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									                  COMMONWEALTH OF AUSTRALIA

       Official Committee Hansard


Reference: Mass marketed tax effective schemes and investor protection

                 TUESDAY, 20 MARCH 2001

                        BY AUTHORITY OF THE SENATE

The Proof and Official Hansard transcripts of Senate committee hearings,
some House of Representatives committee hearings and some joint com-
mittee hearings are available on the Internet. Some House of Representa-
tives committees and some joint committees make available only Official
Hansard transcripts.

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                                 ECONOMICS REFERENCES COMMITTEE
                                              Tuesday, 20 March 2001

Members: Senator Murphy (Chair), Senator Gibson (Deputy Chair), Senators Chapman, Conroy, Cook and
Participating members: Senators Abetz, Boswell, Brandis, Brown, Calvert, George Campbell, Coonan,
Crane, Eggleston, Faulkner, Ferguson, Ferris, Harradine, Harris, Knowles, Lightfoot, Mason, McGauran,
Murray, Payne, Tchen, Tierney and Watson
Senators in attendance: Senators Chapman, Cook, Lightfoot and Murphy

Terms of reference for the inquiry:
   For inquiry into and report on:
 (i)    The adequacy of measures to promote investor understanding of the financial and taxation implications of tax
        effective schemes;
(ii)    The conduct of, and the adequacy of measures for controlling, tax effective scheme designers, promoters and
        financial advisers; and
(iii)   The ATO’s approach towards and role in relation to mass marketed tax effective schemes.

ATKINSON, Mr Stephen Lee, Director, Australian Managed Investments Association ...................... 309

ATKINSON, Mr Stephen Lee, Partner, Wilson and Atkinson................................................................. 397

DOUGLAS, Mr Gray (Private capacity).................................................................................................... 454

EDINGER, Mr Robert John, Managing Director, Chalice Bridge Estate Ltd ....................................... 443

FITZ-JOHN, Ms Valerie Ruth, Tax Consultant, McKays Chartered Accountants............................... 375

FONDA, Mr Oliver (Private capacity) ....................................................................................................... 352

GEAR, Mr George, Chairman, Australian Managed Investments Association ..................................... 309

HENNESSY-HAWKS, Mr Robert James, Director, Australian Managed Investments
Association..................................................................................................................................................... 309

JONES, Dr Michael (Private capacity)....................................................................................................... 454

JONSHAGEN, Mr Bjorn Herluf (Private capacity) ................................................................................. 454

McKAY, Mr Murray Ranald, Partner, McKays Chartered Accountants .............................................. 375

McKAY, Mrs Lesley, Partner, McKays Chartered Accountants............................................................. 375

MEREDITH, Mr David Peter, Director, Resolution Holdings................................................................. 410

SANDERSON, Mr Julien Louis (Private capacity)................................................................................... 454

NORTON, Mr Richard Stanley, Partner, Norton and Smailes................................................................ 390

O’SULLIVAN, Mr John (Private capacity) ............................................................................................... 454

PAREKH, Mr Ashok, Chartered Accountant, Ashok Parekh and Co., Chartered Accountants ......... 448

POPE, Mr Colin, Partner, C. Pope & Associates ...................................................................................... 338

POPHAM, Mr Edward George (Private capacity).................................................................................... 454

RYPER, Mr Lawrence Edwin (Private capacity)...................................................................................... 425

SACH, Mr Geoffrey Harcourt (Private capacity) ..................................................................................... 454

SLEIGHT, Mr Kevin Phillip, Director, Australian Managed Investments Association........................ 309

STEWART, Mr James Roderick (Private capacity) ................................................................................. 454

TAYLOR, Mr Geoffrey Alan (Private capacity) ....................................................................................... 435

THOUME, Mrs Anne Yvonne, Director, MBAS Corporate Services Pty Ltd ....................................... 364

WATTS, Mr Rodney Charles (Private capacity)....................................................................................... 454
WILSON, Mr Frank Cullity, Partner in Charge of Tax Division, Wilson and Atkinson.......................397

YOUNG, Mr Warwick Raymond, Director, Australian Managed Investments Association.................309
Tuesday, 20 March 2001                 SENATE—References                                   E 307

Committee met at 9.09 a.m.

   CHAIR—Today the committee will continue its hearings in relation to its inquiry into mass
marketed tax effective schemes and investor protection. The terms of reference for the inquiry
direct the committee to consider the adequacy of measures to promote investor understanding of
the financial and taxation implications of tax effective schemes, the conduct of and adequacy of
measures for controlling tax effective schemes, and designers’, promoters’, financial advisers’
and the ATO’s approach and role in relation to mass marketed tax effective schemes.

  The committee prefers all evidence to be given in public, but under the Senate’s rules you
have the right to request to be heard in private. Witnesses should note, however, that the nature
of these hearings is likely to be such that it will be very difficult to accommodate requests to
give evidence in private and the committee will only agree to do so if the reasons are

   I now turn to the matter of parliamentary privilege. All witnesses appearing before the
committee are protected by parliamentary privilege with respect to the evidence provided.
Parliamentary privilege refers to the special rights and immunities attached to the parliament or
its members and others necessary for the discharge of the parliamentary functions without
obstruction and fear of prosecution. This means that you cannot be prosecuted or disadvantaged
because of anything you say in evidence or because you gave evidence. Any act by any person
which operates to the disadvantage of a witness on account of evidence given by him or her
before the Senate or any of its committees is treated as a breach of privilege. I can assure you
that this matter is a matter that the parliament takes very seriously.

   Persons giving evidence should be aware, however, that they cannot be protected in respect of
their evidence if that information already exists elsewhere. For example, if a person slanders
another and then repeats the statement to the committee, they do not gain any protection against
a subsequent libel case. Another example is in respect of dealings with the tax office. Making a
submission or giving evidence about your situation to the committee cannot stop the tax office
from continuing action against you to recover money or from auditing you in the future. What
they cannot do is use anything you say in evidence, or in a submission that you have made to
this committee, against you.

   The committee is aware that a great many people in Western Australia and across the country
have had their taxation assessments amended and that in some cases this has caused hardship
and concern. There have been many calls for the committee and the government to pull the tax
office into line. However, I must make it very clear that there are limits to the powers of Senate
committees. In the first instance, the committee cannot rule on whether the ATO acted lawfully
in disallowing the schemes. That is a question of law which can only be determined by the
courts. I understand that test cases should start soon. What the committee can and will do is
look closely at whether the ATO has acted according to its obligations and within its charter. We
will weigh up the views of those who think the ATO has acted unfairly and those who have a
different view. We will also be looking closely at the measures to promote investor
understanding of the financial and taxation implications of tax effective schemes and also how
well the activities of scheme designers, promoters and financial advisers are regulated.

E 308                                  SENATE—References                 Tuesday, 20 March 2001

   Finally, the committee will report to the Senate and make recommendations about what we
believe is an appropriate course of action. At the end of the day, however, it is a matter for both
the ATO and the government to act on the committee’s recommendations. The committee is
seriously concerned that such large numbers of people have found themselves in these difficult
circumstances because they participated in these schemes. While we may not be able to bring
about the kind of resolution people are seeking, hopefully we will be able to put forward
recommendations that ensure investors are better protected in the future and there will be no
repeat of this situation.

   I would just like to explain how we will work through the program. The committee has a list
of witnesses that we have to hear. There are programs available for anyone who wants one.
After we have worked through the program, I intend to open the floor to anyone who would like
to have say. The things that we are most interested in hearing about are how people became
involved in the schemes, the advice they sought to protect themselves before getting involved
and from whom they sought that advice. If you would like to participate in that process, if you
could make yourselves known to either Jackie or Alistair on the right here and we will compile
a list of people from whom we will proceed to take evidence at the latter part of the day.

Tuesday, 20 March 2001                 SENATE—References                                  E 309

[9.13 a.m.]

ATKINSON, Mr Stephen Lee, Director, Australian Managed Investments Association

GEAR, Mr George, Chairman, Australian Managed Investments Association

HENNESSY-HAWKS, Mr Robert James, Director, Australian Managed Investments

SLEIGHT, Mr Kevin Phillip, Director, Australian Managed Investments Association

YOUNG, Mr Warwick Raymond, Director, Australian Managed Investments Association

  CHAIR—Welcome. You have lodged a submission with the committee. Are there any
additions you wish to make to the submission?

  Mr Gear—We have a further submission here.

   CHAIR—Thank you. With respect to the submission and the supplementary submission that
you have now presented, I invite you to make an opening statement. However, given the rather
tight program, I ask that we limit opening statements as much as is possible.

  Mr Gear—I have a short statement to make. I thank you for the opportunity to present
evidence to the committee. In relation to terms of reference 1 and 2, AMIA believes that self-
regulation by the industry is the best way to ensure that the standards of project managers,
advisers and investors, are maintained at a level that would ensure community confidence. This
view was supported by ASIC in its evidence to the committee. Currently, the managed
investment sector is the most regulated and closely scrutinised segment of the finance industry.
As an association, AMIA is willing to work with the regulators such as ASIC and the ATO to
continue to lift standards within the industry. As the committee would be aware, the
overwhelming response from the submissions to this inquiry concern the conduct of the
Australian Taxation Office. In appearing on behalf of our members, we will focus on this area.

  At the outset let us be clear. Investors have done nothing wrong. They have fulfilled their
duty of care under the self-assessment regime. Before investing they were provided with a
prospectus containing financial forecasts of profits, details of the promoters, reports from
technical and marketing experts, as well as a tax opinion from leading tax lawyers and
accountants. Many sought additional advice or opinions from lawyers, accountants, financial
advisers and even from the ATO. What more could they do?

  By contrast, the ATO completely failed in its duty of care to inform the market of its 1990
concerns. A reasonable person would conclude that the allowance of deductions since at least
1988 was a real indication by the ATO that these investments complied with the tax laws in line
with the advice and the prospectus. In our initial submission concerning the ATO making
commercial judgments, we pointed out that they did not have the ability to do this and that it is
not its role. This was demonstrated by you, Mr Chairman, when you were able to show that a
product ruling had been issued for a project with 12 times the cost of the ATO industry standard.
As late as last week, the ATO would not give a product ruling because harvesting costs in a

E 310                                  SENATE—References                Tuesday, 20 March 2001

project were deemed to be too low. The project manager has to now artificially inflate his costs
to investors to get his product ruling.

   Commercial judgments of this nature are best left to experts in the private sector. These
costings are required by law and are in the prospectus, as are projected returns to investors. In
addition a further independent report is required to substantiate the assumptions underpinning
the projections. The committee has been asked by the ATO to conclude that managed
investments are a cost to the revenue. Press reports have estimates as high as $4½ billion. The
truth is that there is no cost to the revenue from managed investments as most projects succeed
and pay considerable tax from profits and employment. As an example, the Minister for
Forestry and Conservation has a study done by his department showing a net seven per cent
return to the revenue from forestry projects.

   If a project fails, the debt forgiveness rules will operate to provide large amounts of revenue
to the ATO. Overall, there is no revenue loss, merely a deferral at worst. That deferral is funds
to a business activity which is itself generating income and paying tax. The ATO has
consistently and knowingly breached nearly every item in the taxpayers charter of rights. The
major concern we have is that the ATO is not treating taxpayers as individuals according to their
own circumstances and is ignoring the existing law. The ATO have also been inconsistent in its
treatment of taxpayers. I will cite two cases. Firstly, our initial recommendations effectively
asked for the running of test cases in the Federal Court before any recovery action was
commenced against taxpayers. This approach was afforded to Foodland who informed the
Australian Stock Exchange that they are currently the subjects of a $53 million disallowance
under part 4A from the ATO. They have been advised that no recovery action will be
commenced until all possible legal avenues of appeal have been exhausted. We ask the
question: why aren’t small investors given equal treatment on this?

  Secondly, information contained at page 10 of the tabled document commissioned by AMIA
details that Mr Carmody personally authorised deductions for infrastructure bonds using non-
recourse financing, which the ATO has itself estimated will cost the revenue $15 billion over 10
years. We are currently seeking confirmation of this and the fact that Mr Shaw QC and Mr
Pagone QC indicated to the ATO that part 4A clearly applied. We understand that no such
opinion has been sought with respect to any or all projects currently under attack. This is a
matter that should be investigated by the committee.

   Let us look at the features of this campaign. The ATO had concerns; it did nothing for at least
seven years. In May 1998 senior tax officers held a meeting in Castleden Place, Melbourne to
review their failure to act earlier and to try to ensure that this would not happen again. The
likely impacts of the campaign, such as marital breakdowns, personal stress and small business
devastation, were anticipated and discussed. The outcomes canvassed by these officers have
proven accurate, as confirmed time and time again in the submissions to this inquiry.

   This campaign by the ATO raises a serious public policy issue and will determine how tax
administration will be carried out in Australia in the future. Traditionally, a taxpayer could
confidently rely on expert advice, supported by numerous decisions of the courts, to predict the
likely outcome of any deduction claimed for their business expense. This current campaign
ignores all this. It also seriously ignores the taxpayer’s charter of rights—chief among them to

Tuesday, 20 March 2001                  SENATE—References                                    E 311

be treated fairly and as an individual. This campaign reaches the lowest level of tax
administration in Australia’s history.

   Let there be no mistake: if the current campaign by the ATO becomes the norm, then the
future for taxpayers is predictable. Firstly, no-one can confidently make an investment decision.
Currently, the ATO has the product ruling system. In effect, you have to accept the ATO’s
dictates to get this ruling. Without it, you cannot sell your product in the marketplace. Secondly,
they will not stop with the managed investment industry. The next in line could be investors
who negatively gear property or shares. They perfectly fit the current criteria. This has been a
devastating blow to the managed investment industry. It is apparent that the motive of the ATO
is to cause as much damage to this industry as possible, and they have succeeded.

  What this means is that virtually all investment in rural areas of Australia from managed
investments has stopped. Given the importance of this investment to local employment in rural
and regional areas of traditional high unemployment and the reduced economic activity on the
commerce of these sectors with its five-to-one knock-on effect has been devastating.
Confidence by investors has gone. Most of them will not invest in managed investments, even
with a product ruling, because they do not trust the Tax Office. As many of them say to us, the
ATO cannot be trusted. They acted retrospectively before and they will do it again. We believe
that the only way this confidence can be restored so that rural investment can return is to
dismiss Mr Carmody, as commissioner, and the senior tax officers responsible for this
campaign. The economic and social damage and distress they have caused is more than enough
reason for them to go.

  Finally, the attitude of the ATO to this inquiry at their first appearance was contemptuous.
The ATO and many other government departments see parliamentary committees as an
annoyance at best and a waste of their time at worst. Given a choice, they would not turn up
and, in many cases, if a committee asks difficult questions then they will take questions on
notice and never give an adequate response; alternatively, they will send inappropriate officers
along who incapable of appropriate responses. In relation to this inquiry, the ATO showed its
contempt by cobbling together mishmash of old press releases and speeches as its submission.
They had a copy of the Senate submissions and could have given the committee responses on
the concerns raised. They chose not to. Their first appearance clearly demonstrated that they had
put no effort into preparation for this important inquiry.

   The ATO knows that MPs have numerous duties other than committee work and that many of
the technical issues are outside their level of expertise. It takes advantage of this to ensure that
the exposure of any adverse action on their part is minimised in the best Sir Humphrey tradition.
We respectfully submit that the ATO should be forced to respond in detail to the matters raised
by us on behalf of the innocent taxpayers who have had their lives devastated or put on hold by
this destructive campaign. Thank you, Mr Chairman. We will answer questions.

  CHAIR—Thank you, Mr Gear. Can I assure those people present that the tax office’s first
appearance is not its last. On behalf of all the committee members here, I know that we will be
seeking answers to the questions that we put to them. In your submission you state that the tax
deductions from schemes are at least tax neutral or positive with projects that succeed?
However, the committee has heard of two factors that call into question the tax neutrality of
many schemes. There is strong evidence to indicate that the scheme promoters have washed

E 312                                   SENATE—References                 Tuesday, 20 March 2001

scheme funds so as to avoid paying tax themselves and there is also evidence that scheme
promoters, through inflated fees, are siphoning off much of the capital raised by these schemes
and that only a trickle makes it into the ground, jeopardising any chance of the schemes turning
a profit.

   With regard to your verbal submission relating to AFFA’s submission to this committee, I will
pose a further question to you that the basis for AFFA’s submission and the figures that they
have used are at the low end of the scale in cost terms and at the high end of the scale in yield
terms. If the same calculation were to be used, for instance, using specific examples of costs
associated with some blue gum plantations in the marketplace today and the yields that were
being used were actually more related to what is achievable and what might not be wished to be
achieved, would the same outcome be achieved in terms of a seven per cent return to the

  Mr Gear—On the first point, if there has been some tax mischief by promoters in terms of
what they do with the money, why would you attack the investors? Why wouldn’t you attack
the promoters?

   Mr Atkinson—That is a very fundamental point. Another way of putting that is to say, ‘How
does it help the investors in these projects, which the tax office purports to do, by disallowing
their tax deductions?’ The fundamental distinction that needs to be made is that, if you are
talking about projects that have higher fees or fees which cannot be substantiated, if you are
talking about promoters that have allegedly washed their funds through a unit trust or a legal
structure and done so at the cost of tax revenue, those issues are properly dealt with under the
Corporations Law. Nearly 90 per cent of these projects that have come under attack by the tax
office have been the subject of prospectuses that have issued.

   The level of corporate governance for a director in a public company is an extremely high
one. They have made statements in a prospectus and signed off on a prospectus. Those issues
are issues really for ASIC; they are Corporations Law issues. The ATO will have you believe
that the way to help the investor is to basically vet the project by disallowing their deductions. If
fees are too high, if promoters have washed their funds illegally through complex or other legal
structures, then that is a Corporations Law issue; it is not a tax issue. We are here today to
represent the taxpayer, the investor, to try to explain to you and to the committee the unfair
treatment that the tax office have given investors, not promoters.

   The essential problem that I believe is the very nature of this inquiry is that the tax office
have thrown a net over all of these projects; they have not discriminated from one project to
another. I believe a reasonable analogy is: they cast a fishing net and they might catch three or
four catfish, but they also catch 25 dolphin. That is the problem. They have not looked at each
project and made an individual assessment in respect of each project. Finally, in answer to your
initial question, we are here today to represent our members who are taxpayers who have had
their deductions unfairly disallowed.

   CHAIR—Thank you. Can I say again that the very reason I initiated this inquiry was to act
in the interest of investors, because I do believe many of them are being caught out very badly,
and not just by the tax office. It is one of the unfortunate circumstances this country finds itself
in with a self-assessment tax system that many of these projects have been funded by tax

Tuesday, 20 March 2001                  SENATE—References                                     E 313

deductions claimed by individual investors. Therefore it is an issue for the tax office. I do not
want to sit here and argue the tax office’s case. I have to deal with the law as it is currently
structured, as does this committee. The questions I am asking you are about the nature of our
terms of reference, that is, whether or not there is sufficient protection for investors in so far as
it relates to the operation of promoters and scheme developers. I put it to you again that the
circumstances that many of these people find themselves in are as a result of the great failure of
mainly mass marketed investment schemes. There has been a study done by the Rural Industries
Research and Development Corporation which was published in February last year. It looked
back to 1983, and in large part found that the majority of these schemes have failed. They have
failed for the very reasons relating to the questions that I put to you. I would like a response to
those questions. I know you would like to just sit here and represent the investors, but it is also
incumbent upon you and your organisation, the Australian Managed Investments Association,
to respond to questions that this committee puts to you.

