Commissioner of Taxation v Ludekens & Anor
Document type: Decision Impact Statement
Venue: Federal Court of Australia (VID 264 of 2013)
Judgment date: 29 August 2013
Date published: 7 May 2014

Summary of decision:
Outlines the ATO's response to this case which concerned whether two investment advisers were promoters of a tax exploitation scheme, or had implemented a product ruling scheme in a way that was materially different from that described in the ruling.

Overview of facts:
On 8 March 2006, the Commissioner issued product ruling, PR 2006/8, in relation to the Gunns Plantations Limited Woodlot Project 2006, a managed investment scheme (MIS). In part, the ruling dealt with income tax deductions available to investors who were accepted into the Project by 30 June 2007. | In 2007, Dr Ludekens was the sole director of Lotus Capital Group P/L (Lotus), the holder of a financial services licence. In early 2007, he came to an arrangement with Gunns to be paid 15% commission on investments procured by him in their MIS. | During 2007, Mr Van de Steeg carried on business as a financial investment adviser and financial services provider with Mr Jonathan Ezzy through Meloka P/L, which had equity in a foreign exchange trading business. | In May and June 2007, Dr Ludekens, Mr Van de Steeg and Mr Ezzy developed a Plan to acquire fully financed woodlots in the Project to a total value of over $20m through separate and discrete 'partnerships', and to later 'on sell' some woodlots (to the value of about $13m) to Secondary Investors known to them. The 'partnerships' comprised different pairings of Dr Ludekens, Mr Van de Steeg, Mr and Mrs Smithson and Mr and Mrs Velardi (the signatories). The Secondary Investors were not the same entities as the signatories. | As part of the Plan, loan obligations under the Project were to be met from profits obtained by investing in Meloka a fund comprising: commissions received by Dr Ludekens from Gunns (about $3m); GST refunds in respect of the acquisition of the woodlots (about $2m); and income tax refunds thought to be receivable by the Secondary Investors (about $6m) according to the terms of PR 2006/8. | The advisers procured Mr Ezzy's personal assistant, Mrs Smithson and her husband, and Mr Van de Steeg's personal assistant, Mrs Velardi, and her husband, to sign, on 30 June 2007, 7 of 10 application forms to acquire woodlots in the Project to the total value of $22,165,000. The advisers told the signatories that they had no obligations under the Project, and that their names would be removed from the investments once the woodlots were 'on-sold' to investors. | On 12 July 2007, Lotus received $3,324,750 in commissions from Gunns in relation to the acquisitions made on 30 June. Lotus then paid $3m to Meloka. | In the second half of 2007, Dr Ludekens and Mr Van de Steeg each encouraged 4 Secondary Investors known to them to enter into purported partnerships in relation to woodlots already acquired (to the value of about $13m), and to then lodge income returns claiming partnership losses (the Secondary Investment). Most of the expected income tax refunds never eventuated, largely due to ATO action. | In January 2008, Lotus received GST refunds of $2,015,000 in relation to the acquisition of the woodlots. Lotus distributed most of that amount to Meloka. | The Commissioner applied to the Federal Court for orders that Dr Ludekens and Mr Van de Steeg pay civil penalties to the Commonwealth for contraventions of section 290-50 of Schedule 1 to the Taxation Administration Act 1953 (TAA). On 18 March 2013, Middleton J dismissed the application ([2013] FCA 142), finding that neither respondent had engaged in conduct that resulted in them being a promoter of a tax exploitation scheme (subsection 290-50(1)), and that neither had engaged in conduct that resulted in a product ruling scheme being implemented in a materially different way from that described in the ruling (subsection 290-50(2)). | The Full Court (Allsop CJ, Gilmour and Gordon JJ) allowed the Commissioner's appeal, declaring that both respondents had engaged in conduct that contravened subsection 290-50(1), and remitted the application for a penalty hearing by a judge. However, the Court agreed with Middleton J that neither respondent had contravened subsection 290-50(2). On 11 April 2014, French CJ and Bell J refused special leave to the respondents to appeal to the High Court from the Full Court's decision. Their Honours noted that the Court's decision involved characterisation of the purposes of the scheme in a way that did not raise a question of construction to warrant the grant of special leave. | Issues decided by the court | Decision of Middleton J - subsection 290-50(1) | Middleton J found that Mr Van de Steeg was a 'promoter' of the Plan within the meaning of section 290-60, but that Dr Ludekens was not. However, Mr Van de Steeg