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Is Bitcoin money?


The ATO published a draft GST ruling earlier this month with regards to the GST consequences of trading in Bitcoins. This comment sets out the relevant parts of the draft ruling and a response to those parts extracted.

Extract from GSTR 2014/D3


5. A transfer of bitcoin is a ‘supply’ for GST purposes. The exclusion from the definition of supply for supplies of money does not apply to bitcoin because bitcoin is not ‘money’ for the purposes of the GST Act.

What is Bitcoin?

21. The Oxford Dictionary of English defines Bitcoin as:

a type of digital currency in which encryption techniques are used to regulate the generation of units of currency and verify the transfer of funds, operating independently of a central bank: bitcoin has become a hot commodity among speculators | If you want to buy something using bitcoin you need to make sure the seller accepts the cryptocurrency.

22. It is described by commentators as ‘a virtual currency that essentially operates as online cash’ and as a ‘crypto-currency, designed to reinvent the way that money works’. Bitcoin operates as a decentralized peer-to-peer payment network whose implementation relies on the use of public-key cryptography to validate transactions involving existing bitcoin and in doing so generates new bitcoin. The Bitcoin system is decentralized in that it is not under the control of a central authority. Transactions on the Bitcoin network are denominated in bitcoin. The value of bitcoin is ‘not derived from gold or government fiat, but from the value that people assign it’.

23. The process through which bitcoins are created and enter into circulation is called bitcoin ‘mining’. Mining involves a ‘miner’ using freely downloadable Bitcoin software to solve complex cryptographic equations that essentially verify and validate transactions involving the transfer of existing bitcoins between other parties, for example to ensure an existing bitcoin cannot be transferred more than once by the one person. The first ‘miner’ to successfully solve an equation receives as a reward a specified number of newly created Bitcoins to their Bitcoin address. The process of ‘mining’ has been explained as follows:

The actual mining of Bitcoins is by a purely mathematical process. A useful analogy is with the search for prime numbers: it used to be fairly easy to find the small ones (Eratothenes in Ancient Greece produced the first algorithm for finding them). But as they were found it got harder to find the larger ones.

For Bitcoins the search is not actually for prime numbers but to find a sequence of data (called a ‘block’) that produces a particular pattern when the Bitcoin ‘hash’ algorithm is applied to the data. When a match occurs the miner obtains a bounty of Bitcoins (and also a fee if that block was used to certify a transaction). The size of the bounty reduces as Bitcoins around the world are mined.

The difficulty of the search is also increased so that it becomes computationally more difficult to find a match. These two effects combine to reduce over time the rate at which Bitcoins are produced and mimic the production rate of a commodity like gold. At some point new Bitcoins will not be produced and the only incentive for miners will be transaction fees.

24. Bitcoins that are already in circulation can be acquired either by exchanging ‘national’ or ‘fiat’ currencies for them through an online exchange (or through a Bitcoin ATM), or by accepting them as a gift or in exchange for goods and services.

25. Bitcoins are sent and received via Bitcoin addresses. A Bitcoin address is a long alphanumeric string used by the network as an identifier. A Bitcoin address can be generated at no cost by any user of Bitcoin and a person can have any number of Bitcoin addresses.

26. Bitcoin uses public key cryptography to make and verify digital signatures used in Bitcoin transactions. Each user is assigned a ‘public/private’ keypair which is saved to that person’s Bitcoin wallet. A Bitcoin wallet has been described as something ‘that stores the digital credentials for [a person’s] bitcoin holdings’.

27. The public key is an alphanumeric number that mathematically corresponds to the Bitcoin address which is publically known. The private key is also an alphanumeric number, however, it is kept secret as it is what allows the bitcoins to be transferred between Bitcoin addresses. The private key is also mathematically related to the Bitcoin address. It is designed so that the Bitcoin address can be calculated from that private key, but importantly, the same cannot be done in reverse.

28. To transfer bitcoins, a person creates a transaction message with the number of bitcoins to be transferred and signs the transaction with their private key. Those bitcoins are associated with the person’s public key. The transaction is then broadcast to the Bitcoin network for validation through the Bitcoin mining process.

29. A bitcoin is only accessible by the person in possession of the private key that relates to the Bitcoin address associated with that person’s bitcoin holdings. Accordingly, a bitcoin consists not just of the numerical amount (or balance) of bitcoins and the Bitcoin address to which they are associated, but also the related private key that allows the holder to do anything with those bitcoin.

The GST Act’s definition of money

The ATO considered the definition of money in s 195-1 of the GST Act where money is given an inclusive definition.

Money includes:

(a) currency (whether of Australia or any other country); and

(b) promissory notes and bills of exchange; and

(c) any negotiable instrument used or circulated, or intended for use or circulation, as currency (whether of Australia or of any other country); and

(d) postal notes and money orders; and

(e) whatever is supplied as payment by way of:

(i) credit card or debit card; or

(ii) crediting or debiting an account; or

(iii) creation or transfer of a debt.

However, it does not include:

(f) a collector’s piece; or

(g) an investment article; or

(h) an item of numismatic interest; or

(i) currency the market value of which exceeds its stated value as legal tender in the country of issue.

The ATO’s reasons

It is not controversial that the ATO came to the decision that Bitcoin was not currency, it not satisfying the definition of currency under the Currency Act 1965 (Cth). Nor was it controversial that the ATO came to the conclusion that Bitcoin did not satisfy parts (b) to (d) of the definition of money, given that parts (b) to (d) contemplate specific banking and financial concepts. Further, the ATO very likely came to the correct conclusion that Bitcoin did not satisfy part (e) of the definition, Bitcoin being not a supply by way of credit card, an account, or the transfer of a debt.

The ATO then considered the broader meaning of money and noted:

67. As was noted at paragraph 31, the definition of ‘money’ in the GST Act is an inclusive definition which generally indicates something broader than what follows in a statutory definition. Determining whether a broader meaning is intended and the content of that meaning is informed by the statutory context in which the term ‘money’ appears.

68. In the Commissioner’s view, the use of the term ‘money’ is intended to prescribe fiat currency and those financial instruments and payment mechanisms which are denominated in, or relate directly to, fiat currency.

69. The meaning of ‘money’ in the context of the GST Act was considered in Travelex Limited v. Commissioner of Taxation (Travelex). There Emmett J observed:

Money is any generally accepted medium of exchange for goods and services and for the payment of debts (see Butterworth’s Australian Legal Dictionary at 759). Currency and legal tender are examples of money. However, a thing can be money and can operate as a generally accepted medium and means of exchange, without being legal tender. Therefore, bank notes have historically been treated as money, notwithstanding that they were not legal tender. It is common consent and conduct that gives a thing the character of money (see Miller v. Race (1758) 1 Burrow 452 at 457). Money is that which passes freely from hand to hand throughout the community in final discharge of debts and full payment for commodities, being accepted equally without reference to the character or credit of the person who offers it and without the intention of the person who receives it to consume it or apply it to any other use than in turn to tender it to others in discharge of debts or payment for commodities (see Moss v. Hancock [1899] 2 QB 111 at 116).

(emphasis added)

The bolded part of Emmett’s judgment can be considered the longstanding definition of money at common law. On the Moss v Hancock view, Bitcoin would very likely satisfy the definition of money at common law. However, the ATO disagreed with the sufficiency of the Moss v Hancock view, which it characterised as the “functional theory to the definition of money”. The ATO continued and said:

71. In the modern era, however, the State theory of ‘money’ requires that, in addition to the functional characteristics described, money ‘must exist within some form of legal framework, because it reflects an exercise of sovereignty by the State in question’.

73. Custom alone, whether it be local or international, cannot make something ‘money’ in the absence of an ‘exercise of monetary sovereignty by the State concerned’. Consistent with statutory context, policy and the wider legislative framework governing Australian currency established by the Currency Act, this is the sense in which the word ‘money’ is used in the section 195-1 definition. Bitcoin, therefore, is not ‘money’ for GST purposes.

Should the state theory of money apply to the GST Act?

The ATO’s draft ruling relies on the premise that the state theory of money poses a necessary condition to the definition of money.

It is my view that if the state theory of money were to apply to the GST Act then it would mean that money can never include a non-currency concept. The conclusion cannot seriously be correct because it would mean the inclusive definition of money is made redundant as part (a) of the definition would give the exclusive definition of money. Furthermore, the fact is that parts (b)-(e) of the definition of money expressly includes concepts which do not derive their efficacy from the exercise of monetary sovereignty by the state. Therefore it must be accepted that money can include concepts which take their value and recognisance by custom and commercial practice.

In any case, it is doubtful whether Mann on Money even goes as far as to advocate the state theory of money. In paragraph [1.11] of the seventh edition, Proctor identifies that:

[The English and Canadian authorities] do not emphasise the legal framework within which money must exist if it is to be used as a final and complete means of discharging financial obligations; indeed the Canadian Supreme Court appears to have taken the view that ‘money’ could exist without any such legal support. By contrast, however, the definitions employed in the Uniform Commercial Code of the United States describe money as ‘a medium of exchange authorised or adopted by a domestic or foreign government as part of its currency’… It seems fair to note that more modern definitions of ‘money’ have tended to adopt a broader approach by including not only bank deposits but even government debt securities, which can readily be converted into cash.

The point to take from Mann on Money is simply that there is no consensus in the common law countries as to the definition of money. In any case, whatever is said in Mann on Money cannot change the task of statutory construction, particularly in light of the inclusive definition in the GST Act, which is in direct contrast to the specific definition in the US Uniform Commercial Code.

The conclusion in paragraph 73 of the ATO’s draft ruling therefore falls once the premise in paragraph 71 is removed. Should it be accepted as a matter of fact that private individuals view Bitcoin as a medium of exchange, a store of value and an item which allows them to discharge their obligations which sound in the payment of money, then Bitcoin should fall within the definition of money in s 195-1 of the GST Act.