  Mr Gear—On the failure rate, we do not know. We do not have an accurate number because
not enough is known.

  CHAIR—In the executive summary of your submission, you make a comparison between
managed investment failures and small business. I would like to know what you base that
assumption or claim on.

   Mr Gear—On the Australian Rural Group. They gave us that information. Looking at the
totality, rural products are only a percentage of all of these schemes. Let me pick up the point
that you made about the 1980s. Where were the regulators? What were they doing? The tax
office have admitted to you that they had concerns in 1990. Do you think that if they had acted
on those concerns back in 1990 we would be sitting here today? I think not. They put it all back
on the investors. From where the investors sit, they are at the end of the chain.

   CHAIR—Can I interrupt you again. Let me make it abundantly clear that I am not putting
anything back on the investors here. I do not think any member of this committee is sitting here
with a view that the vast majority of investors who have found themselves in very difficult
situations have deliberately set about a course of avoiding tax. But bear in mind that we have a
responsibility to pursue the issues related to these managed investment schemes pursuant to our
terms of reference. I make it abundantly clear, on my behalf and that of other committee
members here, that we are not sitting here with a view of putting the blame on the investors. We
will take everything into consideration as a result of the evidence we receive.

  Mr Gear—You take a different view from the tax office, because they do blame the

  CHAIR—That is a matter for the tax office. That is not the view of this committee.

  Mr Hennessy-Hawks—At the hearing on 9 March Mr Peter Flude from the Australian Rural
Group gave evidence to the committee. The Australian Rural Group is by far the biggest trustee
of projects operating in Australia. He pointed out to the committee that only approximately five
per cent of those projects failed. From that we can draw the conclusion that 95 per cent of them
are either succeeding or still carrying on, on the way to becoming successful projects. That
gives us a bit of an indication. Also we need to have a look at that aspect at this stage, because

E 314                                   SENATE—References                Tuesday, 20 March 2001

there has been so much negativity talked about failed projects, which are a small percentage of
the industry. I would like to ask Mr Sleight to comment on the effect the tax effective industry
has had on the rural industry in Australia and on the enormous growth of some sections of the

  CHAIR—Before you proceed, I would like to draw to your attention the report by the Rural
Industries Research and Development Corporation, which is a government funded organisation
that conducted a study on all these schemes from 1983 up until 2000. Their findings would be at
conflict with that of Mr Flude. I suggest to you that, thus far, the evidence received by this
committee would suggest that there is a high degree of failure, and it is as a result of the
questions that I have put to you. I think they are serious problems. Set aside for the moment the
tax implications and the approach of the tax office. As I said, this committee has a responsibility
under its terms of reference to look at the whole gamut of problems associated with mass-
marketed investment schemes. It is my intention that we do that.

   Mr Sleight—I think what you have to do is to consider the success of the managed
investment industry compared with the success of small business. I also think you have to
recognise—as Mr Hennessy-Hawks has pointed out—that whole industries have been created as
a result of the managed investment industry. Two in particular that the politicians are very
happy to make reference to in speeches to rural communities are the tremendous success of both
the Australian wine industry and the forestry industry. Those of us who have met with the
relevant minister will confirm that he is very passionate about the forestry industry. The simple
fact is that those industries have, to a degree of 70 per cent, been funded by investors attracted
by prospectuses and other means to invest their money into industries that are now shining
lights in the Australian economy. There is no doubt that there are failures, but there is also no
doubt that every person that establishes a small business is not going to be successful.

   CHAIR—I understand that. We heard evidence yesterday in Kalgoorlie about investment
schemes that we know have failed, such as Servcom, Oracle and Satcom. Not only have the
investors got into a situation where they are confronted with tax debt but they are also being
issued notices from one particular company, Servcom, with regard to that company seeking
repayment of the loans or other payments associated with the scheme. I think it is a very serious
issue; it is one that people such as you ought to give a lot of thought to.

   Mr Atkinson—I think in fairness—and I think this is what Kevin was saying—at the same
time you have to look at the successes in the managed investment industry. Timbercorp was one
of the top three most successful listed companies, if not the most successful, on the Stock
Exchange in the latter half of the nineties. You have to look at the wine industry in the south-
west of Western Australia. You have to look at Barkworth Olives and the absolute growth in the
olive industry, which was almost non-existent six or seven years ago. I think it is very important
to note that, without discriminating on a project-by-project basis, you cannot be seen to be
giving a fair treatment of the industry. There are projects that have failed but, equally, there are
projects that have been very successful and there are projects whose commercial viability is
imperilled by only one thing, and that is the tax office’s treatment of investors in that project in
the last two years.

  CHAIR— I say again: I am not in the business of picking one out and putting it against
another. I know there have been some successes. In fact, I would like the Australian Managed

Tuesday, 20 March 2001                 SENATE—References                                    E 315

Investments Association, if they could, to provide the committee with information on those
investment schemes—indeed, some of those that you have highlighted—as to the returns that
were projected in the prospectuses and the returns that are currently being paid to investors.

  Mr Gear—Mr Warwick Young is the project manager with one of these projects. He can tell
you himself. You do not have to wait.

  CHAIR—I would like you to take the other part of that on notice. If you could provide us
with a list of schemes that you believe have been successful, particularly as they relate to the
prospectus projections, et cetera. That would be very useful information because it will help us
with our questions of the ATO and ASIC.

   Mr Sleight—Mr Chairman, having been in Kalgoorlie yesterday and seeing the focus of the
day entirely directed towards one particular kind of project that was offered in that town, I think
you have a fundamental challenge here with licensing and the different levels of disclosure
required for different kinds of projects. Managed investments traditionally offer a registered
prospectus which contains comprehensive information. All three of the items of focus yesterday
were franchise opportunities which have completely different levels of disclosure. From our
point of view, that is something that we would certainly like to work on with both ASIC and the
tax office with respect to levelling off the playing field for disclosure requirements. Believe me,
as an authorised representative and director of a dealers licence, I feel extremely frustrated
when we have to comply with very strict criteria and very onerous requirements for the
operation of our proper authority holders, only to find others racing around in areas such as
Kalgoorlie with products which were the highlight of that whole day yesterday with a totally
different level of disclosure requirement. That is something the committee should certainly be

  CHAIR—On that basis, you say in your submission that you do need measures for what you
call the rogue elements in the industry. You might like to inform us of what you believe ought
be done.

  Mr Atkinson—Could I answer that. I will repeat myself, but I believe that you do not cure
the rogue elements in the industry by allowing the tax office to cast their net and disallow
deductions indiscriminately across all projects. I believe that you do it by enforcing the
Corporations Law against the advisers and/or directors that were involved in those projects. We
have some of the strictest corporate governance requirements in the world. They are there, they
are available; the structure is already there. You do not cure rogue projects by allowing the tax
office, without investigating the elements projects, to throw a net over projects and disallow
investors’ tax deductions.

  CHAIR—How do you propose to deal with rogue elements?

   Mr Atkinson—You enforce provisions under the various sections of the Corporations Law
on the duties of directors and under the enormously onerous and complex requirements for
financial advisers to properly inform their clients under the relevant provisions of the
Corporations Law. That would weed out the rogue elements in projects. As a director of several
public companies, when I am at a directors meeting in any company I am involved with, I am
acutely aware of my responsibilities as a director and to my shareholders and investors and my

E 316                                   SENATE—References                 Tuesday, 20 March 2001

fellow directors are acutely aware of the responsibilities we have under the Corporations Law.
That is a very important distinction. There seems to be an underlying assumption here—I
believe it is a false assumption—that the tax office would have you believe that the way you
weed out rogue elements is to crucify investors in those projects by willy-nilly disallowing their
tax deductions.

   CHAIR—That might be the Tax Office’s view, but it is not my view. What I am looking at is
whether or not the law as it exists is sufficient and whether or not the law needs to be changed
or have additions made to it. You mentioned rogue elements. Who do you consider to be rogue
elements in the mass marketed investment industry?

  Mr Sleight—Realistically, it is those operators who have been in the marketplace unlicensed
and untrained, the people that guys like us would not employ and who have gone off to those
places where they know there is a captive audience, where they do the 20-minute sale—which is
quite different to the other operators in the marketplace. In the case of our company, our
authorised representatives are not allowed to do business with anybody until they have seen
them three times, with at least one week between each visit. The standards for licensed
operators are there and they work well. You have got to—

  CHAIR—Could you give me some examples?

  Mr Sleight—For instance, a person does not need to be licensed to operate in the area of
offering franchise arrangements, which was the subject of most of yesterday’s discussions.

  CHAIR—What law would those people be prosecuted under in the current legal regime?

   Mr Atkinson—The Corporations Law or the Trade Practices Act, false and misleading
conduct. Can I just say that that is the area that you look to to, as you say, weed out the rogue
elements of the projects. We could talk for hours about the laws which we do not have, but I
would just like to reiterate that a fundamental distinction in all of this is that if there are rogue
elements in this thing we call the ‘managed investments industry’, the cure is that it is an
enforcement issue. The laws and the regulations are already there for dishonest directors or
advisers who are fraudulent, dishonest or have not done their job properly.

   CHAIR—I understood Mr Sleight to say that there is no law that governs people offering

  Mr Sleight—That is right.

   Senator CHAPMAN—In the discussion and answers to questions from Senator Murphy, you
have strongly expressed the view that, by and large, the industry is well managed and most of
the projects are successful. I will put to you evidence that we received from van Eyk Capital,
which is probably one of the most highly regarded investment research houses in Australia,
relied on by a number of sharebrokers for advice in relation to investments. They put to us in a
briefing that they had researched a large number of these projects in considerable detail and had
reached the conclusion that they would recommend, at the most, two or three of them as suitable
investments for clients.

Tuesday, 20 March 2001                 SENATE—References                                   E 317

  Mr Sleight—Realistically, with respect, I believe that van Eyk has a degree of expertise in
the traditional form of investment marketplace and that they are lacking in the managed
investments area.

  Senator CHAPMAN—That is an assertion. Can you provide some evidence to back that up?

  Mr Atkinson—The analogy is to say that a broking house who gives advice on the purchase
of shares is only recommending three or four share portfolios, therefore it casts aspersions on
the other shares that are listed on the Stock Exchange.

  Senator CHAPMAN—A research institution is quite a different role.

  Mr Atkinson—Some of the largest research organisations are in broking houses.

  Senator CHAPMAN—This is an independent research organisation.

   Mr Hennessy-Hawks—If I could make a comment on that, we have had an enormous
number of dealings with the Barkworth group, which is currently one of the most successful
olive projects in Australia. That group approached van Eyk for a report, and the only thing they
could not agree on was the cost—van Eyk was wanting to charge them to get a positive report.
That is a fact from the marketplace which the managing director of the Barkworth olive group
would be quite happy to confirm to the committee. So the independence of van Eyk, I would
suggest, is somewhat doubtful.

   Mr Atkinson—We have been talking for some time about the success or otherwise of these
projects. The treatment by the tax office of these projects would be the same whether or not they
were successful. That is an important point. In the last two years, the tax office has disallowed
investors’ deductions in projects that are very successful and commercially viable. We have
spent the last 20 minutes talking about the degree or otherwise of the success of projects in the
managed investments industry. I would ask you to consider the fact that in the last two years the
tax office has disallowed deductions in numerous projects that are commercially viable, have
returned income to investors and have operated successfully since their inception.

   Even if today we could say to you that every project in the managed investment schemes was
a success, the tax office would still have operated in terms of the investors in those projects as
they have done in the last two years and, in many instances, disallowed their deductions. Why
they would do that we do not know. With respect to your third term of reference, we believe that
is why they have acted unfairly and indiscriminately against taxpayers. That is our fundamental
point today.

  Mr Gear—Also the application of the tax laws should not discriminate between whether a
project succeeds or fails. If all we were going to do was allow tax deductions to companies that
succeed, who would go into business?

   Mr Young—My concern today, with the limited time we have, is that we are ignoring a very
important issue here: that is, the behaviour of the most senior, powerful, government department
in our country. Not only the investors in these projects and managed investments but also the
general community should be entitled to expect that the Australian Taxation Office would act

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within the law, within their charter, to protect, not to attack, the interests of the individual and to
look objectively at each individual case to apply the appropriate law that exists.

   In the instances of which I have particular knowledge but I have every cause to believe that it
is general, the tax office has embarked on a campaign to throw a blanket over all managed
investment schemes, irrespective of the nature of the project or circumstances of the individual
member. They have commenced their campaign by issuing a position paper, which in
comparing those position papers from one project to another I would suggest that they are very
generic in nature, couched in terms simply to underpin a predetermined decision that,
irrespective of the facts, the deductions claimed in the particular project will be disallowed
under part 4A.

  I say that they have not acted impartially as required by the taxpayers charter and they have
not acted in a professional manner; in fact, they have disregarded the existing law and their
obligation to apply that law. In saying that they have not acted professionally and impartially, I
would like to table for the committee a copy of a position paper issued by the Australian
Taxation Office in relation to the Australian Aloe Project.

  Let me qualify when I say a ‘position paper’. This document was handed to me by an officer
of the Australian Taxation Office on site at another project, not the Australian Aloe Project. He
handed it to me saying, ‘Warwick, this is the position paper we are going to issue in the
Australian Aloe Project. There might be some minor amendments, but essentially that’s it, and
that will be issuing in a couple of weeks.’ Unfortunately, that officer neglected to read his
document before handing it to me. If he had read it, he would have recognised that it was
probably the penultimate draft of that ‘position paper’. Just reading a section from it:

The Australian aloe project arrangements which constitute the scheme include development of an arrangement to enrich
the promoters at the expense of the revenue, putting the arrangement in the market place to attract investors with large up
front deductions exceeding their nominal cash contributions to the scheme, and the use of round robin non-recourse
financing to facilitate the investor’s deductions. (are we being too accusatory in saying that the arrangement is enriching
the promoter at the expense of the revenue? I think we will get lots of flack from him if we put it that way. Not sure what
we could say instead if we do change it—maybe ‘an arrangement substantially funded at the expense of the revenue’—
standard words as used in other papers. I am happy to stay with them)

What conclusion can the committee draw about the objectivity of that particular officer and the

  Senator COOK—Are there any more papers that you want to introduce into evidence? If
they are important to your case, it is advisable that we have them as soon as possible so that we
can examine what they contain and question you on them.

   Mr Young—I will go one step further in relation to that. On a subsequent visit to the
registered office of Australian Aloe, at the end of that surveillance—that visit being in relation
to another project—I presented that document to the particular tax officers and asked, ‘Are you
authorised and, if so, are you prepared to tell me who wrote that?’ With considerable reddening
in both faces, the officer identified there as Mr Sturgess said, ‘There was something you said to
me this morning that made me think you might have had that. I took Troy outside and said,
“What in the hell did you give him that for?”’ The other officer, Troy Whelan, said, ‘Yes, I
shouldn’t have given it to you. It is my neck, my job. You can do with it what you like, but you
should’ve seen what else we wrote.’

Tuesday, 20 March 2001                  SENATE—References                                    E 319

  Mr Atkinson—Can I also make a comment about position papers in general?

  Senator LIGHTFOOT—Mr Young, have you finished what you were saying?

  Mr Atkinson—I’m sorry.

   Mr Young—No, that is it. Obviously the other conversation that was not very complimentary
to the tax office or their attitude ensued, but it is not material to this inquiry.

   Mr Atkinson—I would just make a brief comment. It is also symptomatic in that a position
paper is issued at the start of the process to disallow deductions in projects. The position papers
have one thing in common: they are very standard, if not identical, papers that are delivered to
each project. I have seen that in my capacity as solicitor acting on behalf of projects. It again
reinforces the non-discriminatory nature of what the tax office have done with these projects.
They make an executive decision or, perhaps I should say, it appears as though they make an
executive decision about several projects; they will then send out a position paper that is
completely standard; and, by any fair reading, it becomes apparent very quickly that they have
not looked in detail at the particular circumstances of that project. I would ask you to read that
one example in light of that comment.

  Senator CHAPMAN—In your submission you say that, like any investment, investors need
to do research and they need to compare prices. Evidence we heard yesterday indicated that,
with a number of these projects, there was a lot of what was described as ‘aggressive
marketing’. People were not really given time to make their own assessments and, in fact, the
sort of people who were being targeted did not have the time to make their own assessments of
these investments. How do you suggest that so-called ‘aggressive marketing’ be handled with
regard to these projects, and how does that relate to your comment in your submission?

  Mr Gear—In terms of AMIA’s concern about that matter, as we said at the outset today, we
honestly believe that the best way to ensure that that happens is for self-regulation to take place.
We do not believe that the history—

  Senator CHAPMAN—Can I just intervene? Why hasn’t the self-regulation occurred? You
are advocating self-regulation, but obviously it has not occurred, there has not been self-

  Mr Gear—No. In fact, this body was formed only in 1998.

  Mr Atkinson—Can I also interrupt there?

  CHAIR—It would be much more useful, I think, if you sort out who is responding to what
and do it in a manner that keeps comments short. In that way, we can all get a go.

  Mr Gear—Senator Chapman asked why it has not happened before. We were only formed in
1998. This inquiry gives us an opportunity to put the view that we believe self-regulation is the
best way in which to handle that problem. There are two aspects to this: there is what has
happened in the past, and what happens today. The parliament, to their credit, have passed the
Managed Investments Act—and I think it had unanimous support. That act has gone a long way

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to alleviating those concerns as to what happens into the future. We wish that it had happened
sooner, but we cannot rewrite history. What we can talk about is what has happened in the past.
We want to be part of the future to make sure that this industry—which we believe is a good
industry for Australia and for investors—can go forward on a much higher level. Mr Atkinson
wants to add to that, I think.

  Mr Atkinson—In that situation again, it is a Corporations Law issue; it has nothing
whatsoever to do with tax. If they are aggressively marketing a financial product, they have to
be very careful that they comply with their dealer licence requirements under the Corporations

  All of this discussion assumes that the tax office is correct in disallowing the deductions; it
has not been tested in court yet. It will be shortly but, until tested in court, it is the court that is
the final arbitrator of whether or not the tax office have been right in disallowing these
deductions. Until the court decides, we believe, several cases on this matter, we do not know
whether financial advisers have given correct advice or whether or not the tax office has been
correct in disallowing the deductions.

  Senator CHAPMAN—Is the association doing anything in relation to those promoters who
apparently are aggressively pursuing investors for funds because of the disallowance of the
deduction not having flowed through to the promoter? Are you doing anything to prevent the
aggressive pursuit of investors by these promoters?

  Mr Young—Could you identify them, Senator? I am not certain that we are aware of them.

  Senator CHAPMAN—Servcom was one.

  Mr Gear—I know nothing about Servcom.

  Mr Young—Are Servcom a managed investment?

  Senator CHAPMAN—Mr Atkinson would know something about them.

  Mr Atkinson—I am sorry. What was the question?

   Senator CHAPMAN—I said: is the association, which is advocating self-regulation of this
issue, doing anything to stop or influence the promoters from aggressively pursuing investors
who have had their tax deductions denied, therefore, with the funds not having flowed to the
promoter? Has the association done anything to prevent those promoters from trying to extract
those funds from the investors?

