A trust controlled by Mr Vanda Gould has largely been denied deductions for management fees, bad debts and interest, although amended assessments for three of the income years in question were not authorised by s 171A of the ITAA 1936.
The taxpayer was the trustee of the AA Trust, which was effectively controlled by Mr Vanda Gould. The ATO made or amended the taxpayer's assessments for the 2001 to 2009 income years, other than 2003 and 2006, after disallowing deductions for: management fees allegedly paid to the trustee of the GF Trust; loans to various entities controlled by or connected with Mr Gould that were allegedly written off as bad debts; and interest payments on loans allegedly made to the taxpayer by one of Mr Gould's clients and a number of entities controlled by or connected with Mr Gould, including Hua Wang Bank Berhad (HWBB).
Logan J concluded on the evidence that:
it was more likely than not that the amounts claimed as management fees and interest (other than interest under the HWBB loans) were arbitrarily selected by Mr Gould "for fiscal advantage" at some point after the end of the income year in question; and
the taxpayer failed to show that debts allegedly written off as bad existed in the relevant income year(s) or, if they existed, they were in fact bad.
As regards the HWBB loans, Logan J concluded that loans made under those agreements (totalling $4.28m) were not shams, but that the interest and facility fees paid by the taxpayer were largely not deductible as the relevant loans were not used for income producing purposes (with certain exceptions). His Honour also held that Pt IVA did not apply to disallow those interest deductions.
Logan J did agree with the taxpayer that the assessments for the 2001, 2002 and 2004 income years were not authorised by s 171A of the ITAA 1936 as it had a "tax loss" for those years, but upheld the validity of the amended assessments for the 2005, 2007, 2008 and 2009 income as the taxpayer failed to show that the ATO's opinion that there had been "fraud or evasion" was unlawful.
Finally, Logan J concluded that Mr Gould had been "wilfully blind", which constituted recklessness, rather than intentionally dishonest and therefore the penalties should be 50% of the shortfall amount. (Anglo American Investments Pty Ltd (Trustee) v FCT [2022] FCA 971, Federal Court, Logan J, 19 August 2022.)
In another case involving entities controlled by Mr Vanda Gould, Logan J concluded that management fees and interest payments claimed as deductions by the taxpayer were "fixed arbitrarily" to achieve the best overall tax outcome.
The ATO disallowed deductions claimed by the taxpayer under s 8-1 of the ITAA 1997 for management and consulting fees, and interest expenses, in relation to purported arrangements with various Australian entities also controlled by Mr Gould. As a consequence of disallowing those deductions, the ATO also disallowed deductions for related prior year losses. The income years in question were 2001 to 2007 and 2010 to 2014.
Logan J concluded on the evidence that it was "more likely than not" that the amount of the management fees and interest claimed as deductions "were fixed by Mr Gould after the close of the financial year ... arbitrarily and solely for taxation purposes".
Logan J also concluded that Melbourne Corp had failed to establish that it was not open for the ATO to form an opinion that there had been an avoidance of tax due to fraud or evasion in relation to the 2001 to 2007 income years.
As regards penalties, Logan J reached the same conclusion as in the Anglo American Investments case (reported above) - that they should be based on recklessness rather than intentional disregard of the law. (Melbourne Corporation of Australia Pty Ltd and Anor v FCT [2021] FCA 972, Federal Court, Logan J, 19 August 2022.)
© 2022 CPA Australia Ltd
Comments