What is the policy behind the exception for money in the GST Act?

It is clear that the exception in 9-10(4) for money intends to avoid double taxation as money supplied as payment for a supply should not be a taxable supply in itself (Explanatory Memorandum at [3.7].

On the other hand, it does not serve the policy of the GST Act to remove from the tax base barter-trade transactions. However it would be facile to suggest that Bitcoin is a barter commodity, such as that between an accountant that barters her services for meat supplied from her butcher. Bitcoin as a commodity does not give any utility other than as a medium of exchange (and in some cases as a speculative investment analogous in part to foreign currency). Therefore it is not a commodity that, if not first exchanged for currency, has some other intrinsic value other than as a medium of exchange.

Nonetheless, Bitcoin, as compared to fiat money, has unique advantages and disadvantages, which justifies distinguishing it from fiat money. It is the economic advantages to Bitcoin as compared to fiat money that could justify a different tax treatment to fiat money. I do not purport to explain the features and advantages of Bitcoin in full, save to say that its transferability along with the anonymity associated with its transferral causes it to lose some of the characteristics associated with the specifically included types of money in parts (a) to (e).

However, the policy of the matter should only be relevant if the legal position is ambiguous. Where it is very likely that the state theory of money should not, in the context of the GST Act, augment the common law requirement for money as expressed in Moss v Hancock, the policy of the matter ought to be discounted.


In light of the discussion in the paragraphs above, it is my respectful view that Bitcoin should be considered money in its reference in s 9-10(4) in the GST Act in particular and the GST Act as a whole.


Upon further deliberation, I have come to the conclusion that bitcoin is not money. Whether or not bitcoin is money is a mixed question of law and fact. The factual enquiry requires us to consider whether custom has become sufficiently prevalent that bitcoins are a universally accepted medium of exchange by the people and businesses within this jurisdiction. It comes down to that words “generally accepted”, “common consent and conduct” and “freely from hand to hand… being accepted equally”. Those words, it is submitted import an element of universality about them. Whilst it is not necessary for bitcoins to be accepted by every person and business in the community (after all, credit facilities from banks are not even accepted by every vendor), it must be such that a person in possession of bitcoins should be able to go about his day to day life with some confidence that he or she can use bitcoins as a medium of exchange with an appreciable number of vendors. At the moment, the litmus test can be put thus: would an ordinary person, who was familiar with the concept, but not the trading of bitcoins, today, accept them in satisfaction of a debt or obligation. The answer must necessarily be no, and for many reasons. These reasons include that bitcoin is not a stable store of value and that bitcoins are not accepted by a sufficiently large number of vendors that give a person confidence that he or she can then exchange bitcoins for the goods and services he or she wants with convenience.

Therefore, although I disagree with the ATO’s analysis in GSTR2014/D3, I have come to a similar conclusion that Bitcoin is not money.

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FTZK v Minister for Immigration and Border Protection [2014] HCA 26 


There is a perception, whether or not correct in itself (but also not without foundation), that the current bench of the High Court of Australia is “pro-refugee”. By virtue of a person coming to this perception, it is therefore possible that the person’s view as to the correctness of judgments of the High Court in migration matters becomes clouded by their prejudice.

I do not doubt that there may be decisions of the High Court on migration matters that may eventually be overturned for being incorrectly decided. But equally, I hold the current line of cases on jurisdictional error in high confidence.

Today FTZK v Minister for Immigration and Border Protection [2014] HCA 26 was decided. It is a judgment that may cause people of less informed views to take offence.


FTZK was a national of the People’s Republic of China and he first entered Australia in 1997. When he applied for his visa, he falsely recorded his occupation as “Engineer” even though he was not an engineer and never was an engineer. FTZK explained that “this was the only way [he] could get the visa and leave [the PRC]”.

Meanwhile, in the PRC in May 1997, FTZK was implicated by two alleged co-accused in the crimes of kidnap and murder of a 15 year old school boy in Tianjin in December 1996. FTZK’s two alleged co-accused were executed by authorities in the PRC in May 1998.

In December 1998, FTZK applied for a Protection visa, claiming that he had left the PRC because he had been persecuted on the ground of his religious beliefs. The Minister refused and the Minister’s decision was affirmed by the Refugee Review Tribunal in December 1999. Therefore between January 2000 and February 2004 FTZK lived in Australia as an unlawful non-citizen. In February 2004, he was located and taken into immigration detention. In March 2004, soon after the refusal of a fresh application by FTZK for a bridging visa, he attempted to escape from immigration detention.

On a fresh application in 2011 the Minister concluded that FTZK was excluded from protection under the Refugees Convention by Art 1F(b). Article 1F of the Convention provides:

The provisions of this Convention shall not apply to any person with respect to whom there are serious reasons for considering that:

(b) he has committed a serious non-political crime outside the country of refuge prior to his admission to that country as a refugee;

FTZK appealed to the AAT. It was not in dispute that each of the crimes alleged against him was a “serious non-political crime” within the meaning of Art 1F(b). In May 2012, relying on Art 1F(b), the AAT affirmed the decision to refuse to grant a protection visa.

Procedural History

The Tribunal’s Decision

The Tribunal’s conclusion was based upon four findings.

  1. Documentary evidence provided by the PRC government, including transcripts of interrogation of the two alleged co-accused implicating FTZK in the alleged crimes;
  2. FTZK leaving China shortly after the crimes were committed and him providing false information to the Australian authorities in order to obtain a visa;
  3. FTZK being evasive when giving evidence as to his religious affiliations in Australia and China;
  4. FTZK’s attempt to escape from detention in 2004, shortly after his application for a long term business visa was refused.

The Tribunal recited the four findings and said:

The conclusion I have reached is based on the totality of the evidence I have referred to above. Any one of the various factors would not have been sufficient to establish serious reasons; it is the combination of factors which gives rise to reasons of sufficient seriousness to satisfy Article 1F of the Convention.

On appeal to the Full Federal Court

On the appeal in the Full Court, the majority considered the Tribunal’s findings and said:

The Tribunal clearly regarded these facts as demonstrating [FTZK’s] consciousness of his guilt of the criminal offences and desire to escape from the consequences of his criminal conduct. It was unnecessary for the Tribunal to express this link in order to make it exist.

Kerr J dissented and found that each of those findings made by the Tribunal was of no probative value unless linked to a further fact or circumstance which the Tribunal was required to find, being motive or consciousness of guilt. In other words, the findings on their own do not lead to the conclusion that there are serious reasons for considering that FTZK committed a serious non-political crime in China. Importantly, his Honour said that a reviewing court implying or inferring critical findings of fact, not expressed in the decision-maker’s reasons, would “turn on its head the fundamental relationship between administrative decision-makers and Chapter III courts exercising the power of judicial review.”


What was the legal basis for the decision?

It is Kerr J’s reasons for judgment that prevailed upon appeal to the High Court.

French CJ and Gageler J said first that the ultimate conclusion that Art 1F(b) was engaged is critically dependent upon the existence of a rational connection between the Tribunal’s findings of fact taken in combination and the commission by FTZK of the alleged crimes.

Their Honours acknowledged that a rational connection of that kind existed with respect to the material produced by the Chinese government (accepted by the AAT as “direct evidence” of the allegations). However, they also observed that “the AAT did not regard that material, taken by itself, as constituting serious reasons for considering that [FTZK] had committed the alleged crimes”.

Consequently, the rest of the AAT’s findings were not pertinent to the question of whether there are serious reasons for considering that FTZK has committed a serious non-political crime. Their Honours found:

Those findings are consistent with [FTZK] having the purpose of leaving China and living in Australia. Whether or not they evidence a consciousness of guilt of the alleged offences was not the subject of any explicit finding by the AAT. Nor, contrary to the views of the majority in the Full Court of the Federal Court, is a finding on the part of the AAT that they evidence consciousness of guilt so apparent that the finding should be implied.

Their Honours thereby concluded that the AAT based its ultimate conclusion on findings of fact which it did not demonstrate by its reasons to respond to the question it had asked and that by that omission it committed a jurisdictional error.

Hayne J came to a similar conclusion, finding that:

[O]nce it is recognised that [FTZK had] a well-founded fear of persecution for a Convention reason, his departure from China, his telling lies to obtain the first visa he obtained and his telling lies or giving evasive testimony in connection with his application for a protection visa are as readily explained by his desire to escape from China for innocent reasons as they would be by a desire to run away from the scene of a crime. Likewise, his attempt to escape from immigration detention might be thought to bespeak a disregard for authority and a willingness to break Australian immigration law. But neither of those conclusions bears upon whether there are serious reasons for considering that he has committed kidnapping and murder.

Crennan and Bell JJ observed that all the evidence that the Tribunal took into account had an equally probable explanation in the desire on the part of the refugee to live in Australia – after all, it is exactly also what someone fearing prosecution would do, even if they had not committed a serious non-political crime! Therefore their Honours held that, as a matter of law, the Tribunal had to ask of the evidence before it whether that evidence was probative of “serious reasons for considering” that FTZK committed one or more of the alleged crimes.
Their Honours concluded that:

The path by which the Tribunal reached its conclusion… did not include any consideration of whether, and if so how, the lies and conduct relied upon were concerned with circumstances or events connected with one or more of the alleged crimes. The Tribunal’s findings in respect of [FTZK’s] credit did not involve a rejection of his denial that he committed the alleged crimes or amount to a finding that the lies and conduct constituted an admission against interest by him in respect of those crimes.

In other words, every one of the judges decided that the Tribunal fell into error because its reasons were evasive. It identified evidence that could support the view that FTZK committed a serious non-political crime, but did not then use a process of logic to show why it preferred one interpretation of the evidence over the other.

