FEDERAL COURT OF AUSTRALIA Commissioner of Taxation v Rawson Finances Pty Ltd [2012] FCA 753 Citation: Commissioner of Taxation v Rawson Finances Pty Ltd [2012] FCA 753 Appeal from: [2011] AATA 628 Parties: COMMISSIONER OF TAXATION v RAWSON FINANCES PTY LTD File number: NSD 1711 of 2011 Judge: EDMONDS J Date of judgment: 17 July 2012 Catchwords: INCOME TAX – assessment of receipts said to be loans and disallowance of outgoings said to be interest payments – appeal from Administrative Appeals Tribunal decision setting aside objection decisions – whether taxpayer proved that receipts were loans and so discharged the onus it carried to show that the assessments were excessive: s 14ZZK(1)(b) of the Taxation Administration Act 1953 (Cth) – Tribunal erred in so concluding – appeal allowed Legislation: Administrative Appeals Tribunal Act 1975 (Cth) s 44 Taxation Administration Act 1953 (Cth) s 14ZZK(b)(i) Income Tax Assessment Act 1936 (Cth) Div 7A Pt III, ss 47A, 109K Cases cited: Commissioner of Taxation v Dalco (1990) 168 CLR 614 followed Commissioner of Taxation v Firth (2002) 120 FCR 450 referred to Commissioner of Taxation v Radilo Enterprises Pty Ltd (1997) 72 FCR 300 referred to Richard Walter Pty Ltd v Commissioner of Taxation (1996) 67 FCR 243 followed Date of hearing: 3 and 4 April 2012 Place: Sydney Division: GENERAL DIVISION Category: Catchwords Number of paragraphs: 26 Counsel for the Applicant: Mr BJ Sullivan SC with Ms K Morgan Solicitor for the Applicant: Maddocks Lawyers Counsel for the Respondent: Mr R Hamilton SC with Ms S Kaur-Bains Solicitor for the Respondent: Signet Lawyers IN THE FEDERAL COURT OF AUSTRALIA NEW SOUTH WALES DISTRICT REGISTRY GENERAL DIVISION NSD 1711 of 2011 ON APPEAL FROM THE ADMINISTRATIVE APPEALS TRIBUNAL BETWEEN: COMMISSIONER OF TAXATION Applicant AND: RAWSON FINANCES PTY LTD Respondent JUDGE: EDMONDS J DATE OF ORDER: 17 JULY 2012 WHERE MADE: SYDNEY THE COURT ORDERS THAT: 1. The appeal be allowed. 2. The respondent pay the applicant's costs of the application. Note: Entry of orders is dealt with in Rule 39.32 of the Federal Court Rules 2011. IN THE FEDERAL COURT OF AUSTRALIA NEW SOUTH WALES DISTRICT REGISTRY GENERAL DIVISION NSD 1711 of 2011 ON APPEAL FROM THE ADMINISTRATIVE APPEALS TRIBUNAL BETWEEN: COMMISSIONER OF TAXATION Applicant AND: RAWSON FINANCES PTY LTD Respondent JUDGE: EDMONDS J DATE: 17 JULY 2012 PLACE: SYDNEY REASONS FOR JUDGMENT Introduction 1 This is an application pursuant to s 44 of the Administrative Appeals Tribunal Act 1975 (Cth) by way of appeal from a decision of the Administrative Appeals Tribunal ("the Tribunal") to set aside the objection decisions of the applicant ("the Commissioner"). The objection decisions disallowed objections against assessments or amended assessments issued to the respondent ("Rawson") for the income years ended 30 June 1997 to 2008 inclusive. 2 By assessments for the years of income ended 30 June 1997 and 1998, the Commissioner included in Rawson's assessable income amounts it received in Australia through Mercantile Discount Bank ("MDB"), an Israeli bank: AUD 3 million in the 1997 year and AUD 1.75 million in the 1998 year, which receipts Rawson has at all times contended were loans made to it by MDB ("the MDB loans"). 3 By assessments or amended assessments for the years of income ended 30 June 1997 to 2008, the Commissioner disallowed amounts claimed by Rawson as allowable deductions in each of those years as follows: Year Amount AUD 30 June 1997 13,640 30 June 1998 411,707 30 June 1999 192,109 30 June 2000 128,619 30 June 2001 141,931 30 June 2002 148,350 30 June 2003 160,627 30 June 2004 174,397 30 June 2005 186,219 30 June 2006 163,813 30 June 2007 148,757 30 June 2008 161,102 which amounts Rawson has at all times contended represent interest incurred by it on the MDB loans. 4 The Tribunal's decision had the effect of reversing the assessments in [2] above and the assessments or amended assessments in [3] above. 5 It is from the Tribunal's decision that the Commissioner brings his appeal to this Court. Background The "Dramatis Personae" 6 It will assist the reader if I set out the identity and relationship of the main persons involved in the affairs and events the subject of these proceedings: Mr Erwin Binetter (deceased) – Director of Rawson (21 April 1997 – 25 August 2009) and guiding mind of Rawson until 2004 when he was diagnosed with Alzheimer's – died in 2009 aged 85. Mrs Margaret Binetter – widow of Erwin Binetter – married Erwin in 1954, married for 55 years – Director of Rawson (21 April 1997 – present). Mr Andrew Binetter – son of Erwin and Margaret Binetter – Director of Rawson (9 March 1998 – present). Uncontested Factual Background 7 Rawson was incorporated on 21 April 1997 with one shareholder: Ligon 158 Pty Limited ("Ligon 158"). At the time of its incorporation Rawson had two directors, Mr Erwin Binetter and his wife, Mrs Margaret Binetter (the substantial shareholders in Ligon 158). Mr Andrew Binetter, their son, was appointed a director and company secretary on 9 March 1998. From about 2004 Mr Erwin Binetter began to suffer serious health problems and died on 25 August 2009. 