The AAT has found against a Mr Taxpayer and Mrs Taxpayer on a range of issues traversing many of the world’s tax havens, including: Samoa and the now notorious Hua Wang Bank Berhad.
Before trying to relate this story, the following ‘preliminary observations’ of Deputy President Frost, might set the scene.
94. One remarkable aspect of the arrangements that LLUN, in particular, has got himself into is the apparent reluctance of human beings to get their fingerprints on anything. The arrangements have ‘corporate service providers’ at almost every turn,…
95. There are companies that are directors of companies. There are companies that are nominees of other companies that are directors of companies. … There are characters in the shadows. And there is, as befits a story of this kind, the ever-present whiff of the tax haven.
Interestingly, the Commissioner did not allege ‘sham’ (which surprises me, but, in the end, he didn’t have to).
In the 1980s the Taxpayer went into business designing and manufacturing battery chargers for sale. He did this, initially through a company (his Original Trading Company [Entity 2]) until it went into liquidation (because of earlier tax debts) [para 22]. A subsequent company (his ‘Later Trading Company’ [Entity 4]) then took over.
These battery chargers must have been large as 80 of them (with 550 ‘cable assemblies’) were billed for USD 853k, in Jan 2004 – through the Taxpayer’s UK Nominee Co [para 74].
Vanuatu Co – cashed up but no where to go…
Back in the 1980’s the taxpayer, through Vanuatu corporate services firm: PITCO, incorporated a company in Vanuatu and Mr Taxpayer transferred about $1m to it, intending to buy a house or go into business. None of these things eventuated, so the company was deregistered (‘Vanuatu Defunct Co’) [Entity 8].[para 29]
The Taxpayer said that these funds were savings and an inheritance [para 31] but the AAT was sceptical, and in the absence of evidence about either of these sources, the AAT was inclined to accept the Commissioner’s submissions [new sequence, para 26] that the funds were undisclosed deemed dividends from the Original Trading Company [Ent 2]. However, the AAT held that to be, of no consequence, as the $1m was transferred in May 2000, which was outside the years being reviewed and there was nothing to assess in any relevant year.
Vanuatu Co for New Zealand property profit
Later, Mr Taxpayer had PITCO incorporate another Vanuatu company, to buy land in NZ (the Whitford Property). It purchased that property for about NZD 850k, in March 1994. The Taxpayer alleges he lent Whitford Co the purchase price so that Whitford Co could own the property beneficially. Whitford Co did sell the property, 12 years later (in 2006), for a profit. It sold the land for NZD 3m – more than tripling the purchase price. [paras 25-27].
However, the AAT was not ‘satisfied’ that Whitford Co was the beneficial owner of this land [new sequence, para 1 (immediately after para 188)]. No one could produce a loan agreement which did not help. And the AAT accepted the Commissioner’s submission that Whitford Co held the land on resulting trust for Mr Taxpayer, who contributed the purchase price. This was the result of the judgement of Dixon CJ in (1956) 98 CLR 228, where a person funds the purchase for a stranger. [para 188].
The result was that the Taxpayer was assessed on the (approx) NZD 2m profit, as a capital gain, with the usual 50% discount for property held over 12 months. [new sequence, para 8].
New Zealand ’employee welfare fund’
In the late 1990’s Mr Taxpayer established an ‘Employee Welfare Fund’ in New Zealand [Entity 10] and his, then, trading entity, contributed $2.6m to the fund, and claimed deductions, believing contributions were deductible. The Commissioner disallowed deductions and the trading entity, in the end, went into liquidation (‘Former Trading Company [Entity 2]).
This left the $2.6m in the NZ Welfare Fund.
The Taxpayer changed advisers (after the Welfare Fund fiasco) and they recommended that the ‘corpus’ be ‘rolled over’ to a Samoan Superannuation Fund, that they recommended (see next heading). But this too ended unhappily for the Taxpayer.
- The AAT rejected the argument that the corpus could be transferred directly to the Samoan Super Fund, under a particular clause, as the Super Fund was not ‘substantially similar’ to the Welfare Fund. [new series, para 37]
- The AAT then found that the Welfare Fund money was first distributed to the Taxpayers before they on-contributed it to the Samoan Super Fund.
- The result, the AAT said, was that the taxpayers should be assessed on any part of the distribution that was ‘the income of [the Welfare] fund’ [new series, para 40]. The AAT is gloriously silent about the the technical basis for this assessment, but perhaps it was under s99B of the ITAA36.
[It could have been worse. Initially, I thought the AAT had found the Taxpayers were assessable on the full amount in the Welfare Fund, on the basis they got the intended benefits, as employees. That would have ignored the double taxing effect, though, after the Commissioner disallowed the deductions for the $2.6m contributed. This, at least, works ‘rough justice’.]
Samoan ‘Superannuation Fund’
The Taxpayer was persuaded by his new adviser that he should transfer the ‘corpus’ of the Welfare Fund to a Samoan Superannuation Fund [Entity 1], which, he said, could generate income without being taxed in Australia. [para 36]
It was the creation of this fund that, in fact, triggered the Commissioner’s audit, and first round of amended assessments. He assessed the Taxpayers, on income earned in the Fund, on an accruals basis, under the ‘Foreign Investment Fund’ (or FIF) regime, which was then, still, operational (in Part XI of the ITAA36). [para 7]
There was a lot of analysis of whether the Samoan Super Fund was a ‘superannuation fund’ for Australian tax law purposes – in particular under the ITAA97, which takes one back to the definition in s10 of the SIS Act, involving an ‘indefinitely continuing’ ‘superannuation or retirement’ fund. [see para 127 and following]
The AAT, however, by-passed all that and found that the the Taxpayers were ‘presently entitled’ to the income of the Super Fund and were assessable on its income, directly (under s97 of the ITAA36). [para 166] In doing so, the AAT accepted the Commissioner’s submissions that:
- the Super Fund was little more than a ‘bare trust’, which the Taxpayers were entitled to, and could direct.