did not contravene subsection 290-50(1) because his Honour found that the Plan was not a 'tax exploitation scheme' within the meaning of section 290-65. | His Honour found that paragraph 290-60(1)(a) is confined to active promotional and selling activities, and does not include the mere development and implementation of a scheme. Most of the respondents' conduct relied on by the Commissioner related to the mere development and implementation of the Plan. While his Honour accepted that 'consideration' in paragraph 290-60(1)(b) can include both monetary and non-monetary benefits, he found that the material connection between the Gunns commissions and the GST refunds was with the acquisition of the woodlots, and not with the offers to the Secondary Investors. The only material connection was between one income tax refund paid to Meloka and the offer to one Secondary Investor by Mr Van de Steeg. His Honour then found that, for the purposes of paragraph 290-60(1)(c), Mr Van de Steeg had a substantial role in respect of the marketing to that Investor. | His Honour concluded that, for the purposes of paragraph 290-65(1)(a), the definition of 'scheme benefit' in section 284-150 of Schedule 1 to the TAA required proof by the Commissioner of the difference between the tax liability under the Plan and that under an alternative postulate. The Commissioner failed to demonstrate that the Secondary Investors would not have had the same reduced income tax liability, or that the signatories would not have had an entitlement to GST refunds, in the absence of the Plan. His Honour also found that it was reasonable to conclude that the dominant purpose of the respondents was to make a profit for themselves from the Plan, and not to get scheme benefits for the Secondary Investors or the signatories. However, he was prepared to accept that, under subparagraph 290-65(1)(b)(i), it was not reasonably arguable that a reduced income tax liability was available at law to the Secondary Investors, or that GST refunds were available to the signatories. | Decision of Middleton J - subsection 290-50(2) | His Honour accepted that the Project was promoted by Gunns on the basis of conformity with PR 2006/8. However, he concluded that the respondents did not engage in conduct that resulted in the Project being implemented in a materially different way from that described in PR 2006/8. The purpose of subsection 290-50(2) is to protect the integrity of the product ruling system by ensuring taxpayers can rely on a ruling when investing in the scheme to which the ruling specifically relates. Accordingly, the 'implementation' of a product ruling scheme refers to the way in which the scheme as a whole is carried out. As PR 2006/8 covered neither the Secondary Investment, nor the signing of documents by the Smithsons and Velardis, the Plan could not result in the Project being implemented in a materially different way from that described in PR 2006/8. | Decision of the Full Court | The Full Court considered 6 major issues raised by the Commissioner on his appeal and an issue raised by the respondents on their notice of contention. 1. The Court concluded that Middleton J was wrong to find that the definition of 'scheme benefit', when read as part of section 290-65, required the pleading and proving by the Commissioner of what would have been the tax-related liabilities of the relevant entities apart from the scheme, i.e., the 'alternative postulate'. The proper starting point for the statutory interaction is to recognise that subsection 290-65(1) is concerned with the purpose for which an entity has entered into or carried out a scheme. The focus of the provision, at the time of the conduct in subsection 290-50(1), is on what it was reasonable to conclude that the entity was proposing to do and why, and not on positing what might have been done, removed from what was done. That subsection 290-65(1) does not require an analysis of an 'alternative postulate' is further supported by the fact that it can apply in situations where a scheme has not been implemented, and where promotion has occurred without success and without bringing identified persons into the scheme. [226] - [236] 2. The Court concluded that Middleton J was wrong to find that it was not reasonable to conclude that each respondent entered into or carried out the Plan with the dominant purpose of the signatories or the Secondary Investors getting a scheme benefit. While the respondents wished to make profits from the purchase of woodlots and from running a foreign exchange trading business, they chose the Plan to effect that. It was integral to the Plan that the signatories would obtain GST refunds from the purchase of the woodlots, and that the Secondary Investors would obtain income tax deductions. The getting of those scheme benefits was vital to the carrying out of the Plan, and was the dominant