Millar & Anor v Commissioner of Taxation
Document type: Decision Impact Statement
Venue: High Court (S191 of 2016 (HCA))
Date published: 21 April 2017

Summary of decision:
Outlines the ATO's response to this case. The case concerned whether Mr and Mrs Millar (the taxpayers) had discharged their onus of proving the amount of $600,000 which was received by way of a purported loan arrangement with the Hua Wang Bank Berhad (HWBB) was not a sham, and whether the taxpayers could deduct the interest payments under section 26-25 of the Income Tax Assessment Act 1997 (Cth) (ITAA 1997).

Overview of facts:
In June 2000, the taxpayers wanted to purchase an apartment on the Queensland Sunshine Coast for $1.1 million. The taxpayers' long-time accountant and financial advisor Mr Vanda Gould (Mr Gould) proposed that the taxpayers borrow $600,000 from Hua Wang Bank Berhad (HWBB) provided that they place the equivalent amount, drawn from their Australian superannuation fund, on deposit with HWBB. | HWBB is a bank incorporated in Samoa in 1994 and was beneficially owned and controlled by Mr Gould. Mr Gould prepared all of the transaction documents and all the taxpayers' dealings with HWBB were solely through him. | In October 2000, the taxpayers transferred $600,000 from their Australian superannuation fund to HWBB to put on deposit. HWBB then transferred the same amount to the taxpayers' solicitor to assist with financing the purchase of the apartment. | The Commissioner argued that the real transaction was that the taxpayers had impermissibly accessed their Australian superannuation fund to purchase an apartment. The Commissioner included the amount of $600,000 in the taxpayers' assessable income and also disallowed the deductions claimed by the taxpayers for capitalised interest on the loan. | Issues decided by the court | Decision at First Instance | The Administrative Appeals Tribunal (AAT) decided that the taxpayers failed to discharge their onus of showing that the amount of $600,000 received by them was not a benefit received from their superannuation fund because it was received by way of loan; in other words, the Tribunal was not persuaded that the loan was not a sham. | Issues decided by the Full Federal Court | Sham | The principal issue on appeal to the Full Federal Court concerned the finding of the Tribunal, upheld on appeal by the primary judge Justice Griffiths of the Federal Court; that the taxpayers had failed to discharge their burden of proof that the loan entered into by them was not a sham. | The majority of the Full Federal Court Justice Pagone and Justice Davies, in separate judgments, concluded that there was no legal error in the Tribunal's approach and findings. Justice Logan dissented. | The majority cited and relied upon the High Court decision in Raftland and that central to the concept of sham is an inquiry into whether the parties intended to give effect to the legal arrangements set out in their apparent agreement, understood only according to its terms [43]. Where the transactional documents cannot be taken on face value because of apparent discrepancies between legal rights created and the actual dealings or because of any other evidence, the taxpayer is required to establish that the parties did intend the documents to have the purported legal effect [45]. | The majority had regard to the evidence before the Tribunal: - there were gaps and inconsistencies in the loan documentation; - the taxpayers knew very little of the transaction they thought they were entering into with HWBB; - Mr Gould was the architect and governing mind of the transaction. The taxpayers did not call Mr Gould to give evidence, or any other witness who could give a sufficient explanation of the gaps and inconsistencies in the loan documentation. | - there were gaps and inconsistencies in the loan documentation; - the taxpayers knew very little of the transaction they thought they were entering into with HWBB; - Mr Gould was the architect and governing mind of the transaction. The taxpayers did not call Mr Gould to give evidence, or any other witness who could give a sufficient explanation of the gaps and inconsistencies in the loan documentation. | The majority upheld that the Tribunal was not bound to find that the taxpayers did not have a shamming intention because they simply believed what they had been told by Mr Gould about the loan. On the evidence available, the tribunal had not been satisfied that the transaction documents taken at face value did represent the real agreement between the parties. The majority reasoned that, in the circumstances of this case, the Tribunal was not in error in looking at the subsequent conduct of the parties as evidence of their intention. The evidence which the taxpayers were able to give fell short of disproving sham because they could not prove without further evidence that the purported loan documents represented the real agreement between the parties [45]. | Further, Mr Gould's intention had become relevant because he was the person who knew something about the transaction. He might have been able to explain the discrepancies. In the majority's view, the Tribunal did not wrongly substitute Mr Gould's intention for that of the taxpayers in determining that the taxpayers had not discharged their burden of proof [84]. | Withholding tax | On the Commissioner's notice of contention, which was only necessary to decide if the appeal was allowed, the issue raised before the primary judge and the majority of the Full Federal Court, was whether the taxpayers were required by section 12-245 when read in conjunction with section 11-5 of Schedule 1 of the Taxation Administration Act 1953 (Cth) (TAA) to pay withholding tax on the interest that was capitalised under the terms of the loan agreement between the taxpayers and HWBB. | The majority, Justice Pagone and Justice Davies, upheld the decision of the primary judge to find that capitalised interest is taken to have been 'paid' within the meaning of section 11-5 of the TAA, giving rise to an obligation to pay interest withholding tax pursuant to section 12-245 of the TAA. | Even if the loan agreement between the taxpayers and HWBB was not a sham, the majority concluded that the Tribunal nevertheless should have decided that capitalised interest claimed by the taxpayers as deductions was precluded from deduction by the operation of section 26-25 of the ITAA 1997, because the taxpayers failed to pay interest withholding tax to the Commissioner. Justice Logan dissented. | The taxpayers sought special leave to appeal the decision of the Full Federal Court to the High Court. The application for special leave was heard on the papers and refused by the High Court.