  Mr Atkinson—With respect, I do not understand the word ‘aggressively’ because this is

  Senator CHAPMAN—Threatened with summonses, letters. You ought to know what
aggressive means.

Tuesday, 20 March 2001                  SENATE—References                                    E 321

  Mr Atkinson—I would rather not comment on that particular case.

  Senator CHAPMAN—I am asking you a question. What is the association doing? You are in
favour of self-regulation. What are you doing about it?

  Mr Atkinson—In my opinion, that is an example of a fully recourse loan being pursued
under the terms of the loan agreement.

  Senator CHAPMAN—So, as an organisation, you have no concern for the investors at all.

  Mr Gear—No, we have concerns.

  Senator CHAPMAN—What are you doing about it? Nothing. What are you doing about the

  Mr Gear—No. In relation to the question you asked, Mr Atkinson has made the point that,
most probably, the reason why they are pursuing the investors is that it is a full recourse loan.
Just the same as any other loan company, they might want their money back.

   Mr Hennessy-Hawks—I have an involvement with one of the finance companies that has
financed quite a lot of investment into very good and very legitimate projects, and they have
experienced this same thing. The finance company has borrowed money in, which they have on
lent to people to invest into those projects. That company is called Capital Project Financing.
That particular company has had to deal with an awful lot of people who are in very difficult
situations. I know, from personal experience from the staff in there, that they have bent over
backwards to try to help people and they have bent over backwards to try to extend periods of
loans. But, at the end of the day, people have borrowed the money and they have signed an
agreement. The money will have to be repaid, because the finance company has borrowed the
money from other people, and they want to get their money back as well.

   There are projects out there that we are as uncomfortable with as you are. But that is not a
reflection on the industry or of what the association is trying to do. The association started off a
couple of years ago to get into this industry and to lift the standards of what was happening in
the industry, to work with government and to work with the ATO and ASIC. However, we were
derailed, like everybody else, by this activity of the tax office that, in terms of what they are
doing, is totally out of left field. It returns you to the same perception—if I can go on and just
say this: the perception out there that the investors have done something wrong, which was

  CHAIR—Mr Hennessy-Hawks, Senator Chapman’s question I think is a very valid one. On
the one hand, you present to us an argument that the tax office should not pursue investors for
the tax debt that the tax office thinks they owe until the courts have determined the matter. I
would have thought, in terms of Senator Chapman’s question about self-regulation, that the
industry itself should also take account of the circumstances that investors are facing. That is a
double jeopardy in some people’s cases, and it is likely to grow—not just with Servcom, but
with a whole range of other managed investment schemes that have been financed by finance
companies who will want to recall those loans. That should be the case as well. If you are

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talking about self-regulation, I think Senator Chapman’s point is valid. I think it would be
appropriate if you could respond to his question.

  Senator CHAPMAN—I would add also that, in many of theses instances, the promoter told
the investor that their investment would be fully funded out of the tax refund and so there would
be no further capital injection required from the investor.

   Mr Young—Can I just make an observation? I should point out that I am only a new boy on
the board of this association. I watched what they were endeavouring to do for some time,
before accepting that appointment. It would seem to me to be quite unfair to ask what the
association are doing about some group that I have not heard of—Servcom—when obviously
they have no teeth and are a fledgling association which, having decided to come together and
try and track the responsible people within the managed investments industry, have had to spend
all their time dealing with the absolute disaster and devastation caused by the actions of the tax
office. They are saying that they want to get together, they want to sit down with these bodies
and see what they can contribute to regulating the industry. You cannot suggest that they have
any teeth. This is Servcom—alleged to have been a member of the association? I do not know.

  Mr Gear—No.

   Mr Young—So it is not a member of the association. It is probably one of those companies
acting in a manner that this association, sitting down together with ASIC and the ATO, would
like to make sure cannot be repeated.

  Mr Gear—As Mr Sleight has pointed out, it is a franchise and falls outside the act.

   Senator CHAPMAN—But you are presenting arguments to us for self-regulation when
clearly self-regulation, to the extent that it has been applied so far, has failed.

  Mr Gear—It has not had a chance.

  Mr Atkinson—Senator Chapman, it has not been enforced; that is what I am saying. In your
example—and I am sorry to repeat myself—where there is that situation, the powers are there.
The ACCC, for instance, I believe has franchisee powers. The powers are there in the
Corporations Law to enforce against ‘aggressively market’. If by the term ‘aggressively market’
you mean false and misleading or incorrect, if that is what ‘aggressive’ means in that situation,
the law is already there and should be enforced. It should be enforced by agencies, other than
the Taxation Office, in some indirect way through disallowing tax deductions in those projects. I
cannot see the logic in that you enforce against promoters and directors by disallowing tax
deductions in the projects and giving the investor a double whammy, if you like.

 CHAIR—Mr Atkinson, I suggest that you read ASIC’s submission to the committee as to
why they cannot pursue many of these prospectus companies under the current law.

   Mr Atkinson—Mr Chairman, I was there the day that they gave submissions. I think the
thing that really has to stand out is, like a tax assessment, directors of public companies are
under a continual self-assessment. If it transpires that they have misrepresented to investors and

Tuesday, 20 March 2001                SENATE—References                                 E 323

shareholders, there are ample laws under the Corporations Law by which they can be
prosecuted and, indeed, go to jail.

  CHAIR—I think, Mr Atkinson, you would know full well how difficult it is to bring about a
successful case of misrepresentation, particularly taking account of many of the prospectuses
that have been written and the way in which they have been written—and I think that was
ASIC’s point to this committee.

  Mr Atkinson—Yes. I do not necessarily disagree with that. But I would just say again that
you do not cure that problem by disallowing investors’ deductions in the process. There is no
logic to it.

  CHAIR—That is not my argument.

  Mr Atkinson—But that is what the tax office would have you believe that that is what—

  CHAIR—Let me stop you. As I said at the outset, this committee is not sitting here to argue
the tax office’s case. We have terms of reference, and they are what we are proceeding to ask
questions about. That is the issue for the committee.

  Senator COOK—At 1.2 on page 6 of your first submission, the one which we had notice of,
you give a paragraph stating what and who Australian Managed Investments Association Ltd is.
You say that your headquarters in Canberra has access to 110,000 industry participants. Are
they schemes or companies? What are they?

  Mr Hennessy-Hawks—In the main, they are individual investors into projects. There are
some advisers or proper authority holders, and there are some projects. We are on a campaign at
the moment to recruit as many projects into the association as we can possibly get. But
obviously that is a process that takes time, and everyone is distracted at this point of time.

   Senator COOK—I understand that. I will try to move through some questions fairly quickly,
if I may. I am trying to get a clear idea of who you are. Are you promoters of schemes, are you
investors in schemes—or are you both?

  Mr Hennessy-Hawks—Both.

  Mr Gear—A professional association.

  Senator COOK—A professional association?

  Mr Gear—Yes.

  Senator COOK—Covering whom?

  Mr Gear—We do not recommend projects to investors; we look after the interests. Ours is
more generic. What we would like to do is set standards for project managers and for advisers,
such as described by Mr Slight. For instance, before somebody bought into a project, they

E 324                                  SENATE—References                Tuesday, 20 March 2001

would have to be approached at least three times, so that there could not be the sort of activity
you heard about yesterday in Kalgoorlie.

  Senator COOK—Do people pay an affiliation fee?

  Mr Gear—Yes.

  Senator COOK—Are you audited and your accounts exposed to public view?

  Mr Gear—Yes.

  Senator COOK—Is there any division in voting or determination of your policy and
approach between those who are companies or promoters of schemes and those who are
investors in those schemes?

   Mr Hennessy-Hawks—Yes, there is, purely for administrative purposes. Investors fall into
the category of associate members of the association, which simply means that we do not have
to go to every investor in the association on every issue. There is simply the matter of corporate
governance in that area, because the expense was going to be far too great.

   Senator COOK—Is there any recognition in your structure that there is a conflict of interest
in the sense that not always—maybe mostly, but not in every case—are the interests of investors
consistent with the interests of the promoters? If there is a recognition of that, how is that
dichotomy resolved?

  Mr Hennessy-Hawks—It was discussed at the formation of the association. As there is in
any association, group, union or whatever, there is always the opportunity for conflict between
various sections, but we felt the best way to represent the industry was for the industry to come
together—the promoters of projects, the people marketing projects and the investors—into the
project and have a common association and jointly develop standards within the industry in
conjunction with the ATO and in conjunction with ASIC.

  Senator COOK—I think you have answered that part of the question. Do you have a charter
of principles by which you would ask your company or your promoters to abide?

   Mr Hennessy-Hawks—No, we have not, and the only reason we have not at this point of
time is simply that we have all been derailed because of the activities of the ATO. We were
taken away from what we were doing at that stage, but we made it very clear to the ATO, the
government and the opposition when we first started that that was the procedure we wanted to
undertake. We wanted to sit down with government and with the regulators and design the very
thing that you are speaking about. That was in the process of being done when this activity was
commenced by the ATO.

  Senator COOK—What you are saying is that it is in the works, and it is an objective that
you have, but it is not yet completed?

  Mr Hennessy-Hawks—Not fully completed.

Tuesday, 20 March 2001                  SENATE—References                                     E 325

   Senator COOK—The question behind what Senator Chapman was asking before, and I
think you will agree with this, is the continuum in public policy is that ideally we would like to
assume that everyone in the world is honourable and conducts their affairs on principle and with
respect to everyone else, but we know that that is not quite true. Associations like yours that call
for self-regulation need to set the standards of behaviour for your own membership so that the
shonks in the show can be distinguished from the good guys, but you are not at the point yet
where you have set those standards.

  Mr Atkinson—Adding on to that, in the last two years we have gone around Australia twice
giving seminars. Basically, we have seen our role in the last two years as trying to educate—

  Senator COOK—I am not criticising; I am just trying to get the facts down.

  Mr Atkinson—Just to explain what Robert was saying.

   Senator COOK—We are running against time, and I am trying to move through this. I am
not making any criticism here; I understand what is involved all this, I think. I just want to try to
work out at what state of maturity, if I can use that term, the organisational structure has
reached. At the end of the day, if that self-regulation does not work and the field is populated by
shonks, or there is a public disquiet about the amount of sharp practice going on, the only
alternative is, at the end of the continuum, for the government to step in and to impose rules for
proper conduct in the protection of the public interest. That is the continuum. But, at this stage,
we are at this point where you are fashioning your rules. Have you had any cause as an
association to name any sharp practices that you would want to be publicly disassociated with?

  Mr Hennessy-Hawks—Certainly we have made the point very strongly that people
operating in the area of franchises should be brought into the regulatory body.

  Senator COOK—Is there anything else?

   Mr Hennessy-Hawks—No. That is the main issue, but there are other areas that we have
strongly pushed, such as the ownership of projects. It needs to be pointed out that, over a period
of time, there has been a significant improvement going on within the industry. I would not like
the delusion to be there. There has been a significant improvement going on in the standard of
projects within the industry. Unfortunately, while that was going on in one section, we had the
ATO initially doing nothing, which encouraged the sharks out there to become more and more
aggressive. That is a problem to us in that people who are trying to raise money for legitimate
and good projects in Australia have to compete with those aggressive sharks.

  Senator COOK—I know, you have made that point several times. It is not that I am
insensitive to it; it is that I have a lot of questions. We are well over time, and I will have to
yield the microphone soon to my colleague Senator Lightfoot, who will have some penetrating
questions. Hence I would like to move through my brief relatively quickly, if I may, and with
the greatest of respect to you. It seems to me that there is this major argument about how the tax
office is conducting its affairs. On one hand, Mr Carmody is quoted in your brief as saying in a
speech to the CPA on 12 June 1998 that some of the sorts of things that are features of your
schemes are things that the tax office will not tolerate. That is repeated in your supplementary
submission as well. The tax office is on the record as saying that it does not agree. On the other

E 326                                  SENATE—References                 Tuesday, 20 March 2001

hand, you are on the record, and your legal advisers and accountants are on the record, asserting
that he has got it wrong.

  There are two ways there can be closure on this: one is for it to be determined by a court,
because the tax law is what the High Court ultimately holds it to be in particular cases and not
what the tax commissioner says it is and not what you assert it is. How far off are you from
getting a case to determine this matter? Have there been any discussions between you and the
tax office about managing a test case to determine the critical issues at dispute here? It seems to
me that, until that happens, you will have the tax officer defending what he sees as his role, you
will be asserting the rights of your companies and your investors and we will all be caught in a
maelstrom of argument without knowing what the real outcome is because the only guys that
can tell us ultimately are those that sit on the High Court. How close to that are we?

   Mr Atkinson—This is not an aim. In my capacity as partner of Wilson and Atkinson, we
currently have six federal court cases in track in the Federal Court. We are hopeful that the first
of our cases will be heard in August or September, although that is subject to how the court will
track the requirements. In answer to your question, by the end of the year we would be hopeful
that there would be cases decided in the Federal Court on this matter.

  Senator COOK—Which will clarify the law. I mean cases decided can offer mean that there
are 1,001 other cases—

  Mr Atkinson—Yes.

  Senator COOK—Do you have any agreement from the tax office—to use a technical term,
to cut out the bullshit—and go straight to getting the particular issues that are in dispute
between you decided?

  Mr Atkinson—No, we do not. We would like to, but we do not.

  Senator COOK—Have you put it to the tax office?

  Mr Atkinson—Yes, we have.

  Senator COOK—What have they said?

   Mr Atkinson—It is a bit difficult because the cases are in train into the federal court. I would
rather leave it and say that they are in the process and that, by the end of the year, there should
be one, perhaps two, decided cases that will go a long way to answering the legal questions in
respect of this.

  Senator COOK—Are you promoting a fighting fund to help?

  Mr Atkinson—Yes.

  Senator COOK—Who contributes to that?

Tuesday, 20 March 2001                SENATE—References                                  E 327

  Mr Atkinson—Investors in the projects.

  Senator COOK—What about the companies that promote them?

  Mr Atkinson—No, they do not.

  Senator COOK—Why not?

 Mr Atkinson—Senator Cook, our firm is giving submissions this afternoon. That may be
more relevant this afternoon.

  Senator COOK—It might be, but take on notice that I will ask you this afternoon because
you are here defending the investors as the companies. It goes back to this question of—I am
not asserting anything here—conflict of interest. If the investors are carrying the cost of a
challenge, but the viability of the companies depends on the challenge succeeding, why aren’t
the companies contributing? It seems to be a reasonable question.

  Mr Gear—Some are. The project of which I am chairman is contributing.

   Mr Atkinson—That comes back to the point of fairness in treatment. What AMIA is saying
is that the tax office should basically back off and wait until these cases are decided, because
they will determine who is right and wrong.

  Senator COOK—Yes, I know, but there is a cost burden on making the challenge in the first
place, and that is where I was heading. Moving to the next issue, one of the other ways of
getting closures is to get a political solution. Have you made representations directly to the
government asking them to reach over the tax office and fix this?

  Mr Gear—Yes, we have. We have met with a number of government ministers and members
and informed them of what the tax office were doing. While they are all sympathetic, it seems
that not much happens within the government on this issue.

   Senator COOK—I know, but the action minister is the Treasurer. Have you put this directly
to him?

  Mr Gear—No, we have not.

  Senator COOK—Do you intend to?

  Mr Gear—We would like to. When we are next in Canberra, we will seek a meeting with
him to do just that. I believe that Senator Kemp, the Assistant Treasurer, is the responsible
minister. Your point is that we should go to the top, and we will endeavour to do that.

  Senator COOK—We have just seen bulk unhappiness with the Business Activity Statement,
which is a document of the tax office. We have just seen the government reach over the tax
office and change the way in which the Business Activity Statement is to be put to businesses.
The government cannot direct the tax commissioner, and the BAS statement is the tax

E 328                                   SENATE—References                 Tuesday, 20 March 2001

commissioner’s document, but they are proposing legislation to change it. It would seem to me
that there is an analogy here. You ought to put to the government directly your concerns, given
the investor anger and investor hurt and how widespread it is, that this is an issue that should be
fixed by legislative means.

  Mr Hennessy-Hawks—I will finalise on that by saying that we have been endeavouring to
do that. Three months ago it was much more difficult to get significant meetings with
government ministers. It seems to have got a lot easier in the last month or so, and we will
continue to progress the matter.

  Senator COOK—I hope it gets much easier after Saturday. Leaving that aside, my point is:
we exist—conducting an inquiry, taking up everybody’s time and effort and the money
involved—because there is a problem. If the market worked, the problem would be fixed
between you and the government, and we would not have to bother—we would be doing
something else.

  Mr Gear—We are Perth based. We have approached a number of government members and

  Senator COOK—Your registered office is Kingston, ACT.

  Mr Gear—We live here in the best part of the world. Just last week we were going through
Queensland. We spoke with only one government member, but we did make the point that the
government could agree with us. It is not a big ask. We are not asking the tax office to give up
any legitimate concerns it has. We are asking for the constant harassment, the intimidation and
the phone calls on Saturday, and all the letters that are coming out and all the threats from the
tax office, to stop while this thing is sorted out, as you rightly pointed out, in the Federal Court.
We are not far away from that, but a lot of people are being harassed and intimidated and they
should not be, because they have done nothing wrong.

   Senator COOK—Yes, I know. I have heard the evidence—I have heard the witnesses and I
have heard the depth of concern. That is the first step. The second step is how you fix it and that
is what I have been trying to concentrate on.

  Mr Gear—As the Assistant Treasurer and a former government senator, I would have had
the commissioner up for a chat about this issue. I would have drawn his attention to the
concerns that were being expressed to me by my backbench members and that a body like
AMIA had some sensible suggestions, and I would put it to him that maybe he could look at

  Senator COOK—You would know he is statutorily independent and you cannot direct him.

  Mr Gear—I also know that he listens to what the government says.

  Senator COOK—You can legislate.

Tuesday, 20 March 2001                SENATE—References                                  E 329

  CHAIR—It is all well and good for us to have a little discussion at the moment. This
committee has a terms of reference it has to consider. Before I go to Senator Lightfoot, Senator
Chapman has one question relating to a matter he did ask earlier.

  Senator CHAPMAN—Earlier I asked questions about Servcom and you all expressed
ignorance about Servcom. Yesterday we had a witness who indicated that a Mr Parham had
contacted him regarding a tax effective scheme called Servcom, in which he subsequently
invested. He said, ‘Servcom was supported by a tax opinion from Wilson and Atkinson, a
reputable Perth based legal firm.’ How is that Mr Atkinson expressed ignorance of Servcom.

  Mr Atkinson—No, I have not expressed ignorance of Servcom.

  Senator CHAPMAN—I got the impression when I asked that question—

  Mr Atkinson—I expressed ignorance of the particular circumstances—

  Senator CHAPMAN—It looked as if you were all expressing ignorance, the way it was
presented to me.

  Mr Atkinson—Your question related to chasing the particular loans. I have not ever
expressed ignorance of Servcom.

  Senator CHAPMAN—Do you regard yourself as having any responsibility to the investors
for that opinion?

  Mr Atkinson—Yes, but that again assumes that the opinion is wrong and the tax office is

  Senator CHAPMAN—I understand that, but you accept some responsibility.

  Mr Atkinson—Like all opinions professionally given, it is a qualified opinion subject to the
promoters carrying out what they said they would carry out in the prospectus.