8 In the period June to December 1997 AUD 4.75 million was received by Rawson in Australia through MDB in three tranches: Date Amount AUD 5 June 1997 3,000,000 4 July 1997 1,000,000 4 December 1997 750,000 4,750,000 As noted in [2] above, Rawson has at all times contended that these amounts were received by it in Australia by way of loan from MDB. 9 Rawson remitted to MDB on the following dates the amounts set opposite those dates: Date Amount AUD 18 September 1998 3,200,000 20 July 2009 800,000 8 October 2009 375,000 11 December 2009 375,000 4,750,000 At all times Rawson has contended that those remittances were repayments of principal in respect of the MDB loans. 10 Rawson remitted to MDB on the following dates the amounts set opposite those dates: Date Amount AUD 11 February 1998 187,785 1 June 1998 195,003 21 September 1998 65,564 29 December 1998 62,235 25 June 1999 64,310 30 December 1999 64,310 28 June 2000 64,310 19 February 2001 64,310 No further payments until January 2005 5 January 2005 63,429 4 April 2005 133,516 10 January 2006 553,121 No further payments until July 2009 20 July 2009 266,194 6 October 2009 268,563 11 December 2009 5,115 2,057,765 At all times Rawson has contended that these remittances were payments of interest in respect of the MDB loans. The Tribunal's Decision 11 Despite a number of fundamental deficiencies in the evidence, the Tribunal, principally by recourse to drawing inferences, erroneously in a number of instances, from such evidence as was led, found that the amounts received by Rawson in [8] above were loans made to it by MDB; that the remittances made by Rawson in [9] above were repayments of principal in respect of the MDB loans; and that the remittances made by Rawson in [10] above were payments of interest on the MDB loans. 12 It concluded, therefore, that Rawson had discharged its onus of showing that the assessments or amended assessments were excessive in terms of s 14ZZK(b)(i) of the Taxation Administration Act 1953 (Cth) ("the TA Act"). This conclusion was articulated in two ways: (1) At [231] the Tribunal said: "I am satisfied that [Rawson's] evidence does discharge the onus of proving that the contentious loans were real and that its asserted liabilities for repayment and interest reflect the intended and enforceable reality of the transactions with MDB." (2) Immediately following at [232] the Tribunal said: "The conclusion I have reached on the proper characterisation of the 1997 fund transfers by MDB is that they were loan funds [Rawson] received subject to a repayment obligation. That conclusion tends to carry with it the further conclusion that the payments [Rawson] subsequently made were deductible expenses. They represented [Rawson's] cost of funds and were expenses it necessarily incurred in deriving the income it received from the [Erwin Binetter] related entities to which it on lent the funds." 13 Earlier, the Tribunal had observed at [208]: "There is in my view simply no factual basis for the Commissioner's assessment in relation to the characterisation of the 1997 fund transfers as [Rawson's] assessable income. [Rawson's] evidence demonstrates convincingly that it conducted no business other than the onlending of funds to other entities related to [Erwin Binetter]. It did not conduct any income producing activities before it received the funds from MDB. There is no factual circumstance that would permit [Rawson's] receipt of those funds, even in the unlikely event that MDB held some kind of realisable security on which it had relied in making the transfers, to be characterised as income." 14 These observations of the Tribunal were assailed by the Commissioner on the hearing of the appeal as being infected with error on a number of counts. First and foremost, that they amounted to a reversal of the onus borne by Rawson under s 14ZZK(b)(i) of the TA Act and effectively, but erroneously, required the Commissioner to show that the assessments were factually correct. If that is what these observations amount to, then they are infected with error as there can be no doubt that Rawson carried the onus of showing that the assessments were excessive: The Commissioner of Taxation v Dalco (1990) 168 CLR 614; Richard Walter Pty Ltd v Commissioner of Taxation (1996) 67 FCR 243. 15 Second, that Rawson had not discharged the onus it carried. In this regard, the Commissioner contended that Rawson had not proved, on the balance of probabilities, that the assessments or amended assessments were excessive. Specifically, the Commissioner contended that the evidence adduced by Rawson did not establish that Rawson's receipts of the funds in [8] above were loans from MDB and, if that were correct, there was no other explanation as to the source of the funds nor that the receipts did not have the character of income. 