- the Taxpayers were of full age and there was no impediment to them being assessed under s97.
- this result can be reached without having to allege that the Super Fund trust deed was a sham (as this was the actual effect of the deed and rules).
The key problem for the Taxpayers was that the terms of the Superannuation Fund deed, simply didn’t apply, because there were no member who could benefit. To apply, the Taxpayers had to have been employees of the ‘Principal Employer’ [Entity 42], as the deed only provided benefits, for persons who were, or had been, employees of the Principal Employer or an ‘Associated Employer’. [para 152] The named ‘Principal Employer’ was a Samoan company incorporated in 1994, which had never employed either Taxpayer.
Though the AAT doesn’t quite say this, the analysis could be that, the Super Fund, having failed, for want of any beneficiary, was held by the trustee, on a resulting trust, for parties who transferred the money to the trustee. The AAT had found that it was the Taxpayers who contributed the money to the ostensible Super Fund (because a direct ‘rollover’ from the Welfare Fund was not possible). A ‘resulting trust’ of this kind, could have been the basis on which the AAT found the Super Fund was little more than a ‘bare trust’.
The UK nominee – administered by UK accountants: Lubbock Fine
In April 2001, Mr Taxpayer’s Samoan advisers instructed a UK accounting and corporate services firm: Lubbock Fine, to incorporate a UK company to act a funds manager for the Samoan ‘Super Fund’. All the shares in this UK Nominee Co, were owned by the trustee of that Fund. [para 57 and following]
Despite ostensibly acting on behalf of the Samoan Super Fund, the Commissioner alleged that the UK Nominee Co was really a nominee for the Taxpayers directly. The trouble, for the Taxpayers, was that there was some evidence in the Commissioner’s favour, albeit that another person, at Lubbock Fine, tried to explain away. [para 66 and following] And, it did not help that Mr Taxpayer had a debit card, by which he could access funds held by the UK Nominee, supposedly for the Samoan Super Fund. [new sequence, para 16]
In any event, the AAT found that the taxpayers ought be assessed, on the income from, and gains on, investments held by the UK nominee, either because it was a nominee for the Taxpayers, or because the Super Fund was, itself, little more than a bare trust, for the Taxpayers. [new sequence, para 18]
Montgomery Sterling – investment losses
In about mid 2001, Mr Taxpayer authorised the Samoan Super Fund to place $2m with a US fund manager: Montgomery Sterling, who promptly lost about a quarter of this and made it difficult to get the balance back. [para 56]
And the Taxpayers’ luck didn’t get any better here. The AAT found that the $500k lost, was a loss of capital, and not deductible, under s8-1 of the ITAA97. This was, it said, because none of the Super Fund Trustee, the UK Nominee Co, nor Mr Taxpayer, were currency traders. [new sequence, para 19]
Borrowings to pay liquidator of the Original Trading Company [Entity 2]
As mentioned earlier, the Original Trading Company went into liquidation, as a result of the tax it had to pay, after the Commissioner disallowed the deductions for the $2.6m contributions to the NZ Welfare Fund. In mid-2008, the Taxpayers settled with the Liquidator on the basis that they would pay him $500k, which they borrowed from a friend: Ms Martin. [paras 91 – 93]
To pay Ms Martin back, Mr Taxpayer arranged for the Samoan Super Fund to pay the $500k to Ms Martin (via Entities 39 & 40). All of this was done between August to October 2008.
Just when this loan and repayment looked uneventful, Mrs Taxpayer puts her foot in it and offers a version of events, where Ms Martin pays $230k into the Taxpayer’s account, in December 2008 (in other words, a further advance after the loan was meant to be fully repaid).
The AAT determined that this was undeclared income of the Taxpayers and they should be assessed on it.
After making all these adverse findings, the AAT’s order was, to set aside the objection decisions, and remit the matter back to the Commissioner, to be dealt with, in accordance with its reasons.
(LLUN v CofT  AATA 3058, AAT, Frost DP, 15 June 2017, updated 2 March 2018.)
[FJM; LTN 46, 8/3/18; Tax Month March 2018]
Study questions (answers available)
- Did this case involve a string of transactions that the Taxpayers entered into, or orchestrated, in various tax havens and other countries?
- Did the Taxpayers lose most of the issues they fought?
- Did the AAT assess the $1m transferred that Mr Taxpayer arranged to transfer to ‘Vanuatu Defunct Co’, as a deemed dividend, from the ‘Original Trading Company’?
- Did the Taxpayers avoid being assessed, when the corpus of the Welfare Fund was rolled directly into the Samoan Super Fund?
- Did the Samoan Super Fund’s investment earnings avoid Australian Tax?
- In assessing the Taxpayers on earnings from investments, held by the ‘UK Nominee Co’, did it matter whether this Company was a nominee for the Taxpayers or for the Samoan Super Fund?
- Is it correct that the Taxpayers were even assessed as a result of repaying the money they borrowed to settle the action by the liquidator of the Original Trading Company?