  Senator CHAPMAN—Does one of those Federal Court cases involve Servcom?

  Mr Atkinson—No, it doesn’t.

  Senator CHAPMAN—Is there any legal action pending in relation to Servcom?

  Mr Atkinson—Yes, there is.

  Senator CHAPMAN—It has not got to the court yet?

  Mr Atkinson—No, that is right. We have been trying to expedite it into the court for the last
12 months.

E 330                                 SENATE—References               Tuesday, 20 March 2001

   Senator CHAPMAN—Will it be your intention to charge fees to investors for representation
in that court case?

  Mr Atkinson—Legal fees, yes.

   Senator CHAPMAN—You are not prepared to do it on a pro bono basis, given that they
relied on your opinion?

   Mr Atkinson—With respect, that assumes that the opinion is incorrect and that the tax office
is right. It has not been heard yet. In all of these cases, without exception—and alluding to
Senator Cook’s point—when the Federal Court determines these cases, there will be a better
understanding of the situation in terms of the tax law.

 Senator CHAPMAN—I understand and accept that. That is why I am asking whether you
would be prepared to do it on a pro bono basis.

  Mr Atkinson—I am not answering that.

   Senator LIGHTFOOT—In light of the clarification with respect to Servcom, is your law
firm involved with any other companies that are similarly bent on the raising of capital of this

  Mr Atkinson—If the question is: are we acting for investors in projects that have had their
tax deductions disallowed and are we taking—

  Senator LIGHTFOOT—No, not necessarily—any other company, whether they have had
their tax deductions disallowed or not.

  Mr Atkinson—We are acting for investors in projects.

  Senator LIGHTFOOT—Investors, not the companies?

  Mr Atkinson—That is correct. It is the investors that have had their tax deductions

  Senator LIGHTFOOT—So you are not acting for any companies?

  Mr Atkinson—Not to my knowledge, no.

  Senator LIGHTFOOT—Gentlemen, I wonder whether you could give the committee some
idea whether you have in your organisation—that is, the Australian Managed Investments
Association—Satcom, which I think you denied?

  Mr Gear—No.

  Senator LIGHTFOOT—Servcom, which you also denied?

Tuesday, 20 March 2001                 SENATE—References                                  E 331

  Mr Gear—No.

  Senator LIGHTFOOT—Oracle?

  Mr Gear—No.

  Senator LIGHTFOOT—Budplan?

  Mr Gear—No.

  Senator LIGHTFOOT—Main Camp?

  Mr Gear—No.

  Senator LIGHTFOOT—Oz Refunds?

  Mr Gear—No.

 Senator LIGHTFOOT—Could you tell the committee what percentage of organisations in
Australia—because you are Australia-wide—you represent?

  Mr Hennessy-Hawks—I honestly do not think we could, because I do not know how many
projects are out there. We hear about more every day, and some of them amaze us that they are
even out there. It really would be very difficult to give an answer to that because, as far as we
understand, there is no way of ascertaining just how many projects are out there.

  Senator LIGHTFOOT—Perhaps you might be kind enough to give the committee a list of
the membership of your organisation. Could you undertake to do that?

  Mr Hennessy-Hawks—Yes.

  Mr Sleight—Was that a question concerning corporate membership or total membership?

   Senator LIGHTFOOT—I think total membership is what we want. If you could
discriminate between corporate and others that would be very good for the committee. We are
obviously all looking for a solution, and I do not think there is any question of unanimity with
respect to the ATO standing off and waiting until the Federal Court case is determined—and I
agree with it; I am not about to rescind what I have said. But having said that, there is little
doubt that, if the history is true with respect to the ATO, they will probably take any decision
that is adverse to them to a higher court—maybe to the full bench of the Federal Court or maybe
to the High Court. Do you anticipate that that will happen?

  Mr Atkinson—Yes, I do. I think that it will, at the very least, go to a full Federal Court
decision by three judges, yes.

  Senator LIGHTFOOT—How long do you think it will be before there is a final
determination rather than a penultimate determination?

E 332                                   SENATE—References                 Tuesday, 20 March 2001

  Mr Atkinson—That is very difficult. I would say, with the history of the Federal Court—and
they are a very busy court, obviously—off the top of my head, it would take three to six months,
maybe three months, but it depends on their workload.

  Senator LIGHTFOOT—That is fast-tracking it, I guess.

  Mr Atkinson—Yes. It does depend upon their workload, but obviously a case like this or the
cases that will go before it are potentially very significant and involve and affect a lot of people,
so hopefully it will be expedited.

   Senator LIGHTFOOT—The ATO has been very aggressive in pursuing the participants in
this from an investment point of view and not pursuing the promoters. It seems that the easier
target is obviously the investors and, once again, not the promoters of these schemes. It seems
that the ATO is impotent in its advice or in pursuing the promoters of the scheme so that it has
gone to the softer target with respect to investors. If you agree with that could you enlarge on it?

   Mr Gear—I think that is right. What we have been maintaining is that the investors have
done nothing wrong, as I said in my opening statement. If there has been any tax mischief, I do
not know of it. After all, the promoters put the structure together; they are the ones who receive
the money. Let me say that when they receive the money they have to declare it as income and
pay tax on it. I do not know whether that has been happening—I would not have a clue—but if
it has not, the tax office should be going after the promoters and not the investors. But in terms
of who they have chosen to attack, I just want to give you an idea of the scale of this thing.

   The Australian tax office will send out 440,000 amended assessments. That will generate
about four million letters. That will mean over 230 cases in the Federal Court. It will involve
possibly 400,000 appeals or objections, and then there is a standard procedure in the tax office
to disallow all the objections. That really means another 400,000 appeals to the Administrative
Appeals Tribunal. If the tax office were successful it would bankrupt tens of thousands of
Australian families. I just put that to the committee to show you the quantum of what the tax
office have done, and it could have been so easy. They did not have to do that. They have the
money to run test cases—I know because I gave it to them—and they could have said, ‘We’ve
got a concern with the law; let’s test the law without embarking on this very destructive

  Senator LIGHTFOOT—I think we have noted that.

  Mr Gear—Yes.

   Senator LIGHTFOOT—I understand the seriousness of it; I am not truncating your
statement. We do have evidence of that and you have made the point very clearly this morning.
What correspondences have you—I mean you plural—had, as opposed to conversations or
telephone calls? Do you have any written evidence—emails or others—of where you have
voiced your concern to the taxation department, the Treasurer, the Assistant Treasurer, or even
the Minister for Finance and Administration—or any other member of parliament, for that

Tuesday, 20 March 2001                 SENATE—References                                  E 333

   Mr Hennessy-Hawks—From our records in AMIA’s office we could actually pull that
information out for you if you require it—

  Senator LIGHTFOOT—Yes, please.

  Mr Hennessy-Hawks—but it is a constant thing that is going on every day—

  Senator LIGHTFOOT—Yes, I think we should have it—

  Mr Hennessy-Hawks—but we have no problem whatsoever.

  Senator LIGHTFOOT—so that we can make ourselves familiar with what we want to of
that correspondence, if you could make it available to us.

  Mr Hennessy-Hawks—Sure.

  Senator LIGHTFOOT—Could you mention then to the committee some of those people
that you have corresponded with in respect of this matter?

  Mr Gear—Yes.

  Senator LIGHTFOOT—Could you mention that to the committee now?

  Mr Hennessy-Hawks—We have had meetings with the Deputy Prime Minister and with
Jackie Kelly. Wherever we have been able to get in a door, we have had a meeting with those
people at this point in time. We have had discussions with the Attorney-General on the issue.
We have presented—

  Senator LIGHTFOOT—What I am getting at is: do you have strong relations with the
Deputy Prime Minister and the other ministers?

  Mr Hennessy-Hawks—Yes, we can give you copies of follow-up letters that we have sent to
the ministers and to the Attorney-General thanking them for their time, and we have sent them
additional information. We can make all of that available to you.

   Senator LIGHTFOOT—This is my last question and, while it is not particularly complex,
could you bear with me. We had evidence from a law firm in Kalgoorlie yesterday, which Mr
Sleight heard, that one of the plans was, in the Goldfields at least, that relatively high income
earners—not in the same category as lawyers, of course—were approached either at home and
cold canvassed or at work. They were induced into parting with $150 which triggered a scheme
whereby a refund of $14,500 or thereabouts was returned to the investor—the worker. He then
signed over that $14,500 refund cheque from the taxation department to the promoters of the
scheme. The promoters then returned to him or her—mostly hims—a cheque for $4,500 or
thereabouts, keeping $10,000 for themselves. The taxation department then pursued the person
to whom they had issued the refund of $14,500 or thereabouts. Are you aware of anyone in your
organisation who promotes similar, and one would hope proper, schemes of this nature?

E 334                                  SENATE—References                 Tuesday, 20 March 2001

   Mr Sleight—I can comfortably answer that. I think that it is fair to say that the structure was
only half explained yesterday. Indeed, the generation of a $14,500 refund was as a result of the
client accepting some kind of finance facility. So the $150 may have been a finance application
fee—I do not know. I do not know the specifics of that example. However, I imagine that there
was a loan, perhaps for around $30,000. The loan funds were used to prepay some kind of
expenses in a franchise business arrangement which were claimed as deductible expenses and
which generated a refund of $14,500.

  Senator LIGHTFOOT—Of which the promoters got—

  Mr Sleight—I also imagine that $10,000 was an agreed loan repayment at some time in the
future. That is a fairly standard kind of thing.

  Senator LIGHTFOOT—That brings me to my next question, which I hope is my last, but
only because of the limitation of time. It would appear that the legal advice to the Australian tax
office was that it had no other recourse to recover the funds than to go back to the participator,
the original investor or worker, because there is no legal recourse to the promoters of the
scheme for the taxation department to recoup its funds.

  Mr Sleight—There are a couple of issues there. Issue number one is that you are condemning
the scheme, whatever it is, up front and saying—

  Senator LIGHTFOOT—No, I am saying that with this scheme, for instance, it appears from
the evidence that we took that, of the two major promoters of the scheme, one has gone
overseas and the other is uncontactable—the telephone number they had given has been
disconnected or, at the very best, there is an answering machine on which messages are left
which are never returned. That is what I am talking about.

   Mr Sleight—Again, it would appear that only half the story has been given. The success or
failure of the project—

  Senator LIGHTFOOT—It’s the very bad half, if I may say so.

  Mr Sleight—Yes, I agree. The success or failure of the project, as the lawyers will tell you, is
a separate issue. Court cases in the past have concluded that the taxpayer has done no wrong
whether the project fails or otherwise. But let us not forget that the $30,000 that was claimed by
the investor—

  Senator LIGHTFOOT—We are not talking about successes; we are talking about failures.
That is why the committee is here.

  Mr Sleight—The $30,000 that was claimed by those investors should have been declared as
income by the promoter. If it was not, it is not the investor’s fault, it is the promoter’s fault.

   Mr Atkinson—In addition to this, if the promoter has or has not done that in terms of
declaring income, that is a tax issue and that is quite properly and rightfully the tax office’s
jurisdiction. If they have misled the investor or gone overseas, that is a Corporations Law issue

Tuesday, 20 March 2001                 SENATE—References                                  E 335

and the lawyer should tell their client to make a complaint to ASIC, because that is the avenue
of redress; it is not the tax office.

   Senator LIGHTFOOT—If I could address my question to you, Mr Gear, but you need not
necessarily answer it; we do not want to break the habits of this morning. There is a high
element of fraud—at least a perception that there is a high element of fraud—

  Mr Gear—More perception.

  Senator LIGHTFOOT—That softens it a little. Would you agree with that in respect of
some of these schemes?

  Mr Gear—Obviously the committee will take more notice of the failures than the successes.
That has come through in your questions this morning. It is a natural reaction. What we are
saying to—

  Senator LIGHTFOOT—What about the answer to my question?

  Mr Gear—The answer to your question—

 Senator LIGHTFOOT—Does your association believe that there is an element of fraud, no
matter how small, in these schemes?

  Mr Gear—There are two parts to it, as I have said before. We are talking about past activities
and future activities. We have said in our submission that not everybody in this area acts with
the best intentions. There has been fraud in the past—and I believe Sentinel is one that has been
brought to the committee’s attention, and it will not be the only one.

  Senator LIGHTFOOT—Are you edging towards a ‘yes’ to my answer?

  Mr Gear—I am just taking the lead from you, Senator. Why would you answer a simple
question with just a ‘yes’? The committee is now catching up with the whole thing about what
has happened in the past, but we go back to our point: if the tax office had made its concerns
known back in 1990 when it had them, do you think that we would be sitting here today? Do
you think that might have precipitated the cleaning up of this industry? They were virtually
asleep at the wheel for seven or eight years and then woke up and said, ‘Look, we’re going to
reach back.’ There are a number of facets to your question. But we believe that into the future—
and this is what we are talking about now—we can have a much better industry and we want to
be part of it.

 Senator LIGHTFOOT—But if there is an element of fraud, which you seem to concur with,
what has your association done about it or what does your association intend to do about it?

  Mr Gear—As soon as we get beyond this issue, which hopefully will be soon—maybe
before the next federal election, you never know—what we might do is sit down and, as Mr
Hennessy-Hawks said, we would like to sit down with ASIC and with the ATO. We would like

E 336                                  SENATE—References                 Tuesday, 20 March 2001

to sit down with anybody who has an interest in enhancing the managed investment industry to
come up with a set of principles—

   Senator LIGHTFOOT—It might be better if you sat down with the AFP if there is an
element of fraud in it.

  Mr Gear—Well, you never know.

  Mr Atkinson—The answer to your question is yes, there is an element of fraud. It is an
extremely large industry with a large number of projects. There probably is an element of fraud,
as there probably is in the accountancy industry or in any other industry.

  Mr Gear—The mortgage brokers.

  Mr Atkinson—With respect, the projects that have not got anything like an element of fraud
and which are successful should not be tarred with the same brush.

  Senator LIGHTFOOT—We acknowledge that. I think everyone appreciates the defence of
your association. That is all the questions I have—considering the time.

   CHAIR—I would like to ask two things, one in respect of a follow-up question from Senator
Lightfoot and the request he made for a list of the membership. I am not sure whether you have
provided it, but if you have not, we would appreciate a list of the membership. In the
submission at 1.2 you say that the association is headquartered in Canberra and has access to
110,000 industry participants. With regard to the nature of the prospectus investment based
industry and the legal requirements that are associated with prospectus investors and their
rights, what rights do the 110,000 participants or part thereof of the membership of your
organisation have in respect to its direction and the decisions it may take? You can take that on
notice if you want to respond to it in writing.

  Mr Hennessy-Hawks—I will take it on notice.

  CHAIR—Secondly, I want to bring you forward to today, given that you think we have a
somewhat negative attitude about past failures. With regard to prospectus offerings that are in
the market today, some of which I know involve members of your organisation, is it fair that the
projections in those prospectuses are often way in excess of what is accepted as expert—and I
am talking about real expert—opinion in respect of forest activities in particular? Is it fair that
investors’ entry costs are significantly higher than what most state authorities would say is the
real cost of establishing a blue gum plantation, for instance? Is it fair that, as in evidence
presented to us from some of those organisations and companies in these particular schemes, in
excess of 60 per cent of the money goes out in fees, commissions, et cetera, and as little as 30
per cent actually goes into the investment which, by its very nature, has caused and will cause
many of them not to succeed? Albeit that they may grow trees, they will never pay a return to
the investor, nor will they generate a profit which will return to the tax revenue the tax deferral
made in the first instance.

  Mr Gear—That is a fairly wide-ranging question.

Tuesday, 20 March 2001                SENATE—References                                 E 337

  CHAIR—Yes, I know it is.

  Mr Gear—Could I ask Mr Warwick Young from PPM to answer that question? He is
involved in the writing of prospectuses and has a body of knowledge about them.

   CHAIR—As we are short of time, I would like you to provide us with a written response to
that. There are any number of examples. I base my question on research data by experts—or
claimed experts—in the field, particularly organisations like the Rural Industries Research and
Development Corporation, CALM, the Victorian department of primary industry and energy,
the New South Wales department of primary industry and the Queensland Department of
Primary Industries and Rural Communities. RIRDC is a Commonwealth funded organisation. I
would like a written response to those questions.

                   Proceedings suspended from 10.53 a.m. to 11.01 a.m.

E 338                                  SENATE—References                Tuesday, 20 March 2001

POPE, Mr Colin, Partner, C. Pope & Associates

  CHAIR—Welcome. Please expand on the capacity in which you appear.

  Mr Pope—I am a certified practising accountant and tax agent. As a partner in our practice, I
represent some of the investors.

  CHAIR—You have provided the committee with a written submission. Are there any
additions you wish to make to the submission?

   Mr Pope—Yes, there are. No partner, employee or subcontractor of our firm has investments
in tax-effective schemes, and we did not promote the schemes; we are not here in that capacity.
We have provided opinions and some recommendations in our submission. Our experience has
been that most investors were or are aware of some element of risk in their investments. Most,
however, believed that ASIC, having approved the prospects, had some form of government
approval or recommendation. In our submission we suggested that perhaps ASIC could include
in all prospectuses a statement outlining their role.

   Subsection 1020A(2)(b) of the Corporations Law basically states that ASIC shall refuse to
register a prospectus if the commission is of the opinion that the prospectus contains a false or
misleading statement or that there is an omission. Obviously, in its review ASIC found nothing
false or misleading in relation to the prospectus in relation to any of the schemes. That
subsection is not discriminatory and it does not limit ASIC’s role, but it is a very broad
statement and it could be interpreted that ASIC has approved information in the prospectus.
Having said that, it is unlikely that most investors are aware of that section of the Corporations
Law, but they still have the general view that the prospectus has some form of government

  We have not encountered any investors who invest in the schemes purely or predominantly to
obtain a tax benefit. Our experience has been that most have entered into a scheme expecting
future income. The ATO have made several determinations that part IVA applies to the schemes,
and to my knowledge the ATO have not interviewed or sought information from any
participants. The ATO did not advise any participants that we know of that their activities were
subject to audit or review until such time as a decision was made. The ATO had approved
applications to vary PAYE tax under section 221D, which relates to applications for
participants. That authority is discretionary upon the commissioner, and he was not forced or
obligated to approve those applications.

   The prospectuses are in the public domain and they have received registration from ASIC. In
relation to the Main Camp Tea Tree Oil Project, private rulings have been received in relation to
the growing of tea trees. In relation to Budplan, a private ruling had been applied for, but no
ruling had been issued by the ATO. The Ombudsman in his report has conceded that there has
been defective administration by the ATO in not responding to the Budplan application for a
private ruling.

  A number of participants that we have knowledge of had waited for some time to ascertain
what the ATO’s approach would be before entering into the schemes and, on the basis of no
activity by the ATO, believed them to be reasonable investments. If the ATO had acted within

Tuesday, 20 March 2001                           SENATE—References                                E 339

its own service standards and processed the private ruling on Budplan, many taxpayers may not
have invested in Budplan or later schemes, and perhaps there would not be as many of us here

   In relation to private rulings, the ATO, with some support from the Ombudsman, have
maintained that only the recipient can rely on a private ruling. The taxpayers’ charter states that
all taxpayers shall be treated equally. I have a number of documents that I would like to table
and address as we progress this morning.

  CHAIR—The committee accepts the documents tabled by Mr Pope, and also those tabled by
previous witnesses.