purpose of the respondents. The additional purposes of profit making and the getting of commissions do not affect that conclusion. [238] - [246] 3. The Court concluded that the construction by Middleton J of the definition of 'promoter' in section 290-60 was too narrow. The words used in paragraph 290-60(1)(a) are wide, and are not limited to making offers to participate in a scheme. In an appropriate context, 'otherwise encourages the growth of the scheme or interest in it', can include conduct of developing and implementing a scheme. The Court found that both respondents encouraged the growth of the Plan or interest in it to the Secondary Investors. [248] - [278] 4. The Court also concluded that Middleton J should have found that the conduct of the respondents in procuring the participation of the Smithsons and Velardis as signatories encouraged growth of the Plan. [279] - [284] 5. The Court concluded that the construction by Middleton J of 'consideration in respect of that marketing or encouragement' in paragraph 290-60(1)(b) was too narrow, and that his Honour was wrong to conclude that there was no consideration received by the respondents in respect of marketing or encouragement. The commissions and the GST refunds received by the respondents had a clear relationship to the procurement of the Smithsons and Velardis into the Plan. Those amounts received also bore a clear relationship to the conduct of the respondents in procuring the Secondary Investors. The Court agreed that his Honour was not wrong to not allow the Commissioner to rely on any promises by the Secondary Investors to pay over their income tax refunds as relevant consideration under paragraph 290-60(1)(b) by virtue of this being raised too late in proceedings. [285] - [292] 6. The Court agreed that subsection 290-50(2) did not apply. [293] - [323] 7. The Court rejected the respondents' contention that it was reasonably arguable, for the purposes of paragraph 290-65(1)(b), that the entities which acquired the woodlots were entitled to GST input tax credits in relation to those acquisitions. Those 'partnership' entities did not make acquisitions in carrying on an enterprise, either by carrying on a business or an adventure in the nature of trade. [324] - [331] | 1. The Court concluded that Middleton J was wrong to find that the definition of 'scheme benefit', when read as part of section 290-65, required the pleading and proving by the Commissioner of what would have been the tax-related liabilities of the relevant entities apart from the scheme, i.e., the 'alternative postulate'. The proper starting point for the statutory interaction is to recognise that subsection 290-65(1) is concerned with the purpose for which an entity has entered into or carried out a scheme. The focus of the provision, at the time of the conduct in subsection 290-50(1), is on what it was reasonable to conclude that the entity was proposing to do and why, and not on positing what might have been done, removed from what was done. That subsection 290-65(1) does not require an analysis of an 'alternative postulate' is further supported by the fact that it can apply in situations where a scheme has not been implemented, and where promotion has occurred without success and without bringing identified persons into the scheme. [226] - [236] 2. The Court concluded that Middleton J was wrong to find that it was not reasonable to conclude that each respondent entered into or carried out the Plan with the dominant purpose of the signatories or the Secondary Investors getting a scheme benefit. While the respondents wished to make profits from the purchase of woodlots and from running a foreign exchange trading business, they chose the Plan to effect that. It was integral to the Plan that the signatories would obtain GST refunds from the purchase of the woodlots, and that the Secondary Investors would obtain income tax deductions. The getting of those scheme benefits was vital to the carrying out of the Plan, and was the dominant purpose of the respondents. The additional purposes of profit making and the getting of commissions do not affect that conclusion. [238] - [246] 3. The Court concluded that the construction by Middleton J of the definition of 'promoter' in section 290-60 was too narrow. The words used in paragraph 290-60(1)(a) are wide, and are not limited to making offers to participate in a scheme. In an appropriate context, 'otherwise encourages the growth of the scheme or interest in it', can include conduct of developing and implementing a scheme. The Court found that both respondents encouraged the growth of the Plan or interest in it to the Secondary Investors. [248] - [278] 4. The Court also concluded that Middleton J should have found that the conduct of the respondents in procuring the participation of the Smithsons and Velardis as signatories encouraged growth