Those who are somewhat versed in the law might be screaming House v The King right now – if the factual findings were open to the decision maker, ought the Court to give the decision maker the benefit of the doubt?

The short answer to that is, no. This betrays a fundamental misunderstanding of the relationship between courts of appeal and courts of review (and the relationship between merits review and judicial review).

This brings into focus Kerr J’s observation that a reviewing court implying or inferring critical findings of fact, not expressed in the decision-maker’s reasons, would “turn on its head the fundamental relationship between administrative decision-makers and Chapter III courts exercising the power of judicial review.”

It goes without question that judicial review is not merits review. A court undertaking the task of judicial review is not permitted to traverse the merits of the decision or the findings of the decision maker. The High Court, I should add, did not traverse the findings of the Tribunal. Just as significant as the principle that a court undertaking the task of judicial review must not traverse the merits of the decision, it must not add to or supplement the merits of the reasons of the decision maker. To do so would cause the reviewing court to be undertaking merits review.

There is nonetheless a principle that reasons of the decision maker should not be read with the scrutiny of a legally trained eye for error. Nonetheless, this does not excuse decision makers from giving incomplete reasons or evasive and illogical reasoning. If my interpretation is correct, the principle might excuse grammar, expression and weakness in substance, but it does not excuse absence of substance.

Therefore the principle decided in the present case is completely consistent with the principle that reasons of the decision maker should not be read with the scrutiny of a legally trained eye for error.

For the Tribunal to perform its task according to law, it must ask whether there were serious reasons for considering that the refugee has committed a serious non-political crime. The Tribunal is therefore tasked with publishing reasons that show how the facts, as found, lead to the conclusion as follows. There may well be facts that are self-evident so to speak, for example, an admission by the refugee. But the facts found by the Tribunal in the present case were not self-evident. Without a process of reasoning, the Tribunal was not entitled to conclude there were serious reasons for considering that the refugee has committed a serious non-political crime.

So there was a legal basis for the decision, but why did the law develop this way? It was clearly to further the interests of refugees, no?

As to the latter question, in short: no. The law developed in this way for the benefit of all persons who are subject to executive power. In other words, non-refugees, Australian residents and Australian citizens who, for example, might be denied a mining licence, or permission to import goods necessary for their business. It just so happens that so much of the government’s energy and resources is applied against refugees that migration law cases become prevalent. It is less a failing of the High Court than it is an indicator of the resource allocation priorities of the government.


There was another aspect to the case, and that is the construction of the Convention, particularly the question of the meaning of “reasons for considering”. On that question all Justices of the High Court held that it did not import a domestic standard of proof (whether on the balance of probabilities or beyond reasonable doubt). To the lay person, I do not think that issue is seriously subject to controversy.

I just want to say one more thing. The thing is, it seems these days refugees are the main benefactors of our rule of law. Our cultural value that the government should be kept within the limits of the law appears to be of greater assistance to the “undesirable” elements of our society. Furthermore, I acknowledge that some people find it offensive that an unelected High Court should have the power to restrain an “executive given a mandate to stop the boats” or strike down legislation made by a “democratically elected government”. To these criticisms I only have one thing to say: the High Court has no raw power. Its power derives from the observation by each civilised person in our society of its decisions. I take great pride in that fact because it shows that, at the core, we are a moral people. Nonetheless, within every society there will be those who disobey the law. I only hope that our traditional conscientiousness is not corrupted to the extent that the executive government, with all its raw power, decides that it no longer has to obey the law. It all comes down to one question, should we allow the government to dispense with the law and ride, with arms and all, on the tide of temporal and inconstant popular opinion?


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Howard v FCT [2014] HCA 21

Howard v FCT [2014] HCA 21 is an interesting case. It involved a joint venture between six joint venturers, Howard, Donovan and Quinert, Bucknall, Edmonds and Cahill. Howard, Donovan and Quinert were directors of Disctronics, a company that was used as an investment vehicle for buying Australian insurance securities for the benefit of UK resident shareholders. Howard, Donovan and Quinert therefore entered into the joint venture in their personal capacity and not in their capacity as directors. Nor did they employ any information obtained in the office of director of Disctronics when contemplating entering the joint venture.

The joint venture was broadly that the joint venturers would purchase real property, the Kingston Links Golf Course for the purpose of resale. After acquiring the property, the joint venturers would line up a tenant, Spotless Services Pty Ltd, to make the resale attractive to a prospective purchaser.

What subsequently happened was that the three directors decided that it would be a good idea for Disctronics to acquire the property subject of the joint venture. However, Disctronics could only come in to the picture if the equity it had to put up, in addition to debt funding, did not exceed $1,500,000. Indeed this course was formalised by a meeting of the directors of Disctronics in London comprising of Howard, Donovan, Quinert, and Mackie, the UK based CEO of the Disctronics group. The directors agreed that if the equity requirement to acquire the golf course was less than $1,500,000, they would seek to have Disctronics become the ultimate purchaser of the golf course and that the three original joint venturers would rebate their entitlements (being the profits made) to Disctronics. On the other hand, Edmonds, a non-director joint venturer, proposed that the joint venturers put up $2,400,000 in equity.

The trial judge, Jessup J noted, “If the transaction were to be considered as a speculation for 6 individuals, the higher the purchase price, the better. But, if the transaction were to be considered as an investment for Disctronics, the lower the purchase price, the better.” French CJ and Keane J noted that it was against this background, the inevitable disintegration of what was to be a short-lived joint venture arrangement began. 

Unhappy with how the events were panning out, Edmonds and Cahill decided to hijack the joint venture. The gold course was sold to Kingston Links Country Club Pty Ltd (KLCC), which Edmonds, Cahill and Buxton (a business acquaintance of Cahill’s) had incorporated some two weeks before the execution of the contract for sale of the golf course.

Subsequently, Howard, Donovan and Quinert executed a litigation agreement with Disctronics. The terms of this agreement was that Disctronics would pay their legal fees associated with the proceedings the directors proposed to institute against Edmonds and Cahill, and KLCC and others in the Supreme Court of Victoria. In the Supreme Court Warren J held that Edmonds and Cahill breached the fiduciary duty they owed to the other members of the joint venture. An appeal by the defendants was dismissed. Under the judgment of Warren J, as varied by the Court of Appeal, Howard’s share of the award of equitable compensation, including interest, was $861,853.35.

Now the tax issue arises. Did the appellant, Howard, receive the award of equitable compensation in the amount of $861,853.35 as constructive trustee for Disctronics? If the appellant did, then he would not be liable to tax on the amount and instead Disctronics would be the taxpayer liable to tax on the amount of  $861,853.35.

The appellant submitted that, from the time it was decided by the directors to try to involve Disctronics as the end purchaser, it was not open to him to appropriate any benefit arising from the investment or the opportunity to invest in the golf course project. He was, he argued, constructive trustee of any benefit which accrued from the opportunity.

French CJ and Keane J noted in paragraph [29]: In making [the submission], the appellant had to confront the difficulty that the golf course project was at all relevant times a joint venture between himself and five others, who owed fiduciary duties to each other in relation to the joint venture. It was neither conceived nor pursued by the appellant or the other Disctronics directors in their capacity as directors. Nor was there any apparent conflict between the interest of the appellant as a member of the joint venture, and his fiduciary duties as a director of Disctronics.

Their Honours were not so kind. They first emphasised the protective rationale of the proscriptive duties attaching to a fiduciary’s powers as explained by Mason J in Hospital Products Ltd v United States Surgical Corporation (1984) 156 CLR 41 at 97 and then in [35], they wrote: The appellant attempted to stretch the fiduciary mantle attaching to his position as director to his membership of the joint venture. He did so in order to defeat a claim that he was liable to pay income tax on the amount of equitable compensation awarded to him in the Supreme Court of Victoria. His purpose had nothing to do with the vindication or protection of Disctronics’ interests.

The only way that the directors of Disctronics could have had their fiduciary duties engaged was by the resolution of the directors made in London. Yet that resolution itself provided the limits of the directors’ fiduciary duties. They were to pursue Disctronics interest to the extent that it was possible for Disctronics to acquire the golf course with an equity injection less than $1,500,000. Should it be impossible for Disctronics to do so, the scope of the fiduciary duty ends.

French CJ and Keane J therefore concluded on this issue in paragraphs [37] – [38] that:

The directors of Disctronics, acting in their personal capacities, conceived of a profit-making venture in which they would be involved in their personal capacities. Their entry into the joint venture did not involve the use of any knowledge or opportunity derived from their positions as directors. Acting as directors, they decided that the company could be benefited by being brought in as the ultimate purchaser of the golf course. The decision of the directors did not establish any basis, in principle, to impress their personal interests in the joint venture with fiduciary obligations to Disctronics in the event that it did not acquire the golf course.

Once it became clear that Edmonds and Cahill would not agree to Disctronics as the ultimate purchaser, the potential for Disctronics to derive any benefit from the joint venture was at an end. By that time, or at least by the time Edmonds and Cahill had diverted the project to their own use, the appellant’s duty to pursue any benefit or advantage for Disctronics by procuring its participation in the joint venture project could not further be performed. And the appellant did not obtain any gain or profit before these events occurred.

The appellant submitted, somewhat attractively, at [83] that:

"[T]he project" was one in which Disctronics sought to invest and, in at least some parts of the argument, the appellant appeared to treat that proposition as sufficient to engage the obligation not to obtain an unauthorised benefit from the relationship constituted by the appellant’s being a director of Disctronics. The opportunity to invest in the golf course was, the appellant submitted, "a maturing business opportunity" which Disctronics was "actively pursuing".

