On Monday 4.7.2016, the Full Federal Court, by majority, dismissed husband and wife taxpayers’ appeal from the October 2015 decision of Griffiths J in Millar v FCT [2015] FCA 1104 in a case concerning a property loan arrangement with a Samoan bank being a sham.
The original AAT proceeding (Re Morrison and FCT [2015] AATA 114) was a review of a decision of the Commissioner, which disallowed the taxpayers’ objections against amended assessments and notices of assessment of shortfall penalty for the taxation years ended 30 June 2001 to 30 June 2008 inclusive. The AAT concluded that money which had been placed on deposit with a Samoan bank (Hua Wang Bank Berhad), by an Australian super fund, which was controlled by the taxpayers, together with a relatively contemporaneous loan agreement, by which the bank loaned money back to the taxpayers, in their personal capacity, was a sham. The Commissioner’s position was that the loan documentation was a sham and that the documents disguised the truth of the matter, which was that the applicants had impermissibly accessed their Australian superannuation fund to purchase their apartment on the Qld Sunshine Coast.
Pagone J (a part of the Full Federal Court majority) summarised the facts this way:
- Mr and Mrs Millar wished to buy an apartment on the Queensland Sunshine Coast and made an offer, which was accepted by the vendor, to purchase the apartment for $1.1 million. The purchase was financed in part by a loan of $600,000 from St George Bank and the balance from what purported to be a loan facility between Mr and Mrs Millar and an entity incorporated in Samoa (“the Samoan entity”) which was called the Hua Wang Bank Berhad. The Millars had not had previous dealings with the Samoan entity but they did have money in their superannuation fund. Their longterm accountant and financial adviser, Mr Vanda Gould, advised Mr and Mrs Millar that they could borrow $600,000 from the Samoan entity on condition that an equivalent amount of $600,000 was placed on deposit with the Samoan entity. On 11 October 2000 $600,000 was transferred from the Millar’s superannuation fund to the Samoan entity. On 14 October 2000 the Samoan entity transferred $600,000 to the solicitors for the Millars consistently with the terms of a document purporting to be a loan facility agreement between them and the Samoan entity which they had entered into shortly before the transaction but which was expressed to be with effect from 1 July 2000. The Commissioner treated the arrangement between the taxpayers and the Samoan entity as a sham to disguise Mr and Mrs Millar accessing funds from their superannuation fund contrary to the payment standards contained in Part 6 of the Superannuation Industry (Supervision) Regulations 1994 (Cth) (“the 1994 Regulations”).
The Federal Court said the concept of “sham” was at the core of the appeal. It dismissed the taxpayers’ appeal and they appealed to the Full Federal Court.
The Full Federal Court noted there were 2 issues in the appeal.
- The first was whether the primary judge was correct to hold that the AAT did not err in law in reaching its conclusion that the taxpayers had not discharged their onus of proving that the loan arrangement with the bank was not a sham (“the sham issue”). If the back to back loan was relevantly a ‘sham’, the Commissioner could assess the taxpayers for an impermissible receipt of preserved benefits from a superannuation fund (under the now repealed s26AFB of the Income Tax Assessment Act 1936).
- The second issue was whether the primary judge was correct to hold that the taxpayers were required by s12-245 of Sch 1 to the TAA to pay withholding tax on the interest that was capitalised under the terms of that loan arrangement, and the failure to do so meant that the taxpayers were precluded by s26-25 of the ITAA 1997 from deducting the interest (“the withholding tax issue”). The Court said the withholding tax issue only arises if the conclusions of the Tribunal and the primary judge were in error on the sham issue.
By majority (Logan J dissenting), the Court dismissed the taxpayers’ appeal. Pagone J said “the evidence which the Millars were able to give fell short of disproving sham because they could not prove, without further evidence, that the transactions were as they purported to be”. Davies J found that the primary judge was correct to conclude that no legal error was shown in the Tribunal’s approach.
(Millar v FCT [2016] FCAFC 94, Full Federal Court, Logan, Pagone and Davies JJ, 4 July 2016.)
[LTN 126, 4/7/16]
Catchwords from Full Federal Court decision
TAXATION – appeal from Administrative Appeals Tribunal affirming respondent’s decision to disallow the applicants’ objections against amended assessments and notices of assessment of shortfall penalty – where applicants entered purported loan agreement transaction – where loan agreement transaction facilitated by agent – whether transaction was a sham – whether court erred in not confining its assessment of whether sham existed to an inquiry into applicants’ subjective intentions – whether imputed intention of agent relevant to disprove sham – whether court erred in affirming respondent’s finding that applicants failed to disprove shamming intention.
TAXATION – liability to remit withholding tax – where applicant had not paid interest withholding tax on interest deemed to have been paid – whether payment occurs when borrower transfers sum in respect of capitalised interest – meaning of “deemed to have been paid” – s 221YK(3) Income Tax Assessment Act 1936 (Cth), s 26-25 Income Tax Assessment Act 1997 (Cth), cl 11-5, Sch 1 Taxation Administration Act 1953 (Cth).
