Case: Puzey v Commissioner of Taxation [2002] FCA 1615 ; (2002) 51 ATR 616
Outcome: cited
Mr Underwood gave opinion evidence relating to the level of fees charged to the investors. In 2001 the Commissioner had asked him to inspect the plantation the subject of the Kununurra tropical forestry project also known as the AllRange Project and to provide a report on its progress. That project, which had been earlier considered and rejected by Mr Lenzo, also involved the growing of sandalwood in the Ord. Mr Underwood had formed the opinion that the fees charged to the investors in that project for the purchase of sandalwood seedlings and host seedlings were excessive and gave evidence to that effect in Federal Court proceedings, Puzey v Commissioner of Taxation [2002] FCA 1615 ; (2002) 51 ATR 616. In relation to the EKS project however, he was not of the same opinion. He said that investors in that project were charged fees totalling $60,000 per hectare for services performed by EKS as manager of the project as outlined in the lease and management agreements. The services involved: 1. Planting and raising Santalum Album seedlings or trees. 2. Planting on the invested areas as soon as practicable after execution of the relevant lease and management agreement sufficient Santalum Album seedlings or trees. 3. Planting on the investors' areas such other trees as might reasonably be necessary or required to enable or encourage growth of, or protect, the Santalum Album seedlings. 4. Cultivating, tending, culling, pruning, fertilising, spraying, irrigating and otherwise caring for the trees as and when required. 5. Collecting seeds and propagation material from the investors' areas. 6. Keeping in good repair access roads to the investors' areas. 7. Using all reasonable measures by fumigating and poisoning for extermination and keeping the investors' areas free from vermin. 8. At all times maintaining in good repair and condition fire breaks and irrigation channels in and about the investors' areas. 9. Maintaining the investors' areas according to good forestry practices; and 10. Paying all costs and expenses of establishing and maintaining the plantation. Based on his experience and knowledge of other similar Indian sandalwood projects issued by EKS and an organisation he referred to as ITC, Mr Underwood considered that the fees charged to investors were similar across all projects. The project managers of the 2006 ITC sandalwood project charged investors a fee of $3,520 per 0.04 ha for establishment. This equated to $88,000 per hectare. On that comparison, he regarded the fees charged to investors in the project currently under consideration as not excessive. 58 Mr Underwood was cross-examined in relation to his report in the prospectus. He agreed that as of March 1998 there had not been any international sales of Indian sandalwood grown in Australia of which he knew. He was also cross-examined about the adequacy of the provision for replanting and infilling where planted trees had died. He said in his experience most forestry projects nearly always involved an expectation that there would be some need for replanting in the second year. He did not himself inquire as to whether there was such a provision in relation to the EKS project. He just naturally assumed that it would happen. He agreed that the EKS project had suffered early mortality among seedlings in the first wet season immediately after planting. As to the risks which he perceived associated with sandalwood plantations he said: The tricky aspect with growing Indian sandalwood is that it requires hosts that cut in at different times of the rotation and until you've grown a plantation through to maturity and done everything, you're still basing your experience on the research plots rather than on actual plantations and I've made that clear in every report I've written, that this is a risk that investors need to know about. He explained the concept of the host in the course of cross-examination. The sandalwood is a parasitic or semi-parasitic tree which attaches its roots to the roots of other trees. When a sandalwood plantation is grown from seedlings through to maturity it is necessary to establish a range of different host species during the 15 year period of the growth. The host trees are planted in amongst the sandalwood, adjacent to the sandalwood trees. Progressively the sandalwood kills the trees of the host species and sucks them dry so that other host species trees are needed to replace them. 59 I accept Mr Underwood's evidence that the set up and management of the EKS plantation project indicated that it was properly conceived and generally properly managed. The question whether fees charged to investors were "excessive" involves normative judgments the basis of which needs to be made clear in order to establish their relevance. In a case such as the present, if the level of entry fees paid is able to be characterised, on objective criteria, as inflated beyond what is relevant to the interests and services being acquired, and the costs, direct and indirect, of providing them, then that fact, in combination with others, may support the conclusion that a dominant purpose for entering the scheme was to acquire a tax benefit. In this case Mr Underwood's opinion about the fees was based upon the range of services provided and in that sense was properly based. Using a criterion of somewhat lesser reliability it invoked comparisons with other Indian sandalwood projects. I accept overall that Mr Underwood did have a proper basis for his opinion that the fees charged were reasonable. Such opinions however are necessarily more qualitative than quantitative in character. 60 Evidence was also called from Mr Anantha Padmanabha who, along with Mr Underwood, had prepared a report which was included in the prospectus. He has over 43 years experience in forestry in India predominantly dealing with sandalwood. There was no challenge to his qualifications or expertise. 61 Mr Padmanabha said the sale price of sandalwood in India over the period from 1990 to 2006 has increased from US$4,000 per ton to US$77,000 per ton. That represented an average increase of 23% per annum. In his opinion the increasing price trend will continue due to the rapid reduction in the supply of Indian sandalwood caused by dwindling production. Demand for the wood is increasing in the domestic market of India and in international markets. The gap between supply and demand is also dramatically increasing.