of the Plan. [279] - [284] 5. The Court concluded that the construction by Middleton J of 'consideration in respect of that marketing or encouragement' in paragraph 290-60(1)(b) was too narrow, and that his Honour was wrong to conclude that there was no consideration received by the respondents in respect of marketing or encouragement. The commissions and the GST refunds received by the respondents had a clear relationship to the procurement of the Smithsons and Velardis into the Plan. Those amounts received also bore a clear relationship to the conduct of the respondents in procuring the Secondary Investors. The Court agreed that his Honour was not wrong to not allow the Commissioner to rely on any promises by the Secondary Investors to pay over their income tax refunds as relevant consideration under paragraph 290-60(1)(b) by virtue of this being raised too late in proceedings. [285] - [292] 6. The Court agreed that subsection 290-50(2) did not apply. [293] - [323] 7. The Court rejected the respondents' contention that it was reasonably arguable, for the purposes of paragraph 290-65(1)(b), that the entities which acquired the woodlots were entitled to GST input tax credits in relation to those acquisitions. Those 'partnership' entities did not make acquisitions in carrying on an enterprise, either by carrying on a business or an adventure in the nature of trade. [324] - [331]

Issues decided:
Decision of Middleton J - subsection 290-50(1): Middleton J found that Mr Van de Steeg was a 'promoter' of the Plan within the meaning of section 290-60, but that Dr Ludekens was not. However, Mr Van de Steeg did not contravene subsection 290-50(1) because his Honour found that the Plan was not a 'tax exploitation scheme' within the meaning of section 290-65. His Honour found that paragraph 290-60(1)(a) is confined to active promotional and selling activities, and does not include the mere development and implementation of a scheme. Most of the respondents' conduct relied on by the Commissioner related to the mere development and implementation of the Plan. While his Honour accepted that 'consideration' in paragraph 290-60(1)(b) can include both monetary and non-monetary benefits, he found that the material connection between the Gunns commissions and the GST refunds was with the acquisition of the woodlots, and not with the offers to the Secondary Investors. The only material connection was between one income tax refund paid to Meloka and the offer to one Secondary Investor by Mr Van de Steeg. His Honour then found that, for the purposes of paragraph 290-60(1)(c), Mr Van de Steeg had a substantial role in respect of the marketing to that Investor. His Honour concluded that, for the purposes of paragraph 290-65(1)(a), the definition of 'scheme benefit' in section 284-150 of Schedule 1 to the TAA required proof by the Commissioner of the difference between the tax liability under the Plan and that under an alternative postulate. The Commissioner failed to demonstrate that the Secondary Investors would not have had the same reduced income tax liability, or that the signatories would not have had an entitlement to GST refunds, in the absence of the Plan. His Honour also found that it was reasonable to conclude that the dominant purpose of the respondents was to make a profit for themselves from the Plan, and not to get scheme benefits for the Secondary Investors or the signatories. However, he was prepared to accept that, under subparagraph 290-65(1)(b)(i), it was not reasonably arguable that a reduced income tax liability was available at law to the Secondary Investors, or that GST refunds were available to the signatories. | Decision of Middleton J - subsection 290-50(2): His Honour accepted that the Project was promoted by Gunns on the basis of conformity with PR 2006/8. However, he concluded that the respondents did not engage in conduct that resulted in the Project being implemented in a materially different way from that described in PR 2006/8. The purpose of subsection 290-50(2) is to protect the integrity of the product ruling system by ensuring taxpayers can rely on a ruling when investing in the scheme to which the ruling specifically relates. Accordingly, the 'implementation' of a product ruling scheme refers to the way in which the scheme as a whole is carried out. As PR 2006/8 covered neither the Secondary Investment, nor the signing of documents by the Smithsons and Velardis, the Plan could not result in the Project being implemented in a materially different way from that described in PR 2006/8. | Decision of the Full Court: The Full Court considered 6 major issues raised by the Commissioner on his appeal and an issue raised by the respondents on their notice of contention. 