Issues decided:
Decision at First Instance: The Administrative Appeals Tribunal (AAT) decided that the taxpayers failed to discharge their onus of showing that the amount of $600,000 received by them was not a benefit received from their superannuation fund because it was received by way of loan; in other words, the Tribunal was not persuaded that the loan was not a sham. | Issues decided by the Full Federal Court: Sham The principal issue on appeal to the Full Federal Court concerned the finding of the Tribunal, upheld on appeal by the primary judge Justice Griffiths of the Federal Court; that the taxpayers had failed to discharge their burden of proof that the loan entered into by them was not a sham. The majority of the Full Federal Court Justice Pagone and Justice Davies, in separate judgments, concluded that there was no legal error in the Tribunal's approach and findings. Justice Logan dissented. The majority cited and relied upon the High Court decision in Raftland and that central to the concept of sham is an inquiry into whether the parties intended to give effect to the legal arrangements set out in their apparent agreement, understood only according to its terms [43]. Where the transactional documents cannot be taken on face value because of apparent discrepancies between legal rights created and the actual dealings or because of any other evidence, the taxpayer is required to establish that the parties did intend the documents to have the purported legal effect [45]. The majority had regard to the evidence before the Tribunal: - there were gaps and inconsistencies in the loan documentation; - the taxpayers knew very little of the transaction they thought they were entering into with HWBB; - Mr Gould was the architect and governing mind of the transaction. The taxpayers did not call Mr Gould to give evidence, or any other witness who could give a sufficient explanation of the gaps and inconsistencies in the loan documentation. - there were gaps and inconsistencies in the loan documentation; - the taxpayers knew very little of the transaction they thought they were entering into with HWBB; - Mr Gould was the architect and governing mind of the transaction. The taxpayers did not call Mr Gould to give evidence, or any other witness who could give a sufficient explanation of the gaps and inconsistencies in the loan documentation. The majority upheld that the Tribunal was not bound to find that the taxpayers did not have a shamming intention because they simply believed what they had been told by Mr Gould about the loan. On the evidence available, the tribunal had not been satisfied that the transaction documents taken at face value did represent the real agreement between the parties. The majority reasoned that, in the circumstances of this case, the Tribunal was not in error in looking at the subsequent conduct of the parties as evidence of their intention. The evidence which the taxpayers were able to give fell short of disproving sham because they could not prove without further evidence that the purported loan documents represented the real agreement between the parties [45]. Further, Mr Gould's intention had become relevant because he was the person who knew something about the transaction. He might have been able to explain the discrepancies. In the majority's view, the Tribunal did not wrongly substitute Mr Gould's intention for that of the taxpayers in determining that the taxpayers had not discharged their burden of proof [84]. Withholding tax On the Commissioner's notice of contention, which was only necessary to decide if the appeal was allowed, the issue raised before the primary judge and the majority of the Full Federal Court, was whether the taxpayers were required by section 12-245 when read in conjunction with section 11-5 of Schedule 1 of the Taxation Administration Act 1953 (Cth) (TAA) to pay withholding tax on the interest that was capitalised under the terms of the loan agreement between the taxpayers and HWBB. The majority, Justice Pagone and Justice Davies, upheld the decision of the primary judge to find that capitalised interest is taken to have been 'paid' within the meaning of section 11-5 of the TAA, giving rise to an obligation to pay interest withholding tax pursuant to section 12-245 of the TAA. Even if the loan agreement between the taxpayers and HWBB was not a sham, the majority concluded that the Tribunal nevertheless should have decided that capitalised interest claimed by the taxpayers as deductions was precluded from deduction by the operation of section 26-25 of the ITAA 1997, because the taxpayers failed to pay interest withholding tax to the Commissioner. Justice Logan dissented. The taxpayers sought special leave to appeal the decision of the Full Federal Court to the High Court. The application for special leave was heard on the papers and refused by the High Court.

ATO view of decision:
The decision of the Full Federal Court is consistent with the Commissioner's view.

Administrative treatment:
Implications for impacted ATO precedential documents (Public Rulings, Determinations, ATO IDs) | None. | Implications for impacted Law Administration Practice Statements | The decision has no impact on Law Administrative Practice Statements.

Legislative references: Income Tax Assessment Act 1997 (Cth) section 26-25 Income Tax Assessment Act 1936 (Cth) section 221YK Taxation Administration Act 1953 (Cth) section 11-5 section 12-245 in Subdivision 12-F in Schedule 1
Case references: Raftland Pty Ltd v Commissioner of Taxation (2008) 238 CLR 516 [2008] HCA 21 (2008) 68 ATR 170 (2008) 2008 ATC 20-029