The Federal Court has held that payments made from an overseas company to its Australian subsidiary and another related company were genuine loans and not shams, despite the Commissioner’s claims that the payments were sham transactions used by the controller of the companies to bring into Australia assets held for his benefit and that they were therefore assessable income of the companies.
Background – The Federal Court proceedings involved the tax assessments and amended assessments of four taxpayers, covering the 1994 to 2009 income years.
- The first taxpayer was Normandy Australia, a NSW incorporated Australian company that was a wholly-owned subsidiary of a Hong Kong incorporated company (Normanby Asia?) and wholly-owned subsidiary of Normandy UK.
- The second taxpayer was Advant Pty Ltd, an Australian company owned by two Australian residents, Mr and Mrs Townsing.
- The third taxpayer was Pilmora Pty Ltd, a trustee of the discretionary trust, Townsing Family Trust. The eligible beneficiaries of the trust were Mr Townsing, his relatives and any legal entity appointed by Pilmora.
- The fourth taxpayer was Mr Townsing, director of Normandy Australia, Advant, Pilmora and Normandy Asia.
Another entity, Hua Wang Bank Berhard (HWBB), was incorporated in Samoa and acted as a corporate treasury for Australian-based and international clients of Gould Ralph and Company (a Sydney based accounting firm headed by Mr Gould).
Mr Gould provided accounting and taxation services to Mr Townsing and other Australian-based entities associated with him and his family.
He was also the directing mind of Normandy UK and HWBB.
The court also said that HWBB was held by a person or persons standing behind the cover of JA Investments Limited, a company incorporated in the Cayman Islands. The court held that Mr Gould was at all relevant times, the Appointor.
- Between 2002 and 2009, Normandy Australia received $3.8m, by way of loans or finance, from Normandy Asia. The Commissioner claimed this amount was a sham borrowing and hence assessable income.
- In 2002, Advant received $650,000, by way of loans, from Normandy Asia and $500,000 from Normandy UK. The Commissioner claimed that both amounts were sham borrowings and were assessable income.
- The Commissioner disallowed deduction claims for interest and borrowing expenses in 2002 and 2003.
- In 1994, Pilmora disposed of a receivable in the sum of $5m and incurred a capital loss of that amount. The question was whether the trustee was entitled to that capital loss. The Commissioner argued that the amount was a disguise for bringing into Australia funds held for Mr Townsing and/or entities associated with him, with no obligation on Advant of repayment.
The Commissioner recalculated the s 95 net income of the trusts to include assessable income amounts that Pilmora borrowed from Normandy Asia, Normandy UK and HWBB and disallowed interest amounts as allowable deductions.
The Commissioner also issued amended assessments to give effect to these recalculations after allowing for losses carried forward from earlier years and losses previously returned.
Further, the Commissioner imposed penalties against Pilmora and the Townsings.
The taxpayers appealed against the Commissioner’s decisions.
Decision – The court set aside the Commissioner’s decisions. It concluded that even if an agreement was entered into for the sole purpose of obtaining a favourable tax treatment or a tax benefit, it does not necessarily follow that the payments were a sham and that it was not genuinely intended by the parties to have legal affect.
In regards to the parties to the dealings, the court found that the transactions could not have been at arm’s length. Many of the terms of the instruments were a disguise or pretence to convey the impression that the parties were, and had dealt with each other, at arm’s length, and to that extent were shams.
However, the court said it was possible for instruments to contain elements of pretence, but if those elements do not impugn the intentions of the parties to enter into a transaction of the kind asserted, the transaction itself will not be a sham, even if the pretended terms were.
The court found that the payments from Normandy Asia to Normandy Australia were intended by both parties to be subject to an obligation of repayment by Normandy Australia to Normandy Asia at the time each payment was made and were not anything other than loans and borrowings.
The court also held that the payments from Normandy Asia to Advant were intended by both parties to be subject to an obligation of repayment by Advant to Normandy Asia at the time each payment was made.
It was held also that the payments by Normandy UK to Advant were also intended by both parties to be subject to an obligation of repayment at the time each payment was made.
In regards to Pilmora, the court agreed with the Commissioner that it had not proven, on the balance of probabilities, that it incurred a capital loss of $5m on the disposal of a receivable due to it and there was, therefore, nothing to apply against the capital gains derived by the trust.
In regards to Mr Townsing, the court held that the payments from Normandy UK to Pilmora and the two payments from HWBB to Pilmora were intended by both respective parties, or at least by Pilmora, to be subject to an obligation of repayment by Pilmora to Normandy UK and HWBB respectively at the time each payment was made.
Based on the multiplicity of issues and the fact that the court found for the applicant on some issues and the Commissioner on others, the court remitted the matters back to the Commissioner to raise assessments of income tax, if any, consistent with those primary tax assessments.
Normandy Finance Pty Ltd v FCT [2015] FCA 1420
[Vine 1, 22.1.16] [Tax Institute website]