Hayne and Crennan JJ engaged with the appellant’s submissions, perhaps in a way that confines the scope of the conflict rule at [86] and [87]:

Asserting that Disctronics “sought” or “desired” to invest in “the project”… does not demonstrate that the appellant’s gain or profit was an unauthorised gain or profit which he held on trust for Disctronics. Instead, it is necessary to ask whether the identified gain or profit was obtained or received by reason or by use of the appellant’s position as a director of Disctronics or by reason or by use of any opportunity or knowledge resulting from that position. It was not.

Unlike Regal (Hastings), the appellant made no transaction in the course of his management of Disctronics. He did not obtain or receive the gain or profit by using in any way “the position and knowledge possessed by [him] in virtue of” his office as director.

The company was therefore subsequently prohibited from asserting a fiduciary duty onto the directors in respect of a project originally conceived for the benefit of the directors in their personal capacity.

Hayne and Crennan JJ further relied on a similar finding made by French CJ and Keane J at [94] that “Once the defaulting venturers had diverted the opportunity, there was no conflict thereafter between the appellant’s duties or between his duty and his interests and there was no real possibility of conflict.” Gageler J similarly found at [113] – [114] that:

[The] business opportunity was for Disctronics to become the end-purchaser of the golf course and to receive a rebate of any entitlement the directors might have as a result of their participation in the joint venture if two contingencies were fulfilled: the equity contribution of the end-purchaser did not exceed $1.5 million; and the other joint venturers agreed.

Through no failure on the part of Mr Howard to act in Disctronics’ interest, those two contingencies were not fulfilled. The business opportunity of Disctronics did not come to fruition, and had been irrevocably lost by the time of the commencement of the proceedings…

And what about the litigation funding agreement? There are two issues as to the litigation funding agreement. One is whether the litigation funding agreement sheds light on the existence or scope of any purported fiduciary duty. The second is a question of whether the funding agreement effectively assigned the appellant’s proceeds of the action if and when they were received.

Hayne and Crennan JJ began by saying at [95] that “It may be accepted that, as the appellant argued, Disctronics did not take “No” for an answer, and continued to pursue its desire to be involved in the venture at all times up to and including both the institution of the Supreme Court proceedings and their prosecution to final judgment.” Hayne and Crennan JJ resolved this by finding that Disctronics, the appellant and other directors of the company made common cause against the defaulting venturers in the Supreme Court proceedings and therefore from the time of the defaulting venturers’ diversion of the venture, up to and including the final determination of the Supreme Court proceedings, the appellant’s duties to Disctronics, his duties to his co-venturers and his personal interests were all aligned at [96]. Consequently, the appellant had no conflict between his duties or his duty and interests and there was no real possibility of conflict. Gageler J also came to this conclusion at [115].

Does this therefore mean that the fruits of the litigation were received on constructive trust for Disctronics? If we follow the answer to the first question, the joint venture completely ceased to be an opportunity for Disctronics after the joint venture was diverted by Edmonds and Cahill. Therefore the litigation agreement has no bearing on whether or not a fiduciary duty existed or was created by the agreement. French CJ and Keane J dismissed the appellant’s arguments to this effect in one sentence in paragraph [39].

Then there is the question of what was assigned, and was this assignment sufficient to prevent the Commissioner from assessing the appellant for tax on the judgment debt. The short answer to that question was no. It was a matter of construction of the terms of the agreement. Under the terms of the agreement the appellant, Donovan and Quinert assigned “any award of damages (whether on revenue or capital account), costs or interest made in their favour as a consequence of their participation in the joint venture or arising out of the proceedings and the ultimate outcome thereof”. French CJ and Keane J stressed at [40], that the agreement did not assign the appellant’s interest in the joint venture nor in the cause of action arising out of the breach of fiduciary duties by Edmonds and Cahill and asserted in the main proceeding in the Supreme Court. It did not involve an assignment of a chose in action. French CJ and Keane J applied Booth v Federal Commissioner of Taxation (1987) 164 CLR 159 at 167–168:

"[I]n some cases it may be impossible to identify a present right to future income divorced from the proprietary right which generates that future income. In such cases an attempted assignment deals with future property or an expectancy and operates to vest the future income in the assignee as and when that future income accrues due, but not before it accrues due. Accordingly, the assignment would not be effective to prevent the income being derived or being deemed to be derived by the assignor."

Hayne and Crennan JJ similarly found that the subject matter of the assignment was the future judgment debt, not the cause or causes of action which the appellant pursued in the proceedings instituted in the Supreme Court. Therefore, because the appellant did not assign the chose in action, the only thing left that he  could have assigned was the money that he would receive as judgment debt. This was future property which is first derived by and taxed in the hands of the appellant before it is given to the company. Gageler J agreed with Hayne and Crennan JJ as to the effect of the litigation agreement.

In fact, the entry into the litigation funding agreement was a poor decision by the appellant. The appellant submitted shortly that if this Court were to otherwise dismiss his appeal, the amount of his assessable income from the judgment of the Supreme Court of Victoria should be reduced by what he contended was his share of the legal costs incurred in prosecuting the Supreme Court proceedings. This was considered by French CJ and Keane J. Now the Commissioner accepted that the legal costs incurred by the appellant in recovering the award of equitable compensation would have been a deduction from his income, but the Commissioner further submitted that there was no evidence that the appellant had in fact incurred any costs. After all, the legal costs were paid by Disctronics! The French CJ and Keane J agreed with the Commissioner (with Gageler J in agreement with French CJ and Keane J) and so the appellant lost twice on the litigation funding gamble.

Of course this case gave us the opposite result of Peso Silver Mines and no doubt is a good case to contrast with Regal (Hastings). One might be legitimately wondering whether the outcome of the case was affected by policy. Would the outcome have been the same had the respondent been Mackie, the fourth director of Disctronics and not the Commissioner of Taxation? Further, to what extent should we conceive fiduciary duties as purposive as contemplated by French CJ and Keane J?

Filed under howard tax equity law trust trustee constructive trust corporations joint venture fiduciary litigation funding costs

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Blank v FCT (No 1) [2014] FCA 87 CASE NOTE


On 27 May 2014 the AFR reported that Blank loses Swiss bonus battle. There Mr Butler reported that “Glencore executive turned real estate mogul Vaughan Blank has lost a battle with the Tax Office over more than $145 million in bonuses paid by the Swiss commodities house after he quit in 2006” but it probably does not do justice to the facts and figures of the case before the trial judge, Edmonds J.


Vaughan Rudd Blank, a senior executive at Glencore International, was the taxpayer in this matter. Glencore International is one of the world’s largest commodities firms with a generous executive remuneration package. Part of their executive remuneration package is the Profit Participation Plans (PPP), whereby the executive is allocated units in the PPP with the ability to receive a hefty payment upon termination of his employment and redemption of his units in the PPP by Glencore International.

Mr Blank was a valued executive and was with the Glencore family from November 1991 to December 2006. During this period Mr Blank accumulated a large entitlement, contingent on the terms of Glencore’s PPP. Relevantly to below, part of the PPP required Mr Blank to subscribe for shares in Glencore Holdings for a share price of CHF50. When Mr Blank finally left the Glencore family on 31 December 2006, and upon the execution of certain documents between Mr Blank and Glencore International on 15 March 2007, he was prepared to receive USD160,033,328.25 in redemption of his units in the PPP.

The whole of the $160,033,328.25 was not payable immediately; instead it was payable in 20 instalments over a five year period (together with interest at the six month LIBOR rate for USD on the outstanding balance of the debt), with the final instalment being payable on 31 December 2011. And so, between 31 July 2007 and 1 July 2010, Glencore International paid to Mr Blank the balance of his entitlement (some of his entitlement was withheld to pay Swiss withholding tax).

When Mr Blank filed his tax return for the year of income ended 30 June 2007, he treated the 15 March 2007 event as giving rise to a capital gain in the year of income ended 30 June 2007.  He thus returned a capital gain of AUD100,802,046 (the AUD equivalent of USD160,033,328.25 as at 15 March 2007), equal to the capital proceeds less the cost base (which the applicant assessed at nil) reduced by 50% as a discount capital gain.

The Commissioner subsequently issued amended assessments. Instead of characterising the redemption of the units in the PPP as an event giving rise to a capital gain the Commissioner assessed Mr Blank on each instalment payment, treating each payment as assessable as and when received on the basis that the payments were “eligible termination payments” within the meaning of ss 27A and 27B of the Income Tax Assessment Act 1936 (Cth) (“1936 Act”)  and “employment termination payments” within the meaning of s 82-130 of the Income Tax Assessment Act 1997 (Cth) (“1997 Act”).

When it came to trial, the Commissioner sought to justify his assessment on three heads:

(1)            As ordinary income;

(2)            As assessable dividends or non-share dividends; or

(3)            As assessable eligible or employment termination payments.

The Commissioner also submitted in the alternative that the applicant derived a capital gain in the 2007 income year but disputes the cost base of the units in the PPP, calculated at the time he became an Australian resident on 2 January 2002.

Edmonds J considered the three heads in a different order to the way that they were pleaded. Consistent with the priority of specific taxing provisions to the liability to tax for ordinary income, Edmonds J considered the second ground first and the first ground second.

Non-share dividends

Dividends are assessable by virtue of s 44(1) of the 1936 Act. Most people recognise that dividends are payable to shareholders but the tax acts recognise situations where, economically speaking, the receipt is properly a dividend and should be taxed as a dividend. So the question at present is whether the distribution upon redemption of the units in the PPP fall within the description of dividends under s 159GZZZP of the 1936 Act or non-share dividends under s 974-120 of the 1997 Act.

Division 974 is popularly known as the debt-equity rules. They were designed to classify debt and equity interests for the purpose of the tax acts (see Board of Taxation, Review of the Debt and Equity Tax Rules (March 2014)).