  Mr Pope—The participants in Main Camp Tea Tree have all been assessed and penalised on
the basis of entering the same scheme on the same terms and having the same part IVA
application, without any attempt by the ATO to obtain individual circumstances.

  CHAIR—We are dealing only with Main Camp 3 and 4 in that respect.

   Mr Pope—Yes, that is correct. I understand that 1 and 2 were not included because of the
time constraints. Given that the ATO have determined that all the investors are alike, why would
they not be treated equally? It is on the basis, which is open to interpretation, that the private
ruling—and I understand there are four different rulings, all giving Main Camp Tea Tree 1 or 2
approval—is that they are carrying on a business and that the deductions are allowable. These
rulings should have equal application to all tea tree investors. The rulings are on Tea Tree 1 or
2, not on Tea Tree 3 and 4. Tea Tree 3 and 4 are essentially the same investment and the same
scheme and would not essentially be treated differently.

  I have presented to you a media release from the Australian Wheat Board. The Wheat Board
chairman, Trevor Flügge, sought a private ruling on the assessability of Wheat Board payments.
On obtaining that ruling, he issued a press release, which I believe was in May 1999. It states:

... it offers valuable guidance to other wheat growers about the ATO’s opinion on these issues.

That is not an uncommon practice. Some people may lead you to believe that a private ruling in
relation to a matter is used by other people, rightly or wrongly. The ATO would not cope with
issuing thousands of rulings on one subject, and the ATO would have difficulty in issuing
rulings to every wheat grower on the assessability of their wheat. The ATO would have the
same problem in issuing determinations or rulings in relation to all these tax-effective schemes.
In the case of Budplan, they clearly struggled to provide a ruling for one participant, let alone
for more than one.

   The ATO would also know that that press release had been issued; it is in the public domain.
To my knowledge, the ATO have not refuted the press release or warned wheat farmers not to
rely on it. The ATO would not want thousands of wheat farmers applying for rulings on the
same issue. On that basis, my opinion is that the Ombudsman’s findings and their consensus
with the commissioner that the private rulings that certain investors have received should not
have been relied upon by others are merely a smokescreen or a representation which is not
entirely accurate.

E 340                                  SENATE—References                Tuesday, 20 March 2001

   The ATO considers that the mere publishing of a ruling makes it known to all taxpayers.
Equally, items and products in the public domain—and often processed through government
agencies, such as a prospectus or a media release—should equally be considered within the
knowledge of the ATO. On that basis, the ATO should not be entitled to deny any knowledge of
the schemes until a later time. The ATO has not treated taxpayers as individuals and it is
unlikely that the person making the determinations if part IVA applies has turned his mind to
each taxpayer’s circumstances and made a determination in each individual case. You may find
that the determinations have been treated like nothing more than a bulk mail-out, all made and
signed in one large batch with no consideration for the individual circumstances of each
taxpayer. That is not the gist of the legislation or the Commissioner’s responsibilities.

   Anecdotal evidence of not treating taxpayers individually can be shown by some of the other
documents that I have presented. The second document I will provide to you is from a person
who invested in Satcom. We lodged his tax return and did not claim the Satcom because we
believed there was some doubt as to its deductibility or the tax office’s agreement or
determination of its deductibility. On 2 October 1998, we asked for a private binding ruling; on
13 October 1998, we asked for an objection; on 19 October 1998, the ATO advised us that there
was some complexity with it and they would reply in March 1999, not within the 28 days
required. On 27 October, the ATO advised they would attend to the objection in due course. In
December 1998, the ATO advised that Satcom falls into a special category and, as such, would
issue no ruling. In June 1999, we wrote to the ATO to ask about the progress of the issue.

   In August 1999, we wrote a letter to the ATO asking for an update and complaining about the
time delays. On 27 August 1999, the ATO advised that a general review had not yet been
completed, but was expected in October 1999. On 7 February 2000, we wrote to the ATO
requesting an update and expressing further concerns at the delays. On 21 March 2000, the ATO
sent a letter re-appending synopses. On 23 March 2000, we faxed the ATO a letter regarding no
response and on 5 July 2000 the ATO issued a position paper and letter advising of the position.
Their letter also asked for the taxpayer to fill out a schedule explaining what his deductions
were that he claimed in those years, despite the fact that they had been given an objection in
October 1998 outlining that there were no claims in the returns, and we were asking for the
claims to be allowed. It is now March 2001 and we still have no decision on the objection.

  Another client has received a part IVA determination that tax avoidance has applied. She has
no tax payable and is not assessable even after adding back the investments from the scheme
that she invested in. On the basis of that, we wrote to the ATO seeking a decision or a review of
the decision under the AD(JR) Act. You should find those documents in the information you
have been given. In early February, we asked for the AD(JR) Act request. They are provided
with, I believe, 30 days to respond. It is now seven weeks later and, despite a request on 14
March for a decision, no decision has been given. The ATO is either ignoring the laws passed
by parliament or incapable of complying with them. Either way it is unacceptable for a
department responsible for administering law to be ignoring or incapable of complying with it.

  These are just two examples from our limited involvement with taxpayers involved in the
schemes. We can provide further evidence outside of the schemes’ area of the ATO’s failing of
their own service standards and legal obligations. It is noted that there is no penalty on the ATO
for not complying with the laws and yet the ATO are wishing to enforce and impose penalties
on the investors in these schemes. There is no question in our mind that the ATO have

Tuesday, 20 March 2001                         SENATE—References                                             E 341

contributed towards the current situation we have with the schemes. It may not be entirely their
doing, but the delays in taking any affirmative action, the issuing of private rulings or not
issuing of private rulings, and the failure to treat taxpayers individually, have all contributed to
the overwhelming opinion of investors that their situation is at least partly due to the ATO’s
actions, or lack of actions. That is my submission.

   CHAIR—I have a couple of queries with regard to your submission. On page 2, in respect of
terms of reference 2 of this committee, you said:

In general we have found little indication that controllers, promoters, designers and financial advisers have behaved
anything but ethically and responsibly.

It would seem that a great number of investors would not share that view.

  Mr Pope—I would have to say that I have some doubts about the integrity of some of the
promoters or managers, not so much the investment or financial planners.

  CHAIR—Perhaps I could phrase the question to you in this way: where an investment
opportunity is promoted to an investor that is ultimately proven to have costs associated with
the entry into the investment at four and five times the accepted industry standard for the cost of
establishing a plantation or a plot of tomatoes, do you think that represents a good principle?

  Mr Pope—The managers, I suppose, were obtaining a fee for their extra work in the early
part of the scheme. I do not really offer an opinion on that.

  CHAIR—Would you think it would be acceptable that schemes where as little as 30 per cent
of the revenue or the funds that have been raised go into the project?

  Mr Pope—Would I think it reasonable for that to happen?


  Mr Pope—I would hope that it at least 30 per cent going into the project.

   CHAIR—Evidence to this committee would suggest that one of the major problems,
particularly with agribusiness investment schemes, is that 30 per cent is totally inadequate, and
that has led to the failure of a great number. Do you think that there ought to be some regulation
that ought to control the amount of money and requirements on designers, promoters, et cetera,
to ensure that these projects do proceed and proceed successfully?

   Mr Pope—Yes, I think there should. You can never ensure success, but by insisting on a
larger proportion of the funds going into the agriculture business, you would more likely have
more success.

  CHAIR—Do you think that it ought to be the case that designers and promoters, when
preparing their prospectuses, ought to be required to provide more accurate information with
regard to the projections that they put in them? Shouldn’t it also be the case that if those

E 342                                            SENATE—References                         Tuesday, 20 March 2001

projections are found to be incorrect or if they are found to be misleading the investors have a
legal right to take an action against the promoter or designer?

   Mr Pope—Yes, I do. I also think that the ASIC and the ATO should play a more active part
in prospectuses of this form and perhaps vet them before they hit the public.

   CHAIR—In paragraph 4, on that same page, you say

While the tax saving is advised as a positive in entering into these schemes, the majority of people are not going to forego
some $20,000 or so if they do not expect a return on that money.

As I said to earlier witnesses, the research that has been done thus far would suggest that a great
many of these schemes fail and people do not get a return on their money. What has happened
to a great number of people that they not only confront the prospect of debt but they are caught
up with the tax office disallowing the deductibility. There have been schemes, as you would be
aware, that have been promoted to people that, for $150, you get a $4,500 tax return.

   Mr Pope—I do not know of that scheme at all.

   CHAIR—It has operated, and the same sort of promotional activity has been used on a
number of occasions and is often used in schemes even today, some of which have received
product rulings from the tax office, but in the cases where they have not—and they are the ones
in which we are seeing so many people today having been caught up in them—do you think it is
appropriate that that sort of advertising and that sort of door-to-door sales work is acceptable

   Mr Pope—No, it probably isn’t.

  CHAIR—Do you underwrite your opinions? Do you have public liability insurance in
respect to advice that you give?

   Mr Pope—Yes.

 CHAIR—Do you think it ought to be the case that promoters and designers of mass
marketed investment schemes have the same sort of obligation?

   Mr Pope—Yes, I do.

   Senator CHAPMAN—You indicated in your submission that most investors were aware
there was some degree of risk in investing in one of these projects. Was that purely a business
risk? Or were they aware of the tax risk involved—that the ATO may disallow the deductions?

  Mr Pope—I would say they would be aware, in part, of both. I do not think any of them
dreamed that the ATO would disallow the entire deduction.

  Senator CHAPMAN—Did you specifically advise your clients of the possibility that the
ATO might disallow the deduction?

Tuesday, 20 March 2001                  SENATE—References                                    E 343

  Mr Pope—If I spoke to them prior to their investing, yes I would have. As I say we did not
promote it. We may have had some who phoned and said, ‘I am looking at this. What do you
know about it?’

  Senator CHAPMAN—To what extent do you think your clients in particular, or investors in
general, were aware of the provisions of the self-assessment scheme—that the tax office
subsequently review the claim and disallow the deduction?

  Mr Pope—Most taxpayers are not aware of the self-assessment. They think that once a return
has gone through the tax office and they have received their refund or their bill that is it—that it
has been vetted, like it was under the old assessment rules.

  Senator CHAPMAN—So they are not aware of the way self-assessment operates?

  Mr Pope—No, the majority are not.

  Senator CHAPMAN—The ombudsman has noted that very few participants in the scheme
sought private binding rulings from the tax office. Why do you think they admitted to obtaining
private binding rulings?

  Mr Pope—In relation to Tea Tree, there was a ruling. I have furnished a copy of one. At the
time that Budplan was being promoted, I was aware—and I am not a promoter—that Mr Glen
Stotter had made application for a ruling request, that it had not yet been determined and they
were asking for further information. Having dealt with the ATO and having tried to obtain
rulings it is not always easy as it seems, and they are not always forthcoming. One of the issues
that have been raised in the ombudsman’s report is that the opinions by accountants and
solicitors in the prospectuses are fairly qualified. My experience is that the majority of rulings
are fairly qualified as well. The fact that there is not a ruling does not determine that there is
further risk to the tax deductibility of the claims.

  Senator CHAPMAN—Mark Leibler has given evidence to this committee. He is well
known as a tax expert—a tax lawyer—and he put the view that there was significant negligence,
or at least bad professional advice, on the part of lawyers and accountants by not warning of the
possibility of a tax office crackdown on these investments. Do you agree with his criticism? If
so, why do you think that advisers did not give investors these sorts of warnings?

   Mr Pope—If there was no advice that the tax office may disallow it at a later stage, I would
say there is a problem there. I think the majority of the investments were not promoted and sold
by registered tax agents; they were sold by financial planners and insurance agents with no tax
experience. That is a problem that we encounter all the time. It goes across all industries—you
get car salesmen selling cars on the basis of what the people can claim on a tax deduction from
time to time, so it is not as thought it is an industry specific problem.

  Senator CHAPMAN—What is your view of the current regulatory regime with regard to the
marketing of these schemes? I am talking about the adequacy of the Managed Investments Act
and the adequacy of the Corporations Law generally in relation to the regulation of promoters
and marketeers of these investments.

E 344                                   SENATE—References                 Tuesday, 20 March 2001

  Mr Pope—I would say, personally, based on some of the projected incomes and cashflows in
some of the prospectuses, there needs to be a tighter rein. In relation to tax effective schemes,
the introduction of the public ruling is a very good step in the right direction.

  Senator COOK—One of the questions that has come up the taxpayers charter that the tax
office proclaims. Do you have a view as to whether or not that ought to be made legally

   Mr Pope—Yes, I do. I definitely believe it should be. My practice has found that the ATO
fail the standards of the charter continually and repetitively. In September and October 2000, we
underwent a project with Kevin Plummer of the ATO, who is in the tax agent’s service centre,
because we had been complaining for a number of years about the failure to meet their
standards. Kevin, together with Pat Linney from the problem resolution service and another
gentleman whose name escapes me at the moment attended our office and asked us to provide
them with details of errors and failure to comply with their service standards for a period of
time. In 28 days, we provided them with 43 cases of failure to meet the standards of the charter
or errors or problems with information emanating from their office.

  Senator COOK—So you would favour a situation where the taxpayers’ charter was not a set
of aspirations for the tax office but a set of legally binding commitments for the tax office?

  Mr Pope—Correct.

   Senator COOK—If it were, does that create the same problem that everyone is in now—that
the cost of holding an agency like the tax office, which has deep pockets and infinite patience,
to its legal obligation is just too great for ordinary taxpayers? What I am fishing for is that it is
one thing to have it as a legally binding set of principles by which their public behaviour is to be
held accountable, but there needs to be some sort of mechanism whereby access is cheap, and
efficiently dealt with, if they are believed to be not complying with their charter.

   Mr Pope—There is, but what that avenue would be I do not know. I have not given it any
thought. The charter is supposed to be a directive from Mr Carmody to his staff, and it is
supposed to be a minimum service standard, not a maximum. Their failure to achieve that really
is a bit disappointing.

  Senator COOK—It is a bit like those things that always bear the tag: ‘and no
correspondence will be entered into’.

  Mr Pope—Yes. Do not get me wrong; it is not just the charter. We have legislative
requirements that the commissioner is not adhering to. I think I have provided you with
evidence of that there with the AD(JR) Act request. They have a 28- or 30-day time frame to
provide it and they have not; they just fail to. They have not even corresponded to us to tell us
why or when it will be expected.

  Senator COOK—As a professional accountant, are you aware of any accountability
arrangements for tax commissions in other countries where there is a perfect model we might
wish to look at?

Tuesday, 20 March 2001                 SENATE—References                                    E 345

  Mr Pope—No.

  Senator COOK—This is a problem that is evolving in most countries isn’t it?

  Mr Pope—Yes, it probably is.

  Senator COOK—Turning to your remarks about the Wheat Board’s press release, you point
out that here is a class of taxpayers—that is, wheat growers—whose cases are substantially
identical and the tax office, while not commenting on a press release put out by the Wheat
Board, perhaps informally tolerates that information going abroad, as it saves them from the
workload of every individual wheat grower coming to them to be ruled on.

  Mr Pope—Yes, but I would put it to you that there is no difference between that and the
ruling of the Tea Tree marketing—or very little difference.

  Senator COOK—But the question is: essentially, are the affairs that are being ruled on the
same in the case of every individual? The issue here is the same across a broad representation of
people, isn’t it?

  Mr Pope—Yes, it is.

  Senator COOK—I am not trying to pick a hole in your argument; I just want to hear your
comment. When you talk about the taxpayers’ charter—just coming back to this for a
moment—which requires every taxpayer to be dealt with individually, one can see the
prudential nature of that, because affairs do differ. But, for practical administration purposes,
you need to find what the general case is and extol a general principle, don’t you?

   Mr Pope—Yes, and that is precisely my point: when a ruling was given on Tea Tree, the
Ombudsman and the Tax Office were saying, ‘Other people should not have relied upon that’—
although those circumstances were identical, or as close to identical as you will probably ever
get, to those of other people who did not have the ruling. If all people are to be treated equally,
that ruling should have equal application. And it is not just one office with one ruling; I believe
that it is four offices that have issued four rulings with the same decision. To penalise the
investors in those schemes for following the same line as the Tax Commissioner has followed I
would consider to be unfair.

  Senator COOK—As an accountancy professional, would you articulate for us what you
believe the Tax Commissioner should do in this sort of situation; what is the ideal practice?

  Mr Pope—In this particular instance?

  Senator COOK—Yes.

  Mr Pope—My recommendation would be that penalties and interest not apply to those
schemes entered into before 1998. I think that is when TR 97 or draft ruling ‘97 was
withdrawn—TR 97D17. The courts should probably hear the matter as soon as possible. If it is
found that the investors are not successful, isn’t the financial burden enough in that they have:

E 346                                  SENATE—References                 Tuesday, 20 March 2001

firstly, paid the mangers or promoters and possibly lost that money, if we are to assume that
most of these are going to fail; and, secondly, to also pay the tax on top? Isn’t that penalty
enough? I do not believe that there should be interest and imposition of penalties on taxpayers
who have done nothing more than come to the same conclusion that the Tax Commissioner has.

  Senator COOK—Have you put that to the Tax Commissioner?

   Mr Pope—I probably have; I could not tell you off the top if I have. I have written endless
letters to the commissioner, to the Ombudsman.

  Senator COOK—We are trying to find a way through this—

  Mr Pope—That is right.

  Senator COOK—and your views are very useful for us. To the extent that those views might
have power, it is interesting to know what the tax office’s response to them would be. Are you
unable to throw any further light on that?

   Mr Pope—I would say that the tax office would be very unresponsive to them. They still
want to impose five per cent penalties, when they are conceding that there is a reasonably
arguable position. But because part 4A avoidance applies, they want to impose penalties. I think
the Ombudsman has negotiated it down with the ATO from 10 per cent to five per cent. The
Ombudsman is in a better position to negotiate than I am, and to carry more weight with the
ATO than I am. We have had enough trouble just trying to get information about the basis on
which they have disallowed things in relation to these schemes, let alone sitting down at the
table to come to some sort of arrangement. This whole issue has probably created an industry in
itself of people now going out and marketing their services to negotiate settlements with the

  Senator COOK—For a fee.

  Mr Pope—That is correct. Our involvement to date has been lodging objections, writing
correspondence to parties and people and trying to obtain information. But we just cannot get
any information. When we ask for evidence of reasons for disallowance, we get told that they
are in the position paper. The position paper is just a general view, with no specifics. If there
was a fraud further up the ladder, it should not deny the taxpayer’s claim to the deductibility. If
my office manager skips off with my bank balance and leaves me destitute, that does not deny
me my deductibility for my rent and every other expense that I have had—and neither should it

  Senator COOK—I will turn now to some of the questions that were being followed with the
previous witnesses. Are you familiar with the High Wealth Individuals Taskforce in the Tax

  Mr Pope—No, not personally. My partner would be.

 Senator COOK—If you are not then, sensibly, I cannot ask you any questions about it. Let
me ask you a question about it and see whether you feel able to answer it. Are you aware that

Tuesday, 20 March 2001                  SENATE—References                                     E 347

the High Wealth Individuals Taskforce, which essentially targets the Business Review Weekly’s
top 100 wealthy Australians, routinely reaches negotiated settlements with taxpayers as to what
their tax liability is?

  Mr Pope—Yes, that is right.

  Senator COOK—It exercises the discretion that the Commissioner ultimately has as to what
the real tax level is.

  Mr Pope—Yes.