Extract from Full Federal Court’s comments on the meaning of ‘sham’ (from Logan J’s decision)
- “Sham”, said the High Court in Equuscorp Pty Ltd v Glengallan Investments Pty Ltd [2004] HCA 55; (2004) 218 CLR 471 at 486, [46] (Equuscorp), “is an expression which has a well-understood legal meaning. It refers to steps which take the form of a legally effective transaction but which the parties intend should not have the apparent, or any, legal consequences”.
- In so doing, the High Court cited with evident approval an earlier judgment of a Full Court of this Court, Sharrment Pty Ltd v Official Trustee in Bankruptcy [1988] FCA 179; (1988) 18 FCR 449 (Sharrment). In Sharrment, each of the judges constituting the Full Court proceeded on the basis that it was the subjective intention of the parties to the transaction in question which was relevant (see Lockhart J at 456 and Beaumont J at 468-469, with each of whose judgments Foster J, at 473 agreed).
- Later in time in the High Court was Raftland Pty Ltd v Commissioner of Taxation [2008] HCA 21; (2008) 238 CLR 516 (Raftland). In Raftland, in the application of this same understanding of the legal meaning of sham and on the basis of findings of fact made by the primary judge (Kiefel J, then a judge of this Court) as to the intentions of the relevant actors, those who were or controlled the parties to the relevant transactions, the High Court overturned the conclusions reached in the Full Court of this Court. The Full Court had looked to the presumed intentions not of those persons, but to that of their legal adviser (see in particular, as to the Full Court’s error, Raftland at 531-532, [33]-[35] and 538-539, [58]–[59] per Gleeson CJ, Gummow and Crennan JJ).
- In Raftland, at 531-532, [35], Gleeson CJ, Gummow and Crennan JJ referred, with approval, to remarks made by Mustill LJ (as his Lordship then was) in Hadjiloucas v Crean [1988] 1 WLR 1006 at 1019 (Hadjiloucas) as to several situations “where an agreement may be taken otherwise than at its face value”. They endorsed the remark there made by Mustill LJ, citing another leading case in this field, Snook v London and West Riding Investments Ltd [1967] 2 QB 786 (Snook), that the term “sham”, correctly employed, “denotes an agreement or series of agreements which are deliberately framed with the object of deceiving third parties as to the true nature and effect of the legal relations between the parties” (Hadjiloucas at 1019). As to the objective of deliberate deception present in his Lordship’s remark, Gleeson CJ, Gummow and Crennan JJ cautioned in Raftland, at 532, [36], that the reference to such an objective necessitated some care in the employment of the term “sham”. For, as their Honours allowed, the term may also be used in a less pejorative way which nonetheless admits of the taking of a transaction otherwise than on its face. Put another way, the presence of a fraudulent intention on the part of the parties to a transaction is not exhaustive of the mental element sufficient to ground a conclusion that a transaction may be treated as a sham.
- Also to be remembered, and the observation by Gleeson CJ, Gummow and Crennan JJ in Raftland at 531, [33] is a reminder, is that a case where sham is alleged offers an example of an exception to the parole evidence rule in relation to agreements or instruments in writing. In this case, absent sham, the Millars, as the parties who had signed the loan agreement, were bound by its terms unless fraud, misrepresentation or some other circumstance which would move a Court of Equity to intervene was present: Toll (FGCT) Pty Ltd v Alphapharm Pty Ltd [2004] HCA 52; (2004) 219 CLR 165.
- In the circumstances of the present case, my view, as to the disposition of the issue as to sham in this appeal, may be summarised by adapting a turn of phrase employed by Diplock LJ (as his Lordship then was), at 801, in Snook. My sympathy, like that of Deputy President Frost of the Administrative Appeals Tribunal (the Tribunal) and that of the primary judge, Griffiths J, who respectively affirmed the disallowance of the Millars’ objections to their amended assessments and dismissed a statutory appeal by them from the Tribunal’s decision, is for the Commissioner of Taxation. My judgment on this issue is for the Millars. That disposition is dictated, as it was in Raftland and Snook, by a finding of fact as to the intentions of a party to the material transaction, in this case the finding which the Tribunal made about the intentions of Mr and Mrs Millar, who were the relevant actors, at the time when they entered into the loan transaction in question.
- The finding of fact is to be found at [69] of the Tribunal’s reasons and is expressed thus:
I accept that the taxpayers themselves were unaware, at the time, that what was being created around them was a fiction. They believed what Mr Gould told them: that they were putting funds on deposit with HWBB, and that they were borrowing money from HWBB. That is despite the fact that, if they had taken a step back from what was taking place, they may well have realised that what Mr Gould was offering them was too good to be true.
In this passage, HWBB is Hua Wang Bank Berhad, an entity incorporated in Samoa and Mr Gould is Mr Vanda Gould, the Millars’ longstanding and, as the Tribunal found, trusted accountant.