Therefore the first question is whether the units issued to Mr Blank by Glencore were non-share equity interests in Glencore International, because, the Commissioner contends, the PPP was a scheme for the purposes of Div 974.

The Equity Test

The equity test is set out in s 974-75(1):

(1)       A *scheme satisfies the equity test in this subsection in relation to a company if it gives rise to an interest set out in the following table:

Equity   interests




An interest in the company as a member or stockholder   of the company.


An interest that carries a right to a variable   or fixed return from the company if either the right itself, or the amount of   the return, is in substance or effect *contingent on the economic performance   (whether past, current or future) of:

(a)        the company; or

(b)        a part of the company’s activities; or

(c)        a *connected entity of the company or   a part of the activities of a connected entity of the company.

The return may be a return of an amount invested   in the interest.


An interest that carries a right to a variable   or fixed return from the company if either the right itself, or the amount of   the return, is at the discretion of :

(a)        the company; or

(b)        a *connected entity of the company.

The return may be a return of an amount invested   in the interest.


An interest issued by the company that:

(a)        gives its holder (or a *connected   entity of the holder) a right to be issued with an *equity interest in the   company or a *connected entity of the company; or

(b)        is an *interest that will, or may,   convert into an equity interest in the company or a connected entity of the   company.

This subsection has effect subject to subsection (2) (requirement for financing arrangement).


Section 974-75(1) is expressed to have effect subject to s 974-75(2), which provides:

A *scheme that would otherwise give rise to an *equity interest in a company because of an item in the table in subsection (1) (other than item 1) does not give rise to an equity interest in the company unless the scheme is a *financing arrangement for the company.

The reasoning of Edmonds J turned on the definition of a financing arrangement. The definition of “financing arrangement” is in s 974-130(1):

A *scheme is a financing arrangement for an entity if it is entered into or undertaken:

(a)        to raise finance for the entity (or a *connected entity of the entity); or

(b)        to fund another scheme, or a part of another scheme, that is a *financing arrangement under paragraph (a); or

(c)        to fund a return, or part of a return, payable under or provided by or under another scheme, or a part of another scheme, that is a financing arrangement under paragraph (a).

It was common ground that Mr Blank was not a “member or stockholder” of Glencore International such as to attract Item 1 of the table in s 974-75(1).  In light of this, the Commissioner put forward what could be uncontroversially described as a novel case.

The Commissioner submitted that the definition of “financing arrangement” does not import a requirement that finance must be raised to meet a capital “need” on the part of any particular entity. Rather, the section speaks in terms of a “scheme … entered into or undertaken … to raise finance”.  Therefore the amount of capital actually raised is irrelevant. Here, the scheme was a “financing arrangement” for the purpose of s 974-130(1) because it required Mr Blank to pay CHF50 for a share in Glencore Holdings. That contribution was a form of “finance” for Glencore Holdings. Whether Glencore Holdings had a need for that finance in the sense that it was required for its operations, or could not otherwise have been raised, is beside the point.

Edmonds J considered the Commissioner’s submissions in [70]-[72]:

It may be accepted that, irrespective of whether capital raised was needed or required as finance, a scheme entered into or undertaken to raise capital could be a “financing arrangement’.  The need or requirement for finance is not determinative although the existence of such a need or requirement might more readily lead to the conclusion that the scheme was entered into or undertaken to raise finance. 

But para (a) of the definition of “financing arrangement” requires the scheme to be entered into or undertaken “to raise finance for the entity”, not just capital.  The two are not coterminous, and a conclusion that a scheme is entered into or undertaken to raise capital for prudential, management or other good governance reasons will not be entered into or undertaken to raise finance which contemplates, sooner or later, expenditure of the amount raised.  Unless that dichotomy is observed, each and every raising of capital, irrespective of the objective purpose of the raising, will be a raising of finance.  In my view, such a conclusion is not consistent with the legislative intention to be discerned from the text of s 974-130(1), viewed in the context of Div 974 of the 1997 Act as a whole. (emphasis added)

Edmonds J continued in [73]-[74]:

The identity of the relevant facts and circumstances in the determination process will vary from case to case but there will be some common indicia to consider.  These include the objectively discerned intention of the parties; the size and nature of the company’s business; the size and nature of its other debt obligations; the size and nature of the capital raised under the scheme; the existence and extent of any non-financing purposes of the scheme; and the identity and nature of the provider or providers of the capital so raised – which has at one end of the spectrum a bank or finance company, and at the other end employees of the company or an affiliate participating in a scheme of remuneration.  All these will be relevant, albeit non-determinative, facts and circumstances in the determination process.

In the present case, apart from the fact that capital was raised by GH each and every time it issued shares to participants in the PPPs, there were no indicia which pointed to the scheme, as identified by the Commissioner, being a financing arrangement… Indeed, the recitals suggest that the main purpose of [main purpose of the scheme was] to provide for the stability of GH and its majority holding in GI; to promote the continuity of the management and policies in both GI and GH; and to restrict the manner and means by which the shares in GH may be sold, assigned or otherwise transferred.

The Commissioner put his case in one other way, namely that (by drawing on the EM to the New Business Tax System (Debt and Equity) Bill 2001 (Cth)), it is important to “consider all the relevant circumstances and features of a particular arrangement to determine whether, in substance, it is appropriately characterised as a financing arrangement or not. This is because in certain, albeit unusual, circumstances an employment contract may constitute a financing arrangement, as Example 2.4 shows”. Example 2.4 set out in the Explanatory Memorandum reads:

A company issues shares to all the members of a family except one, who is instead employed by the company for a salary contingent on profits of the company. The calculation of the salary is such that the employee receives a return equivalent to that of the other family members on their shares (increased to reflect the value of the services provided).

In these unusual circumstances the employment contract would constitute a financing arrangement because the employee is effectively funding the company by providing services instead of money. The employment contract is a substitute for shares in the company.

Edmonds J dealt with the matter swiftly in paragraph [85] by distinguishing the explanatory memoranda: “Each employee receives a salary… and discretionary bonuses in addition to their rights under the PPPs so employees cannot be said to be “effectively funding the company by providing services instead of money”. Rather they are being rewarded for their performance by deferred compensation.

Notably, Blank v FCT is the first case that focuses on the application of the debt equity rules.

Ordinary Income

This was the basis by which Edmonds J thought the instalment payments received by Mr Blank ought to be brought to tax. The issue was disposed of quite quickly, with Edmonds J holding that the payments were deferred compensation and assessable as and when he received each instalment.  

Nonetheless, there was the problem of the temporal element. Mr Blank submitted that the more appropriate view should be that what was provided as a reward for services as an employee were the PPP units issued to him, not the proceeds of their subsequent realisation following the termination of his employment.

This part of the judgment is interesting for revisiting the leading cases on service income, including Abbott v Philbin [1961] AC 352 and Tennant v Smith [1892] AC 150.

Edmonds J first rejected Mr Blank’s submission on the basis that “it is predicated on a premise which does not accord with the facts” (at [97]). This is because under the terms of the PPP, Mr Blank did not have any right or property interest in the units used to calculate his entitlement under the PPP. So Edmonds J turned to first principles and asked “what is the reward for service?” (at [98]).

We all know that in Abbott v Philbin the question before the House of Lords was whether an option granted by an employer to an employee should be assessable in the year in which the option was granted or the year in which the option was exercised. Edmonds J made the observation then added at [98]:

What is less observed in the cases that have followed and in academic writings is that one of the reasons why the majority decided it was the option which was the reward in the year of grant, and not the profit on exercise in the year of exercise, was because if it was the latter, there may be no relevant relationship between the profit and service in that year or in the year of grant to bring the profit within the charge to tax.

This consequence was seen in Constable v Federal Commissioner of Taxation (1952) 86 CLR 402, where the receipt from a superannuation fund was not a reward for services because by that time there was no longer a character as a reward for services attaching to that part of the receipt that could be traced to a payment into the fund by the employer.

Each of these cases did not help Mr Blank however, because Edmonds J then said at [101]:

But such considerations do not impel a conclusion in the present case that it is the contractual right to be paid the Amount and not the money constituting the Amount that is the reward for service. If the contractual right to be paid the Amount is not the reward for service, then there is no lack of a relevant relationship between the money constituting the Amount and the applicant’s service to give it the character of income as a reward for service. (emphasis added)

In other words, because Mr Blank could not attribute to his entitlement to each PPP unit the character of a reward for service, we are open to make the conclusion that it was actually the amounts received upon redemption of the PPP that is the reward for service. Edmonds J added at [102]:

It could not be seriously suggested, and I hasten to add that it was not, that the applicant’s contractual right to be paid a salary was reward for his services and its monetary value ordinary income, but the salary itself was nothing more than the realisation of that right and not ordinary income as reward for those services. In my view, the applicant’s right to deferred compensation under the [PPP] is no different. It is the money constituting the Amount, not the contractual right to the Amount, which is the reward for his services and if that analysis be correct, it is the money constituting the Amount which is ordinary income not the monetary value of the contractual right.

As Mr Blank returned his income on a cash basis the income representing the instalment payments was derived on a receipts basis as and when it was paid to him, or applied on his behalf by Glencore International.

One might genuinely think that it is unfair, that Mr Blank should be subject to tax on the deferred compensation all at once, which for most other taxpayers would cause them to pay greater tax in income year of assessment because of progressive rates of taxation. There are probably two answers to that, and the first is that Mr Blank ought to have sought better tax advice and the second is that Mr Blank (being the wealthy executive he was) was probably always going to be taxed at the top marginal rate irrespective of when he derived that income.

