs a reformative function. As to the harshness of the outcome, having regard to Ms Healey's particular circumstances, the Commissioner submits that in determining whether the outcome mandated by the taxation legislation is 'harsh' in Ms Healey's particular circumstances a material factor will be the adequacy of the reason advanced by her for not lodging the 2006 and 2007 income tax returns by their due date. 150 In cross-examination, Ms Healey accepted that in a telephone conversation with Mr Sturgess of the Taxation Department in November 2008 she may have told or emailed him to say that her tax agent was then preparing the income tax returns for 2006 and 2007. There was an email chain where similar assurances were given. In fact, at no stage did she ever tell Mr Sturgess that she did not intend to lodge the 2006 and 2007 income tax returns in order to avoid making a false statement. It would have been open for Ms Healey or her representatives to convey quite clearly to the Commissioner at the time she was being pressed to file returns that she was reluctant to do so for the reason that she was concerned about giving false information in the return, if indeed that was the true reason at the time. As there was no contemporaneous indication to this effect, I am not persuaded that this was the real reason underlying the failure to lodge returns despite repeated requests. 151 In considering whether Ms Healey meets her burden of proving that the Commissioner's refusal to remit the administrative penalty should not have been made or should have been made differently additional material factors include: 1. By letter dated 24 September 2008 the applicant was notified that the ATO had commenced an audit and she was required to complete her 2006 and 2007 income tax returns. Ms Healey was also warned of the possible penalty if the returns were not lodged. 2. Follow-up reminders requesting completion and lodgement of the outstanding tax returns occurred: (a) by emails dated 10 October 2008, 21 October 2008, 4 November 2008, 12 November 2008 and 1 December 2008; (b) by telephone messages left for the applicant on 9 October 2008, 13 October 2008 and 17 October 2008. 3. Ms Healey has continued her failure to lodge income tax returns. Ms Healey has not lodged income tax returns for any of the 2008, 2009 or 2010 income years. 4. Ms Healey's income tax return lodgement history includes: (a) being issued with final notices to lodge returns; (b) other non-lodgements; and (c) a failure to lodge penalty in September 2004. 152 In all these circumstances, remission of penalty would have been surprising. Ms Healey's contentions cannot be accepted. Was there a discount capital gain? 153 A fifth issue raised by Ms Healey in the alternative was that if CGT event A1 was the more specific CGT event was a discount capital gain within Div 115 ITAA 97. This issue does not fall for consideration in light of my conclusion as to the appropriate CGT event. CONCLUSION 154 As each of the appeal points advanced by Ms Healey has been rejected, the appeal must be dismissed. The orders will be: 1. The appeal be dismissed. 2. The applicant do pay the costs of the respondent, to be taxed if not agreed. I certify that the preceding one hundred and one hundred and fifty-four (154) numbered paragraphs are a true copy of the Reasons for Judgment herein of the Honourable Justice McKerracher. Associate: Dated: 23 March 2012