  Senator COOK—Stop me if I am taking you too far, but are you able to say whether your
knowledge extends to the point that these are arbitrary settlements, based on subjective
judgments by the Tax Commissioner?

  Mr Pope—Yes, it does.

  Senator COOK—And what may be driving the Tax Commissioner is a fairly pragmatic view
of what the cost is of getting to the bottom of all the complexity versus what you can recover if
you reach a negotiated settlement.

  Mr Pope—Yes.

  Senator COOK—Do you think there is any consistency of practice by the tax office in its
dealing with that class of taxpayer and with what you are experiencing with your clients in this
type of action?

  Mr Pope—I am sorry, is there any comparison?

   Senator COOK—Let me reframe the question. Do you see consistency in the tax office’s
attitude in settling high wealth individuals’ tax claims and in dealing with your clients?

  Mr Pope—No, I do not. I have worked in the tax office as well. I was a supervisor in the debt
management area some 12 to 15 years ago. I have seen amounts written off at the stroke of a
pen, and I could not fathom why. There is no comparison.

   Senator COOK—If you have seen amounts written off at the stroke of a pen, without going
to the names of individual taxpayers, can you give us examples of the sort of amounts that get
written off?

  Mr Pope—About $5 million in penalties.

   Senator COOK—I am using these words to try and use the English language accurately, not
to criticise: it is almost flippant to say that they are written off at the stroke of a pen; they are
written off because some judgment is made, are they not?

E 348                                   SENATE—References                 Tuesday, 20 March 2001

  Mr Pope—A judgment in the case of the $5 million? In my view, it is a judgment with no
basis. It is a funny story, and I do not know whether you have time to hear it—

  CHAIR—As long as you keep it short.

   Mr Pope—I was asked to write off an amount. I refused to do it on the basis that I did not
think it was equitable. I was told that it was an instruction by the Deputy Commissioner at the
time. I indicated that I had some concerns with it; two other officers did the same. We were told
that, if we took the matter elsewhere, we would be disciplined for a breach of the Secrecy Act.
As far as I am aware, the matter was written off. At the same time, I was dealing with an aged
pensioner who was penalised—I think it was a couple of hundred dollars, maybe less. I asked
that that amount be struck off or written off, and I was instructed that we could not write it off.
We had to raise the debt, issue a bill to the taxpayer and then ask her to write in and request it be

  Senator COOK—How much was that for?

  Mr Pope—About $100, maybe $200.

  Senator COOK—For the pensioner?

  Mr Pope—Yes.

  Senator COOK—And $5 million for someone else?

  Mr Pope—And $5 million for someone else, yes.

  Senator CHAPMAN—At the end of the day, they were both written off, I assume from what
you have said.

  Mr Pope—Yes, they were. But one was written off without a request for the remission.

  Senator CHAPMAN—In relation to the $5 million, there was no initiative from the taxpayer

 Mr Pope—No, just a statement that they were not going to pay it, as far as I am aware, from
my memory.

  Senator CHAPMAN—That is a pretty good request.

  Senator COOK—You would not want that sort of answer to catch on though, would you.

  Mr Pope—No, of course not.

  Senator COOK—Because, if we all said that we would rather not pay it, they would not
collect anything.

Tuesday, 20 March 2001                   SENATE—References                                     E 349

  Mr Pope—That is right. I have tried to negotiate debts for my clients with the Tax Office,
and I was told at one stage, ‘Look, we’re cracking down on people like you who used to work
here and know the system.’ What more can I say?

   Senator COOK—Let me conclude by asking a few questions about your profession. We
have heard some references during the course of today, and certainly during the course of this
inquiry, that some of the schemes that are promoted are, to use the colloquial, ‘shonky
schemes’. We are trying to pin down the percentage of the total number of schemes this might
be and how you deal in public policy terms with ensuring proper regulation—self-regulation,
direct intervention or whatever—those are the things in our mind. Without going to any of those
questions, but accepting that there are some schemes that are crook, where those schemes
feature advice that they are fine by accountants, what does the accountancy profession say?
Does it have any code of ethics that its members are to abide by?

   Mr Pope—They do have accounting standards and a code of ethics. It is nothing that would
preclude someone from giving a statement. With the law being so complex, there is often no
definitive answer. I suppose that is where these schemes have fallen, and the opinions have
fallen in that area. In all honesty, if I were making the opinions that appear in some of the
prospectuses—and I am not talking about the shonky ones, but some of the others; and bearing
in mind the case law and the rulings—I probably would have concluded similar to some of
those opinions.

  Senator COOK—I will just give you a little background. Yesterday, in the roving
microphone section during the inquiry in Kalgoorlie—a well attended hearing—we had what I
would describe as ‘cries from the heart’ from a number of taxpayers who asserted vehemently
that they entered into these schemes for the purposes of providing for their retirement or the
longer term security of their family, not to be tax avoiders. They bristled at the label ‘tax
avoider’ being applied to them. One has to be mindful of their absolute conviction when making
those assertions on their behalf.

   But those same people say that, when they looked at the prospectus, they saw the name of a
qualified accountant, and that is what swung it for them. The ‘deal maker’ was that they
themselves did not feel competent to judge whether this was valid, proper or ethical. But there
was the name of a qualified accountant and, in another case, a qualified QC, and they thought,
‘Well, if these experts in the field say it’s fine, it must be, and so we’re in.’ To some extent, that
comes back to what professional responsibility is taken by associations of lawyers and
accountants for the conduct of their members. If the ‘deal maker’ is a professional opinion, it
may even be that the promoters of a shonky scheme thought it was legitimate because someone
from a professional standpoint said that it was. I am not saying that the conceivers of these
schemes actually believe that, but it is possible to argue that defence. So, from a professional
standpoint, what can you tell us about the liability accepted by professions for the type of
serious opinion that they offer? Can they be sued?

  Mr Pope—They can be sued; whether or not you would be successful is another question,
and I could not answer that one. Their opinions are obviously based on the information that they
have available at the time. Perhaps that goes back to what Senator Murphy was suggesting
earlier—that perhaps more stringent controls need to be in place for the information and advice
that is in there. I think one of the major noticeable things is that the return or expected revenue

E 350                                   SENATE—References                 Tuesday, 20 March 2001

from the investments seems high. But, if you discount it back by 50 per cent, you are still pretty
reasonable. Given that the ASIC are supposed to refuse to register a prospectus if it contains a
false or misleading statement, you would assume that they have looked at it—or that would be
my assumption as a lay person—and that there is some respectability to it. No one can
guarantee the cash flows or revenue, but they should at least be reasonable.

   Senator COOK—This is a terribly difficult area to be precise about. When you are talking
about regulation, this is a continuum that starts at one end with ‘buyer beware’ and ‘let the
investors make the choice and cop the consequences’. At the other end, it is argued that
investors can never have sufficient information to know all that is necessary to make a choice.
In the public interest, to some extent, there ought to be regulation to ensure that investor
ignorance is guarded against—you cannot ever protect it. According to where you sit on this
line, you will make a judgment. But there is no perfect answer, is there?

  Mr Pope—No, there is not. When people are looking to get into something, they are
obviously wishing or hoping that the returns projected will be reached. People are funny. You
get people coming in with business propositions that you explain to them are not going to work,
and yet they still take them up on the basis that they have a hunch or a gut feeling. You are
never going to be able to eliminate that. But I think that more stringent controls are needed on
the prospectus and what is in them. Perhaps there needs to be some sort of—

  Senator COOK—What sort of controls though?

  Mr Pope—What does the ASIC do when they get a prospectus?

  CHAIR—They register it.

  Mr Pope—Yes, and that is it. Why don’t they do something else, like check the cash flows to
see whether they are reasonable? You stated earlier that many numbers of bodies stated that the
projections of income in a lot of these prospectuses were not realistic. I do not think it would
take the ASIC a long time to determine that.

  CHAIR—I do not think we disagree with that.

  Mr Pope—You have just asked for my opinion, and I am giving it.

  Senator COOK—I am very interested in your opinion on this.

   Mr Pope—I think maybe, if there is a cost to it, it should be borne by the person presenting
the prospectus for registration. If it costs them $50,000 to get it registered, it may be a hindrance
to some of these shonkies. I do not know.

  Senator COOK—Comparatively, it might be a small cost up front that prevents a large loss
down the back if these schemes get into trouble.

  Mr Pope—That is right.

Tuesday, 20 March 2001                 SENATE—References                                   E 351

  Senator COOK—In addition to what is already done, can you address yourself a little more
precisely about the sorts of things that should be done?

  Mr Pope—I think prospectuses should have some sort of statement from the ASIC. They
should be accompanied by an opinion from the ATO. In that way, all the information is
available to the investors. From the ATO point of view, I suppose I would like to see them remit
the penalties and interest on the schemes up to a cut-off point of 1998. They have certainly
agreed to discount it up to that date.

  Senator COOK—If you were designing the law against what you know concerning this sort
of industry, you would require a prospectus to have some more detail on it—but detail about
what exactly?

   Mr Pope—Yes. If there is a question, for example, about cash flows, why are there not
opinions from professional people in that field who can determine whether or not they are
exaggerated? If those professional people were adequately liable for any misstatements or false
statements that they made, then perhaps there would be some protection there.

  Senator COOK—And from the Tax Office?

  Mr Pope—Yes.

  Senator COOK—Do you see that some might argue this is an unnecessary interference with
the operation of the market?

  Mr Pope—They could argue that, but I do not see what validation they would have for
arguing that. If it is a requirement to do something before it is approved, it is a requirement to
do it. It is like saying that it is an imposition on making people pass a drivers licence before
they drive a car.

 Senator COOK—So a prospectus would be like a cigarette packet: it would have a health
warning in case of danger.

  Mr Pope—It could have some sort of warning or some sort of indication—some sort of
indication of what the ASIC’s role is, because they do not have a role except to rubber stamp.

   CHAIR—In the additional submission that you have provided to us, there is a ruling that
relates to Main Camp Tea Tree Oil Project No. 4. That states that there is a position paper that
you have not provided to us. Could you provide that to the committee? Also in the additional
information, you have left in the name of one of your clients. I assume that we would remove
that name.

  Mr Pope—Yes, if you could, thank you; and also not let my client know, thank you.

  CHAIR—Thank you for your submissions and for your evidence here today.

E 352                                  SENATE—References                 Tuesday, 20 March 2001

[11.58 a.m.]

FONDA, Mr Oliver (Private capacity)

  CHAIR—Welcome. Do you have anything to add to the capacity in which you are

  Mr Fonda—I am a financial and investment adviser.

  CHAIR—You have provided the committee with a written submission. Are there any written
additions to that submission that you wish to provide to the committee at this point in time?

  Mr Fonda—There is one piece of email evidence that, after I have had the opportunity of
reading, I would like to provide to the committee.

   CHAIR—Please proceed. I also invite you to make an opening statement. But I will ask you
to keep your comments brief, as we are running a little bit behind time.

  Mr Fonda—I suppose you will appreciate that I do not often give testimony to Senate
inquiries, so I am a bit nervous. I have been actively involved in promoting, and investing in,
both tax effective and ordinary investments for over 15 years. On that basis, I believe that I have
a good understanding about the issues involved. I am also the principal of the dealer company
Money Centre, which is based in Perth, which was one of the dealer groups involved in
promoting tax effective investments.

  In addition, I was a founder—in April 1998—and I was a convenor and chairman of the ATO
lobby group based in Perth, which consisted of financial planners, dealers, accountants, lawyers
and some project managers. This was the lobby group that instigated meetings and made
recommendations to senior ATO officials about a product rolling system, which later was
implemented by the ATO.

  My ethnic background—not that you would detect it—is Hungarian. I escaped the country of
my birth in 1982, during the Communist regime, determined to live in a free country that is
governed by the principles of democracy and where the law is fair to everybody. If you had met
me when I came to this country, you probably would not have understood a word I was saying;
some say that they still cannot. Since then, I have learned the language, obtained another
degree, built a successful business and become a respected member of society.

   My financial planning business is based on best practice principles, complying with the very
stringent requirements of the regulatory framework. Its main purpose is to help ordinary
Australian people achieve financial freedom. As part of many investment portfolios, there was
some exposure to tax effective investments that allowed the obtaining of a future cash flow,
with a relatively small after-tax outlay. It suited a lot of ordinary people who did not have much
capital to invest, or who simply wanted to diversify their portfolios. It is here that I would like
to cover the first term of reference: the adequacy of measures to promote investor understanding
of the financial and taxation implications of tax-effective schemes.

Tuesday, 20 March 2001                            SENATE—References                                                  E 353

  Before the introduction of the current product rolling system, investor understanding about
taxation implications was based on legal experts’ opinions printed in the prospectuses of various
investments and the relatively vague indications and decisions on similar projects by the ATO.
Investors could only rely on the logic and commonsense of applying previous case law and
other indications from the ATO—that is, binding private rulings—on certain projects with
similar structures. I have enclosed a number of annexures to my original submission. However,
annexure No. 1 is a very good example of a private ruling that was issued to a taxpayer
investing in Main Camp Tea Tree Project No 2. It allowed all expenses incurred as tax
deductions, whilst acknowledging that these may be financed through a company associated
with the project company. As we know, the identically structured Main Camp Tea Tree Oil
Project Nos 3 and 4 are being disallowed. I ask you gentlemen: where is the logic in that?

  But this goes much further than that. A country has to be governed by rules, and they are
called law; and in a democratic society, those rules must be fair and consistent. Often it would
be very practical to go back and amend certain rules that do not work or serve the right purpose.
But, in a developed society, you cannot do that. Why? Simply because people need rules to rely
on so that they can feel safe to exist, to build their future or build their businesses.

   After arriving in Australia, I learned very quickly Australia’s perception of Communist
countries like Hungary: human rights are treated very lightly, the individual’s rights are not
respected, and the rules are unfair and dictatorial – in other words, it was unsafe to live there.
East Germany did not have a problem with illegal immigrants, and neither did Poland or
Romania. And Hungary was not exactly a country where people were flooding to, wanting to
live there. It was a one-way street: people were getting out of there, not the other way around.
That was the very reason I made the hard decision to live elsewhere and not to stay there.

   The problem is that I can see the evidence of the very same thing that made me leave starting
to emerge here—inconsistency, unfairness and disregard of individuals’ rights. To illustrate how
serious the problem is here I have a short email that I received from an investor last week which
I would like to read to you. It says:

G’Day Oliver,

I am one of the unfortunate people caught up in the ATO’s decision to victimize a group who genuinely thought they
were investing in products benefiting the future of Australia.

I have become so disillusioned by the principles the ATO have adopted, I have now left Australia and am working and
living in Dubai, a tax-free country. It was a hard decision to take skills which are of a shortage in Australia to a foreign
country, but I have become so annoyed by the treatment the ATO have given us, I will not see another cent paid to them
from money I earn.

I would be very grateful if you could put me on the mailing list ... as I still have a very keen interest in the progress made
with this issue.

I was employed as a Licensed Aircraft Engineer with Qantas in Perth and now work for the Emirates in Dubai.

Thank you for your time and I look forward to your reply.

Good luck.

E 354                                            SENATE—References                         Tuesday, 20 March 2001

There is now a protocoling system that was first instigated by our lobby group in Perth. In
proposing this system to senior ATO officials during our meetings, we made it totally clear to
them that both the industry and investors want clarity and certainty about the taxation
implications of these projects. My conclusion about this term of reference is that, as the ATO
failed to make their public rulings on the schemes prior to their commencement before 1998 or
1999, the ATO is the one that failed to promote investor understanding of the taxation
implications of tax effective schemes.

   I would like to cover the second term of reference which relates to the conduct and the
adequacy of measures for controlling tax effective scheme designers, promoters and financial
advisers. I strongly believe that companies and individuals will do whatever they are allowed to
do under any system. If the system is strict, their activities will be limited; if it is loose, their
activities might be more liberal. Scheme designers, promoters and financial advisers are
administered and controlled by the Australian Securities and Investment Commission—ASIC—
which is one of the most powerful statutory bodies in Australia. These measures include very
strict licensing and compliance requirements that control virtually every step of these entities
from promotion to implementation.

  Before the introduction of the protocoling system, the measures for controlling scheme
designers, promoters and financial advisers were just as adequate, in my opinion, with the
exception of lacking certainty. The potential criticism about intermediaries not issuing adequate
warnings about the taxation implications of these projects simply could not be accepted in the
absence of clear indications from our regulators. I have also heard of criticism, even today,
about financial advisers promoting tax effective schemes through tax planning investment
seminars. These functions have, apart from tax effective investment projects—I am talking
about probably my own functions—also dealt with other legal tax minimisation opportunities
and strategies such as negative gearing and superannuation.

   But even if only tax effective investments were sold, clearly financial advisers have used the
attractiveness of the phrase ‘tax minimisation’ to draw the attention of their clients and to attract
more people to their seminars, and this does not necessarily mean that the participants’
dominant purpose of investing was to avoid tax. After all, did the government decide to grant
enormous taxation benefits to superannuation structures, such as superannuation, allocated
pensions and so on, to attract more money into superannuation or did they do that just to be nice

  The taxation benefit is a big attraction and it is an important factor in most people’s decision
making processes about their investments. But this does not automatically make it the dominant
purpose, as the ATO incorrectly assumes. An illustration of that point is the federal case of
Brand v. Federal Commissioner of Taxation 1995. A newspaper article on that case stated:

The Federal Court of Australia found it material that the project was a real business transaction underpinned by genuine
commercial considerations, albeit structured so as to offer tax advantages to participants. It was the taxpayer’s overriding
objective that he wanted to invest in the project because he regarded it as a good commercial investment.

I would like to turn to the third point that, in my view, is the most burning issue, which is the
ATO’s approach towards ruling in relation to mass marketed tax effective schemes. This is the
area I am mainly concerned about, as I believe the ATO’s actions are in sharp contrast with the
democratic constitution of this country. I believe the main outcome of this inquiry should be to

Tuesday, 20 March 2001                  SENATE—References                                     E 355

rectify the way the ATO carried out its duties under the Income Tax Assessment Act and the
taxpayers charter in relation to tax effective investment projects. Having said that, I would like
to reiterate that I do not wish to discuss who is right or who is wrong, whether tax deductibility
is legal or illegal; I merely wish to debate the legality and methods that were used to deal with
these issues and the way the law was administered by the ATO.

  There is the issue of retrospectivity. Whilst it could be argued that under the safe assessment
system the ATO have the right to go back a number of years and disallow arrangements that
were illegal, they have never given any indication to the industry or to the public that these
projects were illegal. Their argument of not knowing about them is simply untrue, as we could
see from numerous private rulings and tax audits conducted in previous years. In fact, they not
only knew about them but also declared them ‘legal’ and acceptable by their private rulings.

   A major component of the ATO’s campaign—and at that point I would refer back to the same
private ruling that I referred to earlier, and there are numerous other examples to the main
private ruling—was to use fear and scare tactics. They threatened, I believe illegally and
without foundation, with a 40 to 50 per cent penalty for an alleged sin that was only assumed,
not proven. My understanding is that a 50 per cent penalty can only apply if there is a fraudulent
and deliberate attempt to avoid tax. This has not only been unproven, but not a single inquiry
has been made about it. Then, in a move that is nothing short of plain extortion, they offered to
reduce the alleged penalty to five to 10 per cent in order to entice people to pay and, in return,
the taxpayers gave up their right to object or appeal. This later component was only withdrawn
after extensive lobbying from the industry.