Termination Payments

Because Edmonds J concluded that the payments were deferred compensation as a reward for services rendered, they were not paid to the applicant in consequence of the termination of his employment. In any case, Edmonds J added, the fact that the termination of his employment was an occasion by reference to which the amount became payable, is not sufficient to enable it to be said that the payments were made in consequence of the termination of his employment: Le Grand v Commissioner of Taxation (2002) 124 FCR 53 at [33].

Capital Gains

Given the way that Edmonds J disposed of the matter on the head of ordinary income, the capital gains issue would also be irrelevant. Nonetheless, in the likely prospect of an appeal, his Honour had to express his views as to the merit of the methodologies and conclusions about the cost base of the PPP reached by each valuer, which required his Honour to consider Spencer v The Commonwealth (1907) 5 CLR 418 and Mordecai v Mordecai (1988) 12 NSWLR 58.

Leave to reopen

Blank v FCT (No 1) was followed by Blank v FCT (No 2) [2014] FCA 517where Mr Blank sought leave, on the day that judgment was handed down in Blank v FCT (No 1) to reopen his case. Mr Blank sought leave to re-open his case to raise the application of s 23AG of the 1936 Act. Leave was refused largely on the ground that Edmonds J considered that the substantive case sought to be argued by Mr Blank was weak. Edmonds J wrote brief reasons in respect of s 23AG.

His Honour first noted at [35] that “the operative exemption from tax is created by s 23AG(1); it requires the foreign earnings to be derived from foreign service”. This meant, his Honour emphasised, that it required foreign earnings to be derived exclusively from foreign service and not from service which is in part foreign service and in part service which is not foreign service. In the present case, his Honour found that it was not possible to identify any portion of the Amount as being derived exclusively from foreign service because the Amount was not calculated by reference to days of service (at [36]). As a matter of statutory construction then, his Honour noted two things:

(1)  Section 23AG(1) does not contain the words “to the extent to which” the foreign earnings are derived from foreign service, such as to accommodate methods of apportionment (at [37]);

(2)  Parliament did provide for a partial exemption in s 23AG(2) when s 23AG was first inserted into the 1936 Act but that partial exemption was not restored to the section when s 23AG was amended in 1991, telling against apportionment (at [40]).

Therefore leave was refused.


Blank v FCT (No 1) [2014] FCA 87 is an interesting case for two reasons; (1) it dealt substantially with the operation of the debt-equity rules and (2) it revisited the leading cases on derivation of ordinary income. Further Blank (No 2) gave a short and sweet judgment holding that s 23AG does not allow for apportionment between compensation that is constituted of both foreign service and non-foreign service. If the matter does go on appeal, it will be interesting especially to see how the debt-equity rules might be argued and s 23AG.

Filed under tax australia case note blank income tax auslaw

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ATS Pacific

In tax circles at least, there has been some interest in the recently handed down decision of the Full Federal Court in ATS Pacific (ATS Pacific Pty Ltd v Commissioner of Taxation [2014] FCAFC 33).

There is an inherent competition between Parliament’s intention to tax and a person’s intention to avoid taxation. Of course in the majority of cases taxation is a straightforward affair; but in a revenue statute Parliament’s dilemma is to use a finite amount of words to cover an infinite variety of circumstances. In the GST context, the base of taxation is the concept of a ‘supply’. Thus a supply of a good would ordinarily attract GST, as will the supply of a service, as will the supply of intangible or real property. Yet equity and policy demand that revenue statutes create concessions and, in this respect, the GST is no exception. The more known GST exceptions include food, healthcare and education. Lesser known GST exceptions include the supply of things for consumption outside Australia (in s 38-190 of the A New Tax System (Goods and Services Tax) Act (GST Act)).

One area that has caused some difficulty has been inbound tourism from overseas. If a non-resident took a flight to Australia, then while in Australian they hit up a hotel or a pub, they would have to pay GST on the accommodation or food that is supplied to him or her. So much is uncontroversial.

Is it possible then, for the non-resident tourist to buy an all-inclusive holiday package while they are overseas and avoid having to pay GST by redeeming the pre-paid purchases (perhaps by way of a voucher) at the same hotel or pub once they are in Australia?

The facts

This was (almost) the business model ran by ATS Pacific. ATS was in the business of selling Australian holiday packages that was eventually consumed by non-resident tourists. Now, had ATS directly sold a holiday package to the non-resident tourist, then ATS would have been liable to charge GST on the holiday components of the package. Parliament foresaw this loophole and provided under s 38-190(2) that a supply of a thing to a non-resident would not be GST-free if it is the supply of a right or option to acquire something the supply of which would not be GST-free. In other words, if ATS sold the non-resident tourist vouchers to acquire a good or service that would not be GST-free in Australia, then that voucher itself would not be GST-free.

So what was ATS’ business model?

Cleverly, ATS did not supply anything to the non-resident tourist.

ATS purported to sell ‘arranging services’ to non-resident travel agents which avoided them selling rights to acquire something that would not be GST-free. In short, ATS sold arranging services to non-resident travel agents, who then on sold the holiday package to the non-resident tourists.

In more detail, a non-resident tourist would say to the non-resident travel agent ‘I would like to go to Sydney’. The non-resident travel agent would then say to ATS ‘I would like to buy a holiday package for my client to go to Sydney’.

ATS would then contact the Hilton and say, I would like to book accommodation for three days and three nights, redeemable by either myself or another person.

ATS would then contact Hertz rental cars and say, I would like to rent a car for three days and three nights, redeemable by either myself or another person.

ATS would then contact Tetsuyas and say, I would like to book an evening for two guests for the degustation menu, redeemable either by myself or another person.

ATS then gives the non-resident travel agent an email saying that everything is ready for the tourist. With this email was a code (something like JK93FF67).

Then when the non-resident tourist comes to Australia he or she would say to the Hilton concierge “JK93FF67” with a wink and a nod. Voila, the non-resident tourist would be given a ‘complimentary’ room for three days and three nights. The same would happen at Hertz and Tetsuyas.

The issues

How did this business model apparently avoid GST?

It was because when ATS made a booking with the Hilton, the Hilton, correctly so, charged ATS GST on the supply of the room. Similarly Hertz charged GST on the supply of the cars. However, because ATS acquired the products in the course of its business, it was entitled to GST input credits and so a refund on its GST (because GST is supposed to be a tax on consumption to be borne by the end user). In essence, ATS’ acquisition of the hotel accommodation, transport, and any other goods or service would be GST-free.

In the ordinary case, was ATS to sell the holiday package to the tourist directly, as identified above, ATS would have had to charge GST on its supply and so the ATO would eventually collect that 10 per cent GST on the initial supply by the Hilton or Hertz rental cars.

Instead however, ATS didn’t actually supply anything to the non-resident tourist did it?

All ATS supplied was a facility for the non-resident travel agent to make arrangements for a non-resident tourist to receive complimentary hotel rooms and car rentals upon his or her arrival to Australia. ATS contended that all it supplied was a single GST-free supply of booking or arranging services. This was, allegedly, made GST free by s 38-190(1) item 2 which provided that ‘a supply that is made to a non-resident who is not in Australia when the thing supplied is done’ is GST free. So the supply of ‘booking services’ was indeed made to the non-resident travel agent while the non-resident travel agent was not in Australia.

Of course ATS turned a profit from this – I use the word complimentary in jest. ATS would pay the Hilton and Hertz, say, $10,000. ATS would charge the non-resident travel agent $10,400, and the non-resident travel agent would charge the non-resident tourist $10,800; all in all a $200 saving because $1,000 GST would have been payable otherwise.

The ATO was understandably upset. The case therefore revolved around a simple question; what was the supply and how do we identify it?

The case on appeal

If nothing was indeed supplied to the end consumer, then the GST payable would ‘drop out’ and never be collected. The primary judge tacked this problem by implying a contractual term (using the jurisprudence in BP Refinery (Westernport) Pty Ltd v Shire of Hastings (1977) 180 CLR 266) that ATS supplied the non-resident travel agent with a contractual right or promise that the Australian providers (the Hilton and Hertz) would provide the products to the non-resident tourist.

This being the case, the primary judge held at [139] that it amounted to ‘a supply under an agreement with a non-resident [the travel agent] in circumstances where the supply is provided, or the agreement requires it be provided to another entity [the tourist] in Australia’ and so was not GST-free under s 38-190(3).

The first question is the characterisation of the supply.

Edmonds J wrote the leading judgment, with whom Pagone J concurred and Davies J agreed. In his Honour’s judgment, his Honour eschewed strictly legal analysis of the rights supplied by whom and to whom. His Honour said at [33]:

I do not think it is desirable, in the interests of certainty of application of a revenue statute, for the characterisation of a supply made by performance of an executory contract, to depend upon whether or not a term can be implied into the contract, unless it is absolutely essential to give business efficacy to the contract. In this day and age, revenue statutes are inherently complex, and the GST Act is certainly no exception. The concept of a “supply”, as defined in s 9-10 of the GST Act, is fundamental to the operation of that Act and has greatly contributed to that uncertainty… Resort to jurisprudence in contract law to imply a term into a contract does not contribute to an aspirational hope, let alone a confident expectation, of certainty of application going forward.

At [39], Edmonds J continued:

In determining the character of a supply – what was really supplied? – pursuant to performance of an executory contract, a court is not to be “handcuffed” by the terms embodied in the four corners of the contract, the more so if those terms and conditions do not represent all the terms and conditions of the contract; or where the contract is but one link in a chain of contracts, the performance of each being related to, if not dependent on, performance of the immediately preceding contract; or where, by reference to the factual matrix of the entirety of the arrangements, the commercial or practical reality points to the conferral or provision of a supply which goes beyond the conclusion that might otherwise be drawn from a confined analysis of the terms and conditions of one contract in that chain.