16 Third, insofar as the Tribunal was saying that faced with a finding that Rawson's receipts of the funds were to be properly characterised as loans from MDB, there were no factual circumstances that would permit the funds to be characterised as income, this too, according to the Commissioner, involved error on the Tribunal's part. A good deal of time was taken up during the hearing of the appeal with discourse on whether this proposition was infected with error. The Commissioner pressed that it was, but was unable to point to any circumstances which might attract a relevant provision of either the Income Tax Assessment Act 1936 (Cth) or the Income Tax Assessment Act 1997 (Cth) ("the Assessment Acts") that would give rise to such a consequence. His counsel initially made reference to Div 7A of Pt III of the 1936 Assessment Act; however, for obvious reasons, those provisions could not apply in the factual circumstances of the present case: see s 109K. No reliance was placed on s 47A of that Act. At the end of the day, the Commissioner's counsel had to concede that there was no obvious provision; none had been relied on before the Tribunal and none was made good during the course of the hearing of the appeal. In reply, the Commissioner's counsel said (T137, ln 5): "The error of law in [208] is the Tribunal excluding, on the information before it, the possibility that the funds transferred could have been assessed … as assessable income." And then said: "That's as high as the submission is put." 17 The difficulty I have with that submission is that the Tribunal at [208] did not generally exclude the possibility of the funds transferred being assessed as assessable income. It only did so on the factual predication that they were properly characterised as, and found to be, loans from MDB. What the Tribunal said at [208] of its Reasons was not intended to travel beyond that factual predication and, for that reason, involves no error of law on its part: see Richard Walter at 247 per Lockhart J; at 259 per Hill J and at 268–269 per Lehane J. 18 My difficulty with the Tribunal's approach lies at the anterior stage of finding that Rawson's receipt of the funds in 1997 was to be properly characterised as loans from MDB. In my view, that finding was not open on the evidence led and, in consequence, Rawson failed to discharge the onus it carried. My view in this regard, and the reasons for it, are amplified below. 19 The Tribunal's error seems to me to be a product of the way in which the Tribunal approached the issue. It seems to have reasoned from a position that Rawson's contention that the funds transferred to it in Australia in 1997 were by way of loans from MDB should be accepted unless the "unusual" features and circumstances of the loans "contradicted" or "cast doubt" on their "reality" in fact. It concluded that the "unusual" features and circumstances did not contradict or cast doubt on that characterisation, but it did not consider whether there was any other alternative explication consistent with those "unusual" features and circumstances; it should have. Analysis 20 The essence of a loan of money from A to B is a corresponding contemporaneous obligation on the part of B to repay the money transferred from A to B: Commissioner of Taxation v Radilo Enterprises Pty Ltd (1997) 72 FCR 300 at 313 per Sackville and Lehane JJ; Commissioner of Taxation v Firth (2002) 120 FCR 450 at [73] per Sackville and Finn JJ. Absent that obligation, the transfer of the money from A to B is something else – a gift, a payment by direction, a payment or repayment of an anterior obligation – but it is not a loan. The obligation of repayment is not proved by subsequent payment of the same amount, let alone a different amount, from B to A; that may be explicable by reference to another obligation or circumstance having nothing to do with the original payment from A to B. Rather, the obligation of repayment is proved by the terms of the contract under which the money was transferred from A to B. 21 In the present case, there was no evidence before the Tribunal of any such contract nor, otherwise, of any obligation on the part of Rawson to repay the amounts it received through MDB in 1997. In certain circumstances this may not be fatal to proving that the funds transferred were subject to an obligation to repay and were therefore by way of loan; but that will not always be the case. For example, where, as here, the alleged lender refrains from giving evidence that the transfers of funds were by way of loans, or subject to an obligation on the part of the recipient of the funds to repay them, such a conclusion may not be open to be inferred if other objective features or circumstances suggest an alternative explanation. 22 The transfer of funds to Rawson in Australia in 1997 may be equally explicable as a transfer of funds from Rawson's bank account or accounts with MDB in Israel (through the instrumentality of MDB), to Rawson's bank account in Australia. Indeed, having regard to the "unusual" features of the transactions in question, and to the subsequent conduct of the parties with which I deal below, such an explanation, in my view, is far more likely to represent what the Tribunal called "the reality and substance" of the fact. 23 Where, it may be asked, did the funds in Rawson's accounts with MDB in Israel come from if they did not come from loans by MDB. That is a matter for Rawson to establish and unless it can show, by reference to that source or otherwise, that they did not have the character of income, it will not have discharged the onus it carries to show that the assessments are excessive. 