1. The Court concluded that Middleton J was wrong to find that the definition of 'scheme benefit', when read as part of section 290-65, required the pleading and proving by the Commissioner of what would have been the tax-related liabilities of the relevant entities apart from the scheme, i.e., the 'alternative postulate'. The proper starting point for the statutory interaction is to recognise that subsection 290-65(1) is concerned with the purpose for which an entity has entered into or carried out a scheme. The focus of the provision, at the time of the conduct in subsection 290-50(1), is on what it was reasonable to conclude that the entity was proposing to do and why, and not on positing what might have been done, removed from what was done. That subsection 290-65(1) does not require an analysis of an 'alternative postulate' is further supported by the fact that it can apply in situations where a scheme has not been implemented, and where promotion has occurred without success and without bringing identified persons into the scheme. [226] - [236] 2. The Court concluded that Middleton J was wrong to find that it was not reasonable to conclude that each respondent entered into or carried out the Plan with the dominant purpose of the signatories or the Secondary Investors getting a scheme benefit. While the respondents wished to make profits from the purchase of woodlots and from running a foreign exchange trading business, they chose the Plan to effect that. It was integral to the Plan that the signatories would obtain GST refunds from the purchase of the woodlots, and that the Secondary Investors would obtain income tax deductions. The getting of those scheme benefits was vital to the carrying out of the Plan, and was the dominant purpose of the respondents. The additional purposes of profit making and the getting of commissions do not affect that conclusion. [238] - [246] 3. The Court concluded that the construction by Middleton J of the definition of 'promoter' in section 290-60 was too narrow. The words used in paragraph 290-60(1)(a) are wide, and are not limited to making offers to participate in a scheme. In an appropriate context, 'otherwise encourages the growth of the scheme or interest in it', can include conduct of developing and implementing a scheme. The Court found that both respondents encouraged the growth of the Plan or interest in it to the Secondary Investors. [248] - [278] 4. The Court also concluded that Middleton J should have found that the conduct of the respondents in procuring the participation of the Smithsons and Velardis as signatories encouraged growth of the Plan. [279] - [284] 5. The Court concluded that the construction by Middleton J of 'consideration in respect of that marketing or encouragement' in paragraph 290-60(1)(b) was too narrow, and that his Honour was wrong to conclude that there was no consideration received by the respondents in respect of marketing or encouragement. The commissions and the GST refunds received by the respondents had a clear relationship to the procurement of the Smithsons and Velardis into the Plan. Those amounts received also bore a clear relationship to the conduct of the respondents in procuring the Secondary Investors. The Court agreed that his Honour was not wrong to not allow the Commissioner to rely on any promises by the Secondary Investors to pay over their income tax refunds as relevant consideration under paragraph 290-60(1)(b) by virtue of this being raised too late in proceedings. [285] - [292] 6. The Court agreed that subsection 290-50(2) did not apply. [293] - [323] 7. The Court rejected the respondents' contention that it was reasonably arguable, for the purposes of paragraph 290-65(1)(b), that the entities which acquired the woodlots were entitled to GST input tax credits in relation to those acquisitions. Those 'partnership' entities did not make acquisitions in carrying on an enterprise, either by carrying on a business or an adventure in the nature of trade. [324] - [331] 1. The Court concluded that Middleton J was wrong to find that the definition of 'scheme benefit', when read as part of section 290-65, required the pleading and proving by the Commissioner of what would have been the tax-related liabilities of the relevant entities apart from the scheme, i.e., the 'alternative postulate'. The proper starting point for the statutory interaction is to recognise that subsection 290-65(1) is concerned with the purpose for which an entity has entered into or carried out a scheme. The focus of the provision, at the time of the conduct in subsection 290-50(1), is on what it was reasonable to conclude that the entity was proposing to do and why, and not on positing what might have been done, removed from what was done. That subsection 290-65(1) does not require an analysis of an 'alternative postulate' is further supported by the fact that it can apply in situations where a scheme has not been implemented, and where promotion has occurred without success and without bringing