If the reader can follow the pro-numerals, at [40] Edmonds J explains:

Undoubtedly, where the supply is made pursuant to the performance of a stand-alone executory contract between B and C which is totally unrelated to any other contract either B or C has entered into, an analysis of the terms and conditions of that contract will shed considerable light on the character of the supply made between B and C. Where, however, the supply is made pursuant to the performance of an executory contract between B and C which is related to a contract between A and B; to a contract between C and D; and to the consumption by D of what A provided B, it could not, at least in my view, be seriously denied that in determining the character of the supply from B to C one could not have regard to matters standing outside the contract between B and C, in particular, to the terms of the contract between A and B, between C and D and to the consumption by D of the contractual promise from A to B in determining the characterisation of the supply from B to C.

In other words, if ATS enters into a contract with a non-resident travel agent with the intention of benefiting the non-resident tourist, that benefit to the non-resident tourist is relevant to characterising the supply by ATS.

Edmonds J concluded on the characterisation issue:

[I]t was open to [the primary judge] to find that the supply made by ATS to the [non-resident travel agents] was to be properly characterised as a promise by ATS that ATS would ensure that when the [non-resident tourists] came to Australia they would be provided with the Products the [non-resident tourists] had paid for, and that there was no error on the part of [the primary judge] in so finding.

The second question was whether any of the GST exceptions in s 38-190(1) applied to the case at hand.

It was almost incontrovertible that the accommodation supplied was not GST-free because of a blanket rule that the exceptions in s 38-190(1) do not apply to supplies of real property; so much followed from the decision in Saga Holidays Ltd v Commissioner of Taxation (2006) 156 FCR 256.

Insofar as the goods and services component is concerned, Edmonds J found that s 38-190(2) applied and at [58] reasoned:

[It] is whether ATS’ supply to the NR Travel Agents characterised as the supply of a promise that it (ATS) would ensure that the Australian Providers would provide the goods and services components of the Products to the NR Tourists when they came to Australia, carries with it a right to acquire those goods or services. In my opinion, having regard to the characterisation of the supply made by ATS to the NR Travel Agents and the articulation of the promise constituting that supply, it did carry a right to acquire those goods or services, albeit a right exercisable by or for the benefit of the NR Tourists. It follows, in my view, that insofar as the non-accommodation components are concerned, the exclusion in s 38-190(2) is triggered with respect to ATS’ supply of the promise, as articulated by the primary judge, to the NR Travel Agents, and such supplies are not GST-free.

The consequence was that none of the supplies made by ATS to the non-resident travel agents were GST free.

Further, while the primary judge found that the margin charged by ATS (in our example above, being $400) was GST-free, because it was, in her Honour’s opinion, consideration received for a booking or arranging service, the Full Federal Court disagreed. In short, because ATS chose to structure their business as the provision of a comprehensive package, they were liable to pay GST even on their margin. The margin could not be dissected and removed from the acquisition of the hotel room, car, or meal by ATS for the non-resident tourist.


ATS Pacific is a good case because it illustrates the creative energies exhibited by taxpayers and their advisors in attempts to minimise tax liabilities.

It is important in the revenue context of course because it eschews a strictly legalistic approach to the supply and acquisition of rights in the GST context. Rightly so I think, if the GST is to be a fair tax and serve its policy purpose of taxing consumption in Australia.

Schedule: s 38-190 of the GST Act

Supplies of things, other than goods or real property, for consumption outside Australia

(1)    The third column of this table sets out supplies that are GST-free (except to the extent that they are supplies of goods or *real property):

Supplies   of things, other than goods or real property, for consumption outside   Australia



These   supplies are GST-free (except to the extent that they are supplies of goods   or *real property)…


Supply   connected with property outside Australia

a   supply that is directly connected with goods or real property situated   outside Australia.


Supply   to *non-resident outside Australia

a   supply that is made to a *non-resident who is not in Australia when the thing   supplied is done, and:

(a)    the   supply is neither a supply of work physically performed on goods situated in   Australia when the work is done nor a supply directly connected with *real   property situated in Australia; or

(b)    the   *non-resident acquires the thing in *carrying on the non-resident’s   *enterprise, but is not *registered or *required to be registered.


Supplies   used or enjoyed outside Australia

a   supply:

(a)    that   is made to a *recipient who is not in Australia when the thing supplied is   done; and

(b)    the   effective use or enjoyment of which takes place outside Australia;

other   than a supply of work physically performed on goods situated in Australia   when the thing supplied is done, or a supply directly connected with *real   property situated in Australia.



a   supply that is made in relation to rights if:

(a)    the   rights are for use outside Australia; or

(b)    the   supply is to an entity that is not an *Australian resident and is outside   Australia when the thing supplied is done.


Export   of services used to repair etc. imported goods

a   supply that is constituted by the repair, renovation, modification or   treatment of goods from outside Australia whose destination is outside   Australia.

(2)    However, a supply covered by any of items 1 to 5 in the table in subsection (1) is not GST-free if it is the supply of a right or option to acquire something the supply of which would be *connected with Australia and would not be *GST-free.

(2A)    A supply covered by any of items 2 to 4 in the table in subsection (1) is not *GST-free if the acquisition of the supply relates (whether directly or indirectly, or wholly or partly) to the making of a supply of *real property situated in Australia that would be, wholly or partly, *input taxed under Subdivision 40-B or 40-C.

Note:    Subdivision 40-B deals with the supply of premises (including a berth at a marina) by way of lease, hire or licence. Subdivision 40-C deals with the sale of residential premises and the supply of residential premises by way of long term lease.

(3)    Without limiting subsection (2) or (2A), a supply covered by item 2 in that table is not GST-free if:

(a)    it is a supply under an agreement entered into, whether directly or indirectly, with a *non-resident; and

(b)    the supply is provided, or the agreement requires it to be provided, to another entity in Australia.

Filed under ats pacific gst gst act supply tourism australia tax taxation federal court full federal court law

1 note

A Response to Edward

A friend of mine, Edward McMahon expressed some legal opinions the other day in relation to the case of Raue v Morris. They can be accessed here:

The opinions expressed by Edward, well-meaning as they may be, are infected with superficiality and do not express views that are capable of being supported by the authorities.

There are 3 fundamental errors, in addition to other sundry errors, in the opinion expressed. I would like to draw attention to those errors and invite correction.

Construction of the Constitution

The first error in Edward’s legal analysis is the opinion that ‘Those wishing to dismiss Tom must fulfill the conditions of 3.1.3 and 3.1.4 of the regulations’ is the only method by which a director can be dismissed from office.

As per the judgment of Bellew J, there are two methods by which a director can be removed from the Board. The first is through the mechanism of clause 7.5(a)(i) in conjunction with clause 9.2(f)(ii). As Bellew J observed in paragraphs 80-82:

Pursuant to the provisions of the Constitution:

(i) membership of the Union is a pre-requisite to holding office as a Director [clause 7.5(a)(i)];

(ii) the Constitution confers, upon the Board, the power to expel a member from membership of the Union if that member is, in the opinion of the Board, guilty of misconduct [clause 9.2(f)(ii)].

Importantly, clause 9.2(f)(E), by its terms, expressly contemplates that the power in clause 9.2(f)(ii) may be exercised in respect of a Director.

In my view, in light of these provisions, the Board has an express power to expel a person from membership of the Union on the grounds of misconduct. The effect of such a decision is that a person so expelled cannot, by virtue of clause 7.5(a)(i), hold office as a Director. In these circumstances I do not accept the submission that the Constitution does not contemplate the expulsion of a Director, or that the Board has no power under the Constitution to pass a motion for such expulsion.

This error meant that Edward’s analysis was confined to considering the requirements of cll 3.1.3 and 3.1.4 of the Constitution, and not on the less onerous grounds of removing a member from the Union, and thereby vacating the member’s office as director.

Breach of Fiduciary Duties

The paragraph that disposes of this argument is framed thusly:

Tom is accused of breaching a fiduciary duty. It is said that by leaking the information in question, Tom has jeopardized the board’s financial relationship with the university. This assertion firstly assumes that the USU receives SSAF monies from university management only so long as it behaves precisely as university management desires. This immediately undercuts any notion of student democracy within the USU. It further assumes that this role of the USU as an obedient child is somehow formalized in a financial arrangement between the bodies and that Tom has jeopordised it by leaking a few words from an unrelated report. Certainly Tom’s actions do not fit neatly into an established category of breach of fiduciary duty, and it takes a scheming mind indeed to advance the argument.

Aside from misunderstanding the principles of fiduciary law, this reasoning is shows glaring lapses of logic. To begin, the foundation for this alleged breach is that, as admitted, ‘by leaking the information in question, Tom has jeopardized the board’s financial relationship with the university’. Edward attempts to assail the argument put forward by proponents of Tom’s removal by arguing three propositions:

  1. This assertion firstly assumes that the USU receives SSAF monies from university management only so long as it behaves precisely as university management desires.
  2. This immediately undercuts any notion of student democracy within the USU.
  3. It further assumes that this role of the USU as an obedient child is somehow formalized in a financial arrangement between the bodies and that Tom has jeopordised it by leaking a few words from an unrelated report.

The first proposition is not contradicted by evidence supplied by Edward.

The second proposition about student democracy is completely irrelevant to fiduciary law, except insofar as disclosure and consent is concerned, which it is not in the present instance.

The third proposition is not contradicted by evidence supplied by Edward.

In criticising the reasoning in this paragraph, other than in respect of Edward’s second proposition, I does not deny the merits of the argument. I merely invite Edward to revise his reasons.