24 There are a number of reasons why the conclusion in [22] above more likely represents "the reality and substance" of the fact than the conclusion reached by the Tribunal. The more obvious are: (1) There was no evidence that the transfer of funds to Rawson's Australian account aggregating in total AUD 4.75 million, a substantial sum of money, carried with it any obligation of repayment to MDB; no agreement, either in writing or oral, imposing an obligation of repayment of Rawson was adduced in evidence. (2) The alleged lender, MDB, was not prepared to have any of its officers give evidence in those terms, apart from furnishing representatives of Rawson with documents which went into evidence through such representatives but did not establish any obligation of repayment on Rawson's part. It is odd that a bank which was willing to allegedly lend Rawson a substantial sum of money, unsecured and in circumstances where Rawson did not have any resources to meet its obligations on the alleged borrowing, was not prepared to have one or more of its officers corroborate the alleged character of the transactions. That oddity evaporates under the alternative explication. (3) There was no evidence that Rawson or any other entity, affiliated or not, gave security for the transfer of funds to Rawson's Australian bank account, whether by way of charge, lien, set-off or surety. That is entirely consistent with the alternative explication of the funds being Rawson's funds, and not MDB's funds, before they arrived in Australia. (4) Rawson had no assets in Australia nor any apparent capacity to repay the alleged loans, but that is irrelevant under the alternative explication. (5) No withholding tax was withheld from the alleged interest payments, at least until the transactions fell under the scrutiny of the Commissioner, and even then there was no evidence of such withholding. But there is no liability to withhold under the alternative explication. (6) That the alternative explication is more likely "the reality and substance" of the fact is a view to which one is impelled by the irregular making of such payments without any protest or action on the part of MDB for such delay or non-payment. Non-payment of alleged interest over the twelve year period of the loans for separate periods of four years and three and a half years respectively without any protest or action on the part of MDB is explicable if the remittances are no more than transfers from one Rawson bank account to other Rawson bank accounts. 25 On the basis of my conclusion that Rawson has not established that the transfer of funds to its Australian bank account in 1997 were loans made to it by MDB, Rawson has not discharged the onus of showing the assessments to be excessive and the Commissioner's appeal must succeed. First, the alleged interest payments will not be an allowable deduction in calculating Rawson's taxable income for the 1997 to 2008 income years, not because they are not interest on loans, but because they do not represent a cost of borrowing funds for use in Rawson's business of lending money to affiliated companies; they are not a working expense. Second, if Rawson's receipt of funds into an Australian bank account in 1997 are not loans from MDB then, in the absence of Rawson showing that they are something else which does not have the character of income, the assessments for the 1997 and 1998 years of income will not be shown to be excessive. As Hill J said in Richard Walter at 259 (reading "MDB" for "Morlea" and "Rawson" for "Richard Walter"): "These principles work out in the present case in the following way. The Commissioner alleges that the payments from Morlea to Richard Walter are income. In order to show that the assessment is excessive Richard Walter must thus show on the balance of probabilities that the payments are not income. It seeks to do that in the present case by making a case that the payments were loans. If this case is accepted, Richard Walter will, but subject to the s 260 issue, be entitled to succeed. In the present case it sought to show the amounts in question were loans through the evidence of Mr Holden who swore that they were and that the accounts reflecting them were correct. His Honour did not believe Mr Holden, finding that there was no intention that the loans would be repaid. This being the case, the payments in question were not loans. Whether they had some other character may have relevance to the question of sham, but that can for the moment be put to one side. It can not be correct to say that the onus lay upon the Commissioner to establish what the payments in question were. If they were not loans it will be for the taxpayer then to show that they are something else which does not have the character of income. If the taxpayer does not do this it will not have satisfied the onus of showing that the assessment is excessive." 26 The Commissioner's appeal must be allowed with costs. I certify that the preceding twenty-six (26) numbered paragraphs are a true copy of the Reasons for Judgment herein of the Honourable Justice Edmonds. Associate: Dated: 17 July 2012