   The reduced penalty, the overhanging burden of interest on the alleged outstanding debt and
the impossible nature of fighting the Big Brother—which was quite reminiscent of the George
Orwell story 1984, which I am sure you are aware of—made a lot of people pay up. I am not
sure whether it was part of their scare tactic or just a strange coincidence, but shortly after I put
together the lobby group in Perth in April 1998, I received several visits from ATO investigators
from the Strategic Intelligence Unit, which amounted to nothing short of a raid. The
investigators had very few papers unturned in my office, and they extensively used my
resources. For example, they did ridiculous things like photocopy whole prospectuses which
were in our research files that could have been obtained from project promoters, and they went
to the extreme of searching through my personal briefcase and other belongings in my office in
my absence, whilst I was with a client. Whether this incident was coincidence or not—or in
conjunction with my activities in the industry, in particular the establishment of the lobby
group—I do not know. However, the experience was very scary and very intimidating. It was
reminiscent of the old days in communist Hungary and the former Soviet Union.

   As we know, the taxpayers charter is effectively a public relations document outlining the
way the ATO are supposed to deal with the public in performing their functions. The ATO have
breached the terms of the charter with every notice that was sent out to taxpayers. They have not
treated taxpayers as individuals. They have failed to examine individuals’ circumstances and
justification for their claims, and in doing so they used a blanket approach in trying to disallow
legitimately claimed business deductions. The charter also provides that people will be treated
fairly. You could compare this with the fundamental democratic principle that one is not guilty
until proven otherwise. The ATO have totally ignored this principle and commitment in the
charter and used the presumption of guilt without any due process or consideration.

E 356                                  SENATE—References               Tuesday, 20 March 2001

   My clients and I have been accused of being tax cheats, which all of my clients and I find
defamatory and very strongly objectionable. This is such a fundamental issue that I would be
extremely surprised and disappointed if the committee did not consider it with the closest
scrutiny. One just cannot assume that another person is guilty and then force that person to
admit that guilt because of stress or a heavy penalty, let alone do this from the position of
strength. It is a very scary and distressing experience for the ordinary person and, as such, is

   My other concern is that there does not appear to be an independent person or body that
taxpayers can turn to, to complain and get a fair hearing. To find a ‘big brother’ is almost
impossible for the average person by himself. Organising fighting groups is costly and difficult,
as the scare tactics do work for the ATO. The supposedly independent Ombudsman is
reportedly married to a high ranking ATO official, and politicians seem to turn a blind eye to
this with the excuse of not wanting to interfere with an independent government body. As I
stated earlier, I believe that a citizen’s right to a fair hearing is a fundamental issue of

   Finally, I would like to quickly deal with the consequences of the ATO’s actions. On the
effect on the people involved: I do not believe that the ATO knows—or, if it knows, is actually
worried—about the strain and stress to which its actions are subjecting individuals and families.
These have already caused, and will cause more, marriage break-ups due to arguments about
money worries; participants being forced to sell their assets and houses and become poor or
bankrupt; stress, depression and loss of income; and suicides. In our case this whole situation
has already put enormous pressure on our family relationship.

  If the tax objections go against us—I am talking personally—we will have to sell all our other
investments and assets and probably file for bankruptcy as well, which will result in a very
small amount left in superannuation and our having to rely on a full pension from the
government to fund our old age. This is in spite of the many years of hard work I have put into
building my business and becoming a respected enterprise in this country.

  I used to employ over 30 Australians. Now I have one employee and a part-time accountant. I
earn less which means I consume less and I pay less tax, which as you very well know probably
has a tenfold roll on effect on the economy. The effect is huge. Indeed, talking about the
economy, I do not know the exact number but there is an estimated 50,000 to 70,000
participants in the various projects. There would be a huge amount of people whose retirement
plans will be basically shot to pieces, and we will simply have to rely on the government
welfare system. There is no question in my mind about this, as I deal with this every day in my

  It is my understanding that the government is also concerned about the current level of
investment in research and development in Australia. Who will be prepared to make such
investment only to have harsh penalties and previously allowed deductions disallowed in the
future? Rural projects such as vineyards, orchards and other plantations are extensive
commercial undertakings requiring huge capital influxes at their commencement. They are also
very labour intensive employing large numbers of workers, from establishment works to
picking and harvesting. This creates employment, especially in the rural areas, which is one of
the main agendas of the government policy. If the ATO’s current action is not stopped,

Tuesday, 20 March 2001                         SENATE—References                                              E 357

unemployment in these areas will rise, which as we know has a manifold roll on effect again on
the economy.

   Much of the product from these projects, physical and intellectual, is sold overseas increasing
the country’s exposure to revenue. Also, for many reasons, mainly related to risk, many of these
projects would not have been able to be established by the traditional funding methods. If it
were not for these projects, Australia would have again lost some sound and very exciting ideas
to overseas industries. Probably a good example is the tea tree oil industry, as we have lost in
the past other industries like the macadamia or the eucalyptus oil industry, which originated in
Australia. So the benefit of these projects to Australia is manifold: for example, investment in
our decreasing rural economy; reduction in unemployment, mostly in rural areas; associated
taxation income from workers and investors; and assistance to the balance of payments.

   CHAIR—You are reading a lot of the submission that you have provided in writing. As I
indicated to you at the outset, we have got a time constraint and we want to deal with as many
issues in terms of questions and responses as we can. I will say this for all witnesses who will
appear later: rather than read out your submission which we have received in writing, make
additional comments to it and that would be most helpful. We actually have read the
submissions and we do take account of them.

  Mr Fonda—I have just arrived at my conclusion, if I may.

  CHAIR—Thank you.

   Mr Fonda—In simple terms, the way I see what happened is that for various reasons the so-
called tax effective investment projects proliferated and became very popular amongst
investors. The ATO, failing to perform their duties efficiently and fearing a large-scale, short-
term revenue loss, regardless of the positive flow-on effect on the economy and the country, in
an attempt to cover up their inefficiencies decided to retrospectively challenge these
arrangements. By doing this, they breached the taxpayers’ charter and many other areas of the
common law in spite of established case law supporting the legality of structures, thereby
causing enormous pain to the people involved.

   Lastly, my recommendation is to require the ATO to immediately grandfather these projects
at least with respect to investments made to 30 June 1998, as it was recommended in TR
1997/17. This would allow Australian people to proceed with their lives and retirement plans
without the huge burden currently present and would still leave the ATO—and this is an
important point—in a position of complete control via the current protocoling system. I would
also recommend a thorough review of some of the ATO’s procedures to ensure full compliance
with the common law and the taxpayers’ charter and the proper democratic principles that I
believe in..

  CHAIR—I want to ask you a couple of questions with regard to some of the information in
your submission. One question relates to a private ruling that dealt with the Main Camp Tea
Tree Project No. 2. That ruling relates, in part at least, to the application of part IVA. It says:

With respect to the possible application of Part IVA of the Income Tax Assessment Act, the Commissioner cannot rule on
this matter.

E 358                                            SENATE—References                        Tuesday, 20 March 2001

It then proceeds to say:

Having regard to the factors outlined in section 177D of the Income Tax Assessment Act, the Commissioner must
determine whether any of the participants in the scheme have entered into the scheme for the dominant purpose of
obtaining a tax benefit for any taxpayer.

A request for a ruling in respect of the application of Part IVA of the Income Tax Assessment Act must contain all the
relevant information outlined in section 177D of the Income Tax Assessment Act.

I assume from that statement that that was not the case. Can you advise the committee whether a
further ruling was sought and further information was provided to the tax office in respect of
that private ruling?

  Mr Fonda—I am not aware of the history of this private ruling—I obtained only a copy—
however, I suspect that the purpose of obtaining this private ruling was not to assess the
application of part IVA, but to prove that the arrangement itself as it stood was appropriate and

   CHAIR—Having read the ruling, it would appear to me that there was a question by the
applicant with regard to the application of part IVA. It is sometimes very difficult for the
committee when we consider evidence based on assumptions—or, rather, second- or third-hand
information. It must be understood by witnesses that, when providing information to a
committee and asking us to take it into account, we have to be able to question both the veracity
and integrity of that evidence. I find it very difficult when I have presented to me a document
about which I am unable to raise questions. Therefore, it makes it very difficult for me and the
committee then to take it into account when we deliberate on what we might or might not do
about the particular terms of reference for the committee.

  Mr Fonda—With respect, the ruling actually says what it is about. It says:

Are amounts paid for management fees, farm fees and interest allowable as a deduction under the Income Tax
Assessment Act?

That is what the ruling is about. On my reading, it is not about the application of part IVA.

   CHAIR—If I may interrupt you, the heading ‘RULING’ appears on page 2. Page 1 has the
headings ‘COMMENCEMENT OF ARRANGEMENT’ and under that says ‘Unknown’, and
then the heading ‘ASSUMPTIONS’—and what you are reading are the assumptions. The ruling
is under the headline ‘RULING’. There are a number of paragraphs. The first paragraph says:

It is considered that the rulee is carrying on a business and the payments for management fees, farm fees and interest are

I accept that. It then says:

With respect to the possible application—

which implies that a question was asked about part IVA. That is what I am saying.

Tuesday, 20 March 2001                 SENATE—References                                   E 359

   Mr Fonda—It might well be that, on reading this ruling, I assumed that it was a standard
paragraph because the commissioner had to make it clear that, even though the binding ruling
applies in normal circumstances, he cannot rule on part IVA unless he knows the individual
circumstances of that individual. That has not been provided, obviously, and therefore he could
not rule.

   CHAIR—I can read the ruling. I was asking you whether you were aware of the applicant
making a further request and providing information to the tax office with respect to the tax
office’s statement. You said you are not, and I appreciate that. The reason, as you would know,
is that many of the taxpayers who have found themselves in these difficult circumstances have
had part IVA applied to them. That is why my question about the part IVA business is at least
important to me—so I can make some judgment about how the tax office has dealt with these

  Mr Fonda—Senator Murphy, you might be aware that the Ombudsman criticised the ATO
for not ruling on part IVA—

  CHAIR—I am fully aware of that. My role here is to seek information regarding what I think
might be helpful at least to me in part and, hopefully, to the committee. That is why I asked you
the question in respect of the statement by the tax office. I assume that you are fully aware that
private binding rulings only have application to the person to whom they are issued, despite the
argument about whether everybody else was involved in similar or same circumstances. You
would be aware that that is the case.

  Mr Fonda—Absolutely, yes.

  CHAIR—In the latter part of your submission you talked about the riot in your offices. What
happened as a result of that? Was there any outcome?

  Mr Fonda—I was very upset. I immediately complained to the—

  CHAIR—What I want to know is: did the tax office do anything at the end of the day?

  Mr Fonda—At the end of the day they did not come back, although they said they would
come back. I believe they did not come back as a result of my very serious and vigorous
complaints to the—I cannot recall the name of the body in the tax office—the ‘conflict
resolution body’ or something like that. I also wrote to the Ombudsman. They both investigated
the matter. Naturally they found nothing wrong in relation what has happened, although they
had some comments about the fact that certain parts of the raid might not have been appropriate.
However, they did not come back.

  CHAIR—The tax office never pursued you, never took any action against you as a result of
the raid?

  Mr Fonda—No. However, the experience was very frightening and this was the main

  CHAIR—We accept that.

E 360                                  SENATE—References                Tuesday, 20 March 2001

  Mr Fonda—I did not want to conclude that it happened because of my activities. It might
have been a coincidence.

  CHAIR—Having read your submission, we accept that. I just have to deal with the issues. I
am also cognisant of time.

  Senator CHAPMAN—Mr Fonda, do you agree that taxpayers need more education about
the powers of the tax office to audit returns several years after they have been accepted under
the self-acceptance scheme? Do investors and taxpayers generally, but particularly investors in
these projects, understand that risk element?

  Mr Fonda—I think it is a fair comment in general terms. Regardless of being participants in
tax effective investments or having businesses, I would agree with the statement that generally
people are not fully aware of the implications of the self-assessment system.

  Senator CHAPMAN—Did you advise your clients of that possibility before they invested?

  Mr Fonda—Absolutely.

  Senator CHAPMAN—How do you think taxpayer awareness of that aspect of tax law might
be improved?

   Mr Fonda—I think most of the improvement has already been done by instituting the
protocoling system. The protocoling system is what we asked for, which is giving certainty in
industry and giving certainty to individuals. I simply cannot believe that we had to wait 15 years
to get such a system implemented.

  Senator COOK—What was the reason given to you by the tax office for ‘raiding’—as you
have termed it—your premises?

   Mr Fonda—They supplied a legal document under section—I cannot remember the number;
I have full records in my office—which is an official requisition of their rights, or official
statement of their rights, to have access to everything that I have in my office. Their name, I
suppose, should shed some light on this—the Strategic Intelligence Unit. Basically, when I
asked, ‘Why me and why here?’ they said, ‘Oh well, no particular reason. We just want to look
into these so-called tax-effective investments.’ They would not tell me where they got my name
from or my company’s name or why I was selected. I suppose I have been fairly active in the
industry. We have been promoting a number of tax-effective investments in the past. As I said, I
was involved in the lobby group and was quite vocal in the industry. But ultimately, I do not
know why they selected me.

  Senator COOK—What happened? Did some officers present themselves without warning?

  Mr Fonda—They supplied a requisition a day before, giving me about 24 hours’ notice. It
was not appropriate because I had client meetings and a few engagements the following day.
However, they insisted they wanted to come the following day.

Tuesday, 20 March 2001                 SENATE—References                                   E 361

  Senator COOK—What conclusions are you asking us to draw? I know you have said you
have been very active here and it could have been related to that, but it could also have been a
coincidence. What are you putting to us?

  Mr Fonda—I would like to withdraw any allegation that there could be a connection. The
conclusion I would like you to draw is that they used these tactics in communist countries, in
the Soviet Union, in the bad old days under ‘big brother’. They are not necessary in a
democratic country. I am highlighting one of the aspects of this whole ATO campaign as an
addition to the other things I mentioned.

  Senator COOK—You have heard some of my questions to the previous witness, Mr Pope.
Do you have any views about what he was speaking about in relation to prospectuses? Should
there be more regulation of prospectuses?

   Mr Fonda—I thought a lot about this. I believe that the current regulatory system is more or
less adequate. It is a very hard question because we are talking about the bad elements of
fraudulent parties. There are fraudulent elements in every part of life and every part of
industry—look at mortgage brokering, and property investment. Unfortunately, you cannot
screen them out. However, to screen those bad elements out is really the regulatory
environment’s job, by building reliable and consistent systems. Part of this system is the product
ruling system, taxwise. Businesswise, the ASIC, which is the regulatory body in that area,
should have the responsibility, or maybe they should revise their guidelines on how they
approve prospectuses.

   Senator COOK—This is the point of the discussion. Can I make an effort to pin you down
by what you mean by ‘maybe they should revise their practices’? What should they do? We are
in a position of having to make a decision about this. One thing is for sure—whatever we decide
will not please everyone. Some will say that it is too heavy-handed and some will say that it is
not heavy-handed enough, or whatever. These are judgment calls. You are an experienced
professional in this field. What, if we can push you a bit on this, do you think they should do?

  Mr Fonda—In my experience and in my opinion, I feel that there is very little else that the
regulators can do or should do in this matter because, as you just said, they might be
overstepping and being too heavy-handed in regulating the industry.

  Senator COOK—Or they might not.

   Mr Fonda—Or they might not. But let me remind the members of the committee that the
prospectuses, according to the Corporations Law, must contain, apart from projections and other
things, independent experts’ opinions about those projections, independent experts’ opinions
about the business structure and the tax structure. Those elements are already there. I believe
that the current protocoling system and also the new managed industry act, which makes it
much harder for the cowboys to enter the industry, are adequate at the moment to regulate the

  Senator COOK—So you would leave it as it is?

  Mr Fonda—As far as that side of it is concerned, absolutely.

E 362                                   SENATE—References                 Tuesday, 20 March 2001

   CHAIR—Following on from Senator Cook’s question, it has been submitted to this
committee in evidence, and certainly from my own research I have been able to establish, that in
many prospectus offerings in the marketplace today, and even some with product rulings, which
have entry costs for the participants—that is, the investor—and which represent three, five, six
or eight times the type of establishment costs with many of the projects that are proposed, as
little as 30 per cent of the money actually goes into the scheme. This poses a significant threat
to the viability of the scheme. Do you think that is an acceptable practice?

   Mr Fonda—Firstly, I believe that the pricing of an investment should be left to the markets
to decide whether that is acceptable or not. If an investor finds, based on the figures, projections
and costs, that the investment is a viable and good investment then it is up to the manager to
charge as much as they can. The manager or promoter is entitled to make a profit—that is what
they are in business for. I would use an analogy here. We all buy handbags for our wives or
girlfriends. But try to buy a Gucci handbag—why is it $350, as opposed to $40 for one that you
can buy in Betts&Betts? The Gucci handbag might be a bit nicer but there is a huge profit
margin there that someone makes. Is it illegal?

   CHAIR—The difference here is that what you are asking the taxpayer-investor to do in the
main is claim a tax deduction which is a tax deferral. It is argued by all of the promoters and so
on that there is no threat to the revenue—that is, the tax revenue of this country. But the reality
is if the venture fails it does not generate any revenue; it does not generate a profit. I find it
impossible to align most of the projections I have looked at and the forecasts both in yield terms
and in profit terms to be anything but unreliable. That is a very significant problem when you
are asking the taxpayers of the country to essentially fund a lot of these investments by deferred
tax claims. That is a question I am asking you. In cases where the promoters and the developers
are taking huge profits and potentially putting at risk the overall investment project, do you
think that is an acceptable practice in the light of how these things are funded?

   Mr Fonda—If that was the case I would find it objectionable. However, in my view, it is not
the case because any deduction that an investor claims has to be income on the other end. So it
is an income to the manager. The manager pays us an investment adviser’s commission. We pay
tax on our commission. They pay contractors to set up orchards and vineyards. They pay tax on
their income. So it is not that the revenue is really lost. I do not believe that, unless we are
talking about the bad elements, those ones that set up various artificial schemes. But again, that
is not the investor’s problem. That should never be an issue to the investors. That should be a
Corporations Law problem, to be dealt with by ASIC. I do not think this practice is a bad
practice; it is a way of funding higher risk ventures that are funding industries that otherwise
could not stand up. I very strongly believe that, and I believe there is a place for those as long as
the promoters and the managers are honest. Unfortunately, it is not the investors who control

  CHAIR—It is unfortunate.

  Mr Fonda—It is the regulators who have to control that.

  CHAIR—I agree; that was the point of my question.

Tuesday, 20 March 2001               SENATE—References                               E 363

   Mr Fonda—We can talk about regulation. I am probably not the person to give you advice or
even suggestions as to how the industry and the system should be regulated. There has been a
huge mischief done here by the ATO. They are victimising people who are innocent about this

  CHAIR—Mr Fonda, can I interrupt you and say that we are not here—and I made the point
at the outset—to argue the tax office’s case. Our job is to ask questions with regard to
submissions and evidence presented to us. We do that and we hope that people will provide us
with some answers. Our purpose is to make a determination about what we might recommend
ought to be done. I thank you for your submission and for the verbal evidence you have given

E 364                                   SENATE—References                 Tuesday, 20 March 2001

[12.45 p.m.]