Edward continues to say that “Certainly Tom’s actions do not fit neatly into an established category of breach of fiduciary duty, and it takes a scheming mind indeed to advance the argument”. This approach is a clever revision of fiduciary law that is not supported by the authorities. It is unnecessary to fit a set of facts into an established category of breach. So much transpires from the leading judgment of Deane J in Chan v Zachariah (1984) 154 CLR 178 at 198-9:

The variations between more precise formulations of the principle governing the liability to account are largely the result of the fact that what is conveniently regarded as the one “fundamental rule” embodies two themes. The first is that which appropriates for the benefit of the person to whom the fiduciary duty is owed any benefit or gain obtained or received by the fiduciary in circumstances where there existed a conflict of personal interest and fiduciary duty or a significant possibility of such conflict: the objective is to preclude the fiduciary from being swayed by considerations of personal interest. The second is that which requires the fiduciary to account for any benefit or gain obtained or received by reason of or by use of his fiduciary position or of opportunity or knowledge resulting from it: the objective is to preclude the fiduciary from actually misusing his position for his personal advantage. Notwithstanding authoritative statements to the effect that the “use of fiduciary position” doctrine is but an illustration or part of a wider “conflict of interest and duty” doctrine… the two themes, while overlapping, are distinct.

What emerges from the quoted paragraph is that it is not necessary to find established categories of breach, for example, breach by misappropriation of funds, or breach by exploiting a corporate opportunity for personal gain. It is sufficient to show that the fiduciary acted in a manner where his or her personal interest conflicted with his or her fiduciary duty.

Improper Use of Information

Edward here conflates two concepts, impropriety and due care and diligence. As I understand Edward’s argument, he is advancing a positive case that a director’s duty of due care and diligence informs contours of impropriety. This novel approach is not supported by authority.

First, it is trite to observe that a director, or any person for that matter, may be under concurrent but separate duties and the duties do not all meld into one.

Let me illustrate this with an analogy: in one sense, everyone is under a duty of care with respect to liability in negligence. It is not an answer to a suit that I made improper use of information, that I was particularly careful when I was doing so.

Second, Edward makes the claim that ‘Tom’s duty of care and diligence demanded that USU members be informed of this collaboration, so that they could make an informed decision about their participation in this industrial action’. This claim is unsupported by authority.


What is right and what is legal may, at times, fail to coincide. What is just and what is fair may also at times fail to coincide. This is such a case.

Every member of the USU has consented to the rules of governance to which they subscribed upon becoming a member. Therefore one cannot complain of being treated unjustly if they are subject to the rules to which they have voluntarily subscribed.

Accepting that what is right and what is legal does not coincide, I have taken the view that morally speaking, Tom should not be removed for preferring the interests of the protestors over the interests of the USU.

It does engender mild irritation however when people advocate incorrect views of the law with such confidence. And so, while I would prefer not to be seen as advancing a case against Tom, I must correct what in my view is an manifestly unreasonable interpretation of the law.

Filed under raue v morris tom raue usu hannah morris equity fiduciary

1 note

The Relationship Between Same Sex Marriage and Communism

Sometimes an answer is determined by the way the question is framed. The present case is an example of this principle.

As the High Court noted in paragraphs [3]-[5]:

As the title of the ACT Act indicates, its object is to provide for marriage equality for same sex couples, not for some form of legally recognised relationship which is relevantly different from the relationship of marriage which the federal laws provide for and recognise. The Marriage Act does not now provide for the formation or recognition of marriage between same sex couples. The Marriage Act provides that a marriage can be solemnised in Australia only between a man and a woman and that a union solemnised in a foreign country between a same sex couple must not be recognised as a marriage in Australia.

Those provisions of the ACT Act which provide for marriage under that Act are not capable of operating concurrently with the Marriage Act.

Because the ACT Act does not validly provide for the formation of same sex marriages, its provisions about the rights of parties to such marriages and the dissolution of such marriages cannot have separate operation and are also of no effect.

Key to that conclusion was the reasoning in paragraph [57]:

The Marriage Act regulates the creation and recognition of the legal status of marriage throughout Australia. The Act’s definition of marriage sets the bounds of that legal status within the topic of juristic classification with which the Act deals. Read as a whole, the Marriage Act, at least in the form in which it now stands, makes the provisions which it does about marriage as a comprehensive and exhaustive statement of the law with respect to the creation and recognition of the legal status of marriage. Why otherwise was the Marriage Act amended, as it was in 2004, by introducing a definition of marriage in the form which now appears, except for the purpose of demonstrating that the federal law on marriage was to be complete and exhaustive?

Am I the only one who thinks that the 2004 amendment was ineffectual to its purpose?

There is a subtle distinction between the Federal Parliament’s power to legislate with respect to marriage and its power to define marriage.

Let me frame my concern in this way: is the power of the Federal Parliament to legislate on a subject matter that currently exists, it being same sex marriage as a concept distinct from opposite sex marriage, or is it to legislate with respect to defining marriage so as to exclude from the definition of marriage the union of two men or two women? In other words, what is the power of the Federal Parliament to define the subject matter on which it is given legislative power by s 51?

It looked as if the High Court took the view that the Federal Parliament does have the power to define marriage. Indeed in paragraph [9], the judgment reads ‘By contrast, if the federal Parliament can make a national law providing for same sex marriage, and has provided that the only form of marriage shall be between a man and a woman, the two laws cannot operate concurrently’.

The amendment inserted the words ‘marriage means the union of a man and a woman to the exclusion of all others, voluntarily entered into for life’. It was not an amendment to say that all social arrangements other than those provided for under the Marriage Act between a man and a woman are void (or words of similar effect). The words, as I understand them, clearly purport to define the subject matter of s 51(xxi).

If the proper inquiry was whether or not the 2004 amendments were even effective to do what they purported to do. If the proper enquiry was made, I do not think that the High Court could have come as easily as they did to the same conclusion in paragraph [59] that ‘these particular provisions of the Marriage Act, read in the context of the whole Act, necessarily contain the implicit negative proposition that the kind of marriage provided for by the Act is the only kind of marriage that may be formed or recognised in Australia’.

Of course I do not profess to be a constitutional scholar and I am wary of trying to fit in Communist Party case style arguments where they do not belong. Nonetheless, it was an issue that I believe warranted some discussion. It is now perhaps a moot point but I hope that if an exam question is going to be set on similar factual circumstances, someone else could have a crack at it. 

1 note

This is a good one

So it looks like even some of the best judges fail to understand the nature of tax effective transactions. 

All the while the Chief Justice is saying, guys, we’re getting off topic. Focus!

Poor Mr Dhanji, being taken in two different directions by the bench…

Milne v The Queen [2013] HCATrans 279 (8 November 2013)

HAYNE J: Before we dive into the statute can I just understand the transaction better than I do?


HAYNE J: The taxpayer owns shares. The taxpayer swaps share with an offshore entity. Swapped shares swapped out go into offshore entity. What then happens, offshore entity realises the shares?

MR DHANJI: No, can I go back a step?


MR DHANJI: The taxpayer owns shares. Shares are transferred to offshore entity, whilst within the offshore entity those shares are exchanged for other shares. The exchange for other shares - - -

HAYNE J: Within the offshore entity?

MR DHANJI: Within the offshore entity but that was for capital gains tax purposes a disposal of the shares. Effectively, they were sold and what was - - -


FRENCH CJ: That was the relevant disposition.

MR DHANJI: That was the relevant disposition. If I can just perhaps go back a step, in terms of this case, there are these curious Dutch Stichtings and these particular structures - - -

FRENCH CJ: We do not need to get into the detail of it.

MR DHANJI: But none of that matters - - -

FRENCH CJ: The essential question is whether the concealment of the disposition, or the asserted concealment of the disposition can constitute an intended use of the property – a use of the property for – in relation to an intended offence.

MR DHANJI: Intended offence?



FRENCH CJ: The intended offence being the nondisclosure of the capital gain.

MR DHANJI: That is right, your Honour, but more particularly whether that disposal was a disposal that could be termed a disposal with an intention that there would be the future use of the shares…

Your Honours no doubt appreciate that the applicant was charged under section 400.3… So when one goes to the provision what is required is that there be a - pursuant to (1)(a) - dealing with the “money or other property”. That was the shares. There is no issue that was able to be or had the capacity to be a relevant dealing.

HAYNE J: The dealing was the swap out?

MR DHANJI: The dealing was the swap out.


MR DHANJI: No, the dealing was the swap. So they were transferred into the overseas company.

HAYNE J: The transfer out.

MR DHANJI: No, not the transfer out, the exchange for the other shares. So, in other words, when they were sold, to put it in very simple terms, it was when they were sold.

HAYNE J: I am sorry to be so slow, but the taxpayer was alleged to deal with shares and the dealing asserted was the transfer to the offshore entity or the dealing by the offshore entity constituting a swap?

MR DHANJI: The second.

HAYNE J: Well, how was the taxpayer dealing with it at that point?

MR DHANJI: I appreciate that that was the company’s – that was the company’s dealing, or indeed the offshore company’s dealing.


MR DHANJI: The Crown case was that the applicant was in effect complicit in some - - -

HAYNE J: But he transferred shares into an offshore entity so that the offshore entity could subsequently engage in a transaction which would see a swap which was a CGT event which would never quite happen to meet the return.

MR DHANJI: No, your Honour, because - - -


MR DHANJI: No, because it was not the Crown case that the transfer into the offshore entity was the dealing. The dealing was clearly, on the Crown case, the disposal of shares.

FRENCH CJ: Can I just try and – in this little journey of exploration – formulate my understanding of what the question is and is it – tell me whether this is correct – whether the concealment by use of certain offshore corporate structures and a share swap transaction of the disposal of shares owned by the company controlled by the applicant, whether that concealment constituted the applicant’s intended use of the shares as an instrument of crime, the crime being that of obtaining a gain by subsequently failing to disclose the capital gain derived from the disposal.