identified persons into the scheme. [226] - [236] 2. The Court concluded that Middleton J was wrong to find that it was not reasonable to conclude that each respondent entered into or carried out the Plan with the dominant purpose of the signatories or the Secondary Investors getting a scheme benefit. While the respondents wished to make profits from the purchase of woodlots and from running a foreign exchange trading business, they chose the Plan to effect that. It was integral to the Plan that the signatories would obtain GST refunds from the purchase of the woodlots, and that the Secondary Investors would obtain income tax deductions. The getting of those scheme benefits was vital to the carrying out of the Plan, and was the dominant purpose of the respondents. The additional purposes of profit making and the getting of commissions do not affect that conclusion. [238] - [246] 3. The Court concluded that the construction by Middleton J of the definition of 'promoter' in section 290-60 was too narrow. The words used in paragraph 290-60(1)(a) are wide, and are not limited to making offers to participate in a scheme. In an appropriate context, 'otherwise encourages the growth of the scheme or interest in it', can include conduct of developing and implementing a scheme. The Court found that both respondents encouraged the growth of the Plan or interest in it to the Secondary Investors. [248] - [278] 4. The Court also concluded that Middleton J should have found that the conduct of the respondents in procuring the participation of the Smithsons and Velardis as signatories encouraged growth of the Plan. [279] - [284] 5. The Court concluded that the construction by Middleton J of 'consideration in respect of that marketing or encouragement' in paragraph 290-60(1)(b) was too narrow, and that his Honour was wrong to conclude that there was no consideration received by the respondents in respect of marketing or encouragement. The commissions and the GST refunds received by the respondents had a clear relationship to the procurement of the Smithsons and Velardis into the Plan. Those amounts received also bore a clear relationship to the conduct of the respondents in procuring the Secondary Investors. The Court agreed that his Honour was not wrong to not allow the Commissioner to rely on any promises by the Secondary Investors to pay over their income tax refunds as relevant consideration under paragraph 290-60(1)(b) by virtue of this being raised too late in proceedings. [285] - [292] 6. The Court agreed that subsection 290-50(2) did not apply. [293] - [323] 7. The Court rejected the respondents' contention that it was reasonably arguable, for the purposes of paragraph 290-65(1)(b), that the entities which acquired the woodlots were entitled to GST input tax credits in relation to those acquisitions. Those 'partnership' entities did not make acquisitions in carrying on an enterprise, either by carrying on a business or an adventure in the nature of trade. [324] - [331]

ATO view of decision:
The ATO notes that the views of the Full Court about the operation of sections 290-60 and 290-65 are consistent with the Commissioner's submissions to the Court. The ATO also respectfully accepts the views of both Middleton J and the Full Court about why neither respondent had contravened subsection 290-50(2).

Administrative treatment:
Implications for ATO precedential documents (Public Rulings & Determinations etc) | None

Legislative references: A New Tax System (Goods and Services Tax) Act 1999 s 7-1(2) s 7-5 s 7-10 s 9-20 s 11-5 s 11-15 s 17-15 s 23-1 Corporations Act 2001 (Cth) Pt 7.6 Div 4 Income Tax Assessment Act 1936 s 177C s 177D s 177F Income Tax Assessment Act 1997 s 960-100 s 995-1(1) Taxation Administration Act 1953 Schedule 1 s 255-1 s 284-150(1) s 290-5 s 290-50 s 290-50(1) s 290-50(2) s 290-55(4) s 290-60 s 290-60(1) s 290-65 s 295-65(1)
Case references: Australian Education Union v Dept of Education and Children's Services 248 CLR 1 [2012] HCA 3 (2012) 86 ALJR 217 Certain Lloyd's Underwriters v Cross (2012) 87 ALJR 131 [2012] HCA 56 248 CLR 378 Commissioner of Police v Kennedy [2007] NSWCA 328 Federal Commissioner of Taxation v Consolidated Press Holdings Ltd (2001) 207 CLR 235 [2001] HCA 32 2001 ATC 4343 (2001) 47 ATR 229 Federal Commissioner of Taxation v Hart (2004) 217 CLR 216 [2004] HCA 26 55 ATR 712 2004 ATC 4599 Forrest v ASIC (2012) 86 ALJR 1183 [2012] HCA 39 247 CLR 486 Sea Shepherd Australia Ltd v Federal Commissioner of Taxation (2013) 212 FCR 252 [2013] FCAFC 68 2013 ATC 20-397 SZGIZ v Minister for Immigration and Citizenship (2013) 212 FCR 235 [2013] FCAFC 71
Subject references: Civil penalty Tax exploitation scheme Scheme Benefit Promoter Markets or otherwise encourages growth or interest in scheme Consideration received in respect of marketing or encouragement Implementation of product ruling scheme