THOUME, Mrs Anne Yvonne, Director, MBAS Corporate Services Pty Ltd

  CHAIR—Welcome. You have presented a written submission to the committee. Are there
any additions you wish to make to the written submission?

  Mrs Thoume—No, there is none.

  CHAIR—Would you like to make an opening statement?

   Mrs Thoume—Yes. I have a few brief remarks to make. As you will see from my
submission, I am an external member of a number of compliance committees. In addition, I was
involved in the industry prior to the enactment of the Managed Investments Bill in my capacity
as a corporate trustee. I would like to draw a comparison here between investments in tax
effectives, as they are named, and investments in the stock exchange.

   Marketing of tax effective schemes is achieved by way of a prospectus. The marketing of
listed companies, or those in the process of listing, is also achieved through a prospectus. For
tax effective investments, there is little or no secondary market. Therefore, investors are
unlikely to become involved without the benefit of a prospectus. Stock exchange listed shares
are regularly traded without the investor knowing anything about the project. Investors can
suffer substantial losses, as was evidenced by the crash in the tech market last year.

   If the purpose of this inquiry is to ensure investor protection, there being none in ASX
trading, then the matter of the deductions being allowed at some future date should be seriously
considered. Many of these projects do not require all funds up front but allow for staged
payments. This ensures the smooth running of the project and also ensures that the promoter is
not provided with all the funds at one time. The investors who have had their tax deductions
disallowed are not in a position financially to continue committing to the projects, and thereby
quite often have to withdraw from the projects. This results in the investors forfeiting their
investments. The project’s success is based on the ability of the investors to maintain payments
during the specified period.

   I would like to make a comment here now on scheme designers. With regard to the control of
scheme designers, promoters and financial advisers, there can be three entirely different
companies with individuals involved here—each may have the same goal of raising funds for
the project but each may approach the matters differently. Whilst in the process of establishing
the project, the scheme designer will apply for a tax product ruling, as it is unlikely investors
would be interested in investing in a project which does not have a ruling. Given the current
situation, investors who have invested prior to 1998 have found themselves in that position.
Also, investment advisers will be reluctant to promote the project without the product ruling.

  Scheme designers are subject to the restrictions placed by ASIC on the scheme documents;
that is, the constitution, compliance plan and prospectus. The constitution and compliance plan
are subject to rigorous review by ASIC. The promoters, who are now referred to as responsible
entities, are subject to rigorous controls when applying for a dealer’s licence. This will not be
given unless certain criteria are met, and this is again quite strict. The proper authority holder or

Tuesday, 20 March 2001                 SENATE—References                                    E 365

financial adviser is governed by the terms of the dealer’s licence and is subject to a number of
regulatory controls if the policy statements are adhered to.

   I would like to make a short comment on the ATO. Although there is a tax deduction for the
investor when investing, there are also tax commitments placed on the RE when the funds are
received. The RE will employ staff and those staff pay income tax. The investor pays tax on any
returns received. Also, it must be noted that these tax effective projects provide employment.
The forestry and vineyard projects bring a lot of employment into what are, in effect, low
employment areas. One project in which I am involved—stone fruit—has brought life to a small
town by building a packing shed and employing local staff.

   With regard to management fees, the management fee is in the main based on financial
projections. There is obviously a profit margin for the promoter, but the success of the project is
reliant on the manager RE. Regarding management fees in general, these are clearly stated in
the prospectus and the investors are encouraged to read a prospectus in its entirety prior to
investing. Management fees, as with all fees, are based on what the market will bear. This is a
commercial reality.

  CHAIR—In regard to your last statement that management fees are based on what the
market can bear, should it also be the case that management fees represent such a large portion
of the entry cost, that is, sometimes in excess of 60 per cent—and this is the same question that
I have asked other witnesses—thus putting at threat the potential viability of a particular

  Mrs Thoume—I understand, with the projects that I am involved in, that the management is
quite extensive and quite intense. Certain projects like Pulonia require an enormous amount of
input by staff, and that is paid from the management fees as far as I am aware. With regard to
these fees, they are not paid up front; they are paid as staged payments over a number of years.

  CHAIR—It is a fact, though, that most of them are paid up front.

   Mrs Thoume—Most of them were and I think that was the reason why a lot of them fell
over. When I was a corporate trustee, we had a lot of projects that simply did not make it and all
the fees were paid over at 30 June and the promoter, or the manager—a promoter was called a
manager back then—was expected to carry out the entire project for the term of the project with
a fee paid maybe at the beginning of a 15-year period.

  CHAIR—I note that you have listed here that one of the projects you have been appointed to
as a trustee is Palandri Wines.

  Mrs Thoume—Yes.

 CHAIR—As I understand it, the entry costs for Palandri Wines—I am saying this from
memory—are around $150,000 for about one-third of a hectare.

  Mrs Thoume—Yes.

E 366                                   SENATE—References                 Tuesday, 20 March 2001

   CHAIR—It has been put to me that the real establishment cost—and that includes the staff to
do the planting, et cetera—is more likely to be about $35,000. On that basis and considering the
potential returns to the investor, and again dealing with the issue of tax deferral in the first
instance, doesn’t that pose some threat to the real viability of the project and doesn’t it also pose
a threat in relation to the return to the tax revenue for the tax deferral in the first place?

  Mrs Thoume—I imagine it would. I just have to say here and now that I am no longer
involved in Palandri; I was when I sent my submission in, until the beginning of March, and I
am now no longer involved with them. A lot of funds would be expended on marketing and
promotion and an extensive amount of their money is spent on building the business and that
will make it more successful. It is not just simply putting some grapes in the ground and
processing the wine; it really is marketing and having a market out there which is ready to
receive the wine when it does eventually come on the market.

   CHAIR—Of course I accept that, but when reviewing and studying the amounts of money
that are actually spent in those areas, it still demonstrates that there is a significant degree of
profit taking. The Rural Industries Research and Development Corporation has found that there
is a real problem in this area, let alone the problem, of course that we know, that people are
confronted with in respect of the ATO. But looking forward to the future and how we might
better address the management of these types of investment industries—and I, frankly, have a
personal view that they do have the capacity to make a very significant contribution to rural and
regional Australia—I want to make sure that they are properly managed both in the investors’
interests and in the interests of the Australian economy. I am concerned also, as I said, with
regard to a whole range of other schemes, particularly some that involve one other project that
you have got listed here—Australian Plantation Timbers.

  Mrs Thoume—Yes.

  CHAIR—I have the same concern with regard to their approach as well.

  Mrs Thoume—Their level of fees?

  CHAIR—Yes. The level of money that is raised in funds in the first place, and the level of
money that is actually put into the project. Then, in considering that, you look at how the
projections that the particular APT have made in respect of the returns, the prices and the yields
that they have used to actually generate those returns, are fundamentally flawed and are indeed
questionable at best—and I think, quite frankly, misleading at worst.

  Mrs Thoume—I would disagree with that. A substantial amount of land has been purchased.
A substantial amount of work has been done to ensure that the MAI—being the mass index of
the trees—will be sufficient to achieve the projections at the end of the period.

  CHAIR—Can I put it to you that there is not one state primary industry authority that would
agree with many of the projections contained in forest plantation prospectuses. They all use
their mean annual increment and they have them at the top end of the scale. Research would
show—that is, the historical data, and that is why I question these matters—that the types of
mean annual increments contained in prospectuses are very often not achieved. In fact, they are
quite often substantially lower, which I know you would understand. I ask you: would that not

Tuesday, 20 March 2001                 SENATE—References                                   E 367

change substantially the returns to investors and thus put the viability of the project making a
profit at risk?

  Mrs Thoume—I did not really want to discuss any individual clients. But with regard to
APT, the situation is such that they have substantial amounts of land which the company have
bought themselves and have planted as well. In the event that the MAI is not sufficient on the
planted land which belongs to the investors, this is also going to be harvested to ensure that the
projections are met.

  CHAIR—If I just take your answer: one assumes then that APT have factored the cost of
entry into the investment, the cost of the land?

  Mrs Thoume—The company owns land in excess of that which is planted for the scheme.

  CHAIR—That is not my question. My question is: do you think APT have factored the cost
of purchasing the land into the investment cost to the investor? That is, does the entry cost have
factored into it the purchase of the land?

  Mrs Thoume—Yes, it does.

  CHAIR—If you were a private individual and you purchased land to plant trees, would that
be an allowable deduction under the current taxation law?

  Mrs Thoume—The purchase of the land?


  Mrs Thoume—Tax expertise is not my area. I work on the compliance plans, constitutions,
so I would not give an opinion on a taxation issue.

  CHAIR—Sorry, the fact is that it is not. If you or I or anyone else in this room sought to
purchase an acre or 5,000 acres, we would not be entitled to make a claim for the cost of the
purchase of that land if we as individuals planted it with trees or anything else.

  Mrs Thoume—But these are staple securities, aren’t they? The shares are used by the land.
The money is raised through the shares.

  CHAIR—I do not think in APT that any of the investors own the land. I think the land
actually belongs to the managers of APT. Is that not the case?

  Mrs Thoume—It is owned by the companies.


  Mrs Thoume—The companies, the investors –

  CHAIR—The investors do not have shares in the company, do they?

E 368                                  SENATE—References               Tuesday, 20 March 2001

  Mrs Thoume—Yes, they do.

  CHAIR—I would like you to produce evidence to that effect.

  Mrs Thoume—Yes, okay, not a problem.

  CHAIR—I would like evidence that they actually have shares that give them rights to the

  Mrs Thoume—But you do differentiate between the scheme and shares?

 CHAIR—Yes, I do. I would like to see some evidence that shows me that the investors in
APT actually have ownership of some land. Senator Chapman, do you have some questions?

   Senator CHAPMAN—The Ombudsman and also senior tax lawyers have expressed concern
that investors in these schemes were not properly advised about the risk that their tax deduction
claim would not be allowed. Do you have a view about that and why that advice was not
forthcoming to potential investors?

  Mrs Thoume—If a proper authority holder is correctly trained, as they should be, then that
would be part of the information given to the client. I think the checks and balances are there—
but whether they are being used or not I do not know, but the procedures are in place.

  Senator CHAPMAN—You indicated your view that the current regulatory regime is
adequate to protect investors.

  Mrs Thoume—If it is adhered to, yes.

  Senator CHAPMAN—You are talking about both the Managed Investments Act and the
broader Corporations Law.

  Mrs Thoume—Yes, if proper authority holders/investment advisers apply the rules and abide
by their procedures manuals and give the client full information, the client should be totally
fully informed of all the risks, as well as the positive attributes of an investment.

   Senator CHAPMAN—I referred this morning to a briefing on evidence we had received
from an investment research house called van Eyk Capital. Among the views that they
expressed to us was the view that the current regulatory framework is not adequate. They claim
that promoters and highly paid advisers are subverting that framework, particularly in the agri-
business sector. What would your response be to that claim by van Eyk?

  Mrs Thoume—Again, my response is: if they are properly trained and if they abide by the
procedures manuals, then there should be no problem. I would see an exposure here. The
principle behind someone being an investment adviser is their giving a broad spread of
investments. If someone is just simply selling one product, then that is all they are doing. It
really does not look at the complete breadth of the clients’ needs. All it does is sell the one
product and I think that is probably something that I have always had a bit of a problem with.

Tuesday, 20 March 2001                 SENATE—References                                    E 369

But if you have a full financial plan and everything has gone through with the client—all their
needs and their goals—part of it certainly is tax planning. I believe it is there. If you read the
policy statements, if you write procedures manuals, if you abide by these procedures manuals, I
believe it is there.

   Senator CHAPMAN—Does the current regulatory framework draw a distinction between
advisers who are providing broad investment advice—in other words, as you say, a financial
plan for people—and those who are simply promoting investment in a particular product? And,
if it does not, should there be some distinction drawn in the way the two different people are

  Mrs Thoume—It is the terms of the licence. If the licence only allows the dealer to deal in
their own securities, initially, you are not able to deal in your own securities after 1 July 2000.
Now a lot of the promoters have a variation to their licence, which allows them to sell their own
products. I do not think the policy statements have been amended to incorporate that. Basically,
you have an advisory services guide, you have the client sign off and they confirm that they did
not ask for a full financial plan. Maybe that could be tightened up.

  Senator COOK—Do you think that the regulation of the tax office would be greatly
improved if the taxpayers charter were a legally binding document on the tax office?

  Mrs Thoume—Yes, I do.

  Senator COOK—What should then be done to enable the rights it would then legally confer
on taxpayers to be properly policed? You are still faced, are you not, with the same dilemma of
the high cost of pursuing the tax office at law?

  Mrs Thoume—Yes. Again, how do you overcome that? The fact that you have a right to take
an action means that there is a cost involved in taking an action. So you are always going to
have that cost factor.

  Senator COOK—You could have some sort of ombudsman in place to arbitrate and, in the
event of a lack of satisfaction on either side, then to reserve your legal rights to pursue it. You
could do something like that, couldn’t you?

  Mrs Thoume—Yes, you could.

  Senator COOK—Should they be things that we should look at?

  Mrs Thoume—I certainly think so. There is a lot of discord and a great deal of stress out
there now with the various individuals who have had their deductions disallowed. Sorry to go
off the point slightly, but there are projects out there which will flounder because people will
not continue to make their payments due to the fact that they have had their tax deduction
disallowed and they do not have sufficient resources to be able to keep the project going.

  Senator COOK—These projects depend on the investors being viable in the first place, don’t

E 370                                   SENATE—References                 Tuesday, 20 March 2001

  Mrs Thoume—Yes.

  Senator COOK—It is the investors who are having the difficulty with the tax office. Should
the project managers be making a contribution to the costs of defending the investors’ rights?

  Mrs Thoume—That is a difficult one.

  Senator COOK—They would not have a project if they did not have investors.

  Mrs Thoume—Exactly.

  Senator COOK—The viability of the investors to sustain themselves is on the line.

  Mrs Thoume—I suppose now with the product ruling that is irrelevant. It is those prior to
1998. One would assume if it has a product ruling and a product ruling is abided by, then there
will be no further issues. With regard to those previously some of the managers are not even
there any more. So it would be very difficult to go back and ask them to put up any funds to
fund the class action which is, in effect, what they would have to do.

  Senator COOK—It would be, but it is not entirely impossible. In regard to the principle of
the question, do you think there is any obligation?

  Mrs Thoume—If the promoter has, in all good faith, got a product ruling and has abided by
that product ruling then no, I do not think there is any obligation.

  Senator COOK—We have some evidence that some promoters are prepared to help.

  Mrs Thoume—That is fantastic, but I think it would be very difficult to oblige certain
companies or promoters. Some schemes are not very big. The revenue raised in them might be
$3 million to $5 million for the entire project. They are not all multi-million dollar projects. I do
not know why people would be getting in to promote something that is so small. But they do,
and the costs are prohibitive.

  Senator COOK—One of my concerns about of all of this is the high cost of getting a legal
remedy here and the amount of time it takes. The longer it takes, the more people are in
suspension about their livelihood and futures. It could be something that we recommend the tax
office settle with the investors or their representatives—some sort of test case to quickly settle
the law so that everyone knows where they are—as quickly as they possibly can.

  Mrs Thoume—But those that have a class action now and have funded it are waiting for this
to get moved to a hearing date. It is not the investors or the promoters who are dragging their
heels; it is the ATO who are dragging their heels. Regardless of who is going to fund it that is
not going to move it any more quickly.

  Senator COOK—I am looking at how quickly you try to bring this to closure. At the
beginning of these proceedings today the Chairman read out the limitations of our powers. We
can make recommendations and, if the parliament is so moved by our recommendations, then

Tuesday, 20 March 2001                  SENATE—References                                    E 371

the parliament can legislate. But we cannot direct the tax office. Would trying to work out
useful recommendations that might have practical utility and resolve pressing issues quickly be
an avenue that we should go down? I am asking you to advise us from your position here
whether you think that is worthwhile.

  Mrs Thoume—I do. I do not know whether it would work but it would be good if it could be
put in train. The feeling is very strong—and I am sure other people share my view—that the
ATO are dragging their heels. How you could make them move more quickly I really do not
know. It is not the financial situation of the person who has the class action. A lot of people
have spent substantial amounts of money on it. I absolutely agree that it should be moved more
quickly, but I really do not see how that is going to move it along.

  Senator COOK—So you do not think we should look at this?

  Mrs Thoume—Yes I do.

  Senator COOK—I want to go to one of the other comments that you made in your evidence.
The dominant purpose of these schemes is not about minimising tax—I think it was you that
made this comment; it may have been the previous witness—it is about investing in the project.
Was that you?

  Mrs Thoume—It was not me, but I agree with that.

  Senator COOK—You agree with that?

  Mrs Thoume—Yes.

  Senator COOK—The commissioner of taxation says that, although it is not true, the
dominant purpose is to minimise tax. As a consequence, his argument is essentially, ‘I should be
empowered to move.’ Do you accept that there is a public relations problem for the industry if it
keeps hanging out its shingle which says that it is a tax effective industry?

  Mrs Thoume—Yes, it is incorrect or it is badly named.

  Senator COOK—It is pointing, isn’t it, hanging out the flag saying, ‘This is all about tax’?

  Mrs Thoume—Yes.

  Senator COOK—It is saying, ‘PS—the way to get there is to do this.’ What should be done
about that?

   Mrs Thoume—I guess renaming it definitely would change that. But let us look at all of the
other tax effective projects: negative gearing is tax effective but it is not sold as being tax
effective; leasing can be tax effective but it is not sold as such. It is a label that has been hung
on this particular area, probably incorrectly. It is managed investments.

E 372                                   SENATE—References                Tuesday, 20 March 2001

  Senator COOK—How would you define something that is simply about managing tax with
a dominant purpose for that, not for the investment element? What would your definition be?

  Mrs Thoume—Blatantly—I do not really know.

  Senator COOK—I am just trying to work out where the line is drawn. Again, the
commissioner has made a judgment that the line is drawn here. You are contesting that that is, in
fact, fair. The line has to be drawn somewhere, and really I am putting you on the spot and
asking you: in your judgment, where should the line be drawn?

  Mrs Thoume—I think probably in the sorts of projects where there was a massive tax
deduction for a very small outlay. That would have been promoted purely for tax purposes. I
would assume, but I do not know. I still think the dominant purpose of most people is, at the end
of 15 years, to have a plantation or a vineyard or an apple grove or an olive plantation which
provides a return. I still think that people will look at the returns. I think those with an immense
tax deduction totally disproportionate to the amount invested—

  Senator COOK—I think, hearing from many of the people who are investors in these
schemes, quite clearly you are struck by the passion and the compelling nature of their evidence
about what motivated them. We have a public policy duty here to try to clarify some of these
shady areas. One of them is: where do you draw the line on the dominant purpose test? I am just
asking you: can you help us?

  Mrs Thoume—I think you have to look at the returns and the probability of those returns
being met and the expectation of the investor of those returns being met. There are all sorts of
factors that are confronted along the way. I suppose investors invest in everything for different
reasons. You can invest in the stock market and lose your money just as easily as you could
invest in this. I do not know. I really do not want to go further on that one.

   Senator COOK—I have talked to a number of witnesses about whether they think the ASIC
regulation is sufficient as it stands or whether there should be more regulation or less regulation
to protect investors here. Do you have any views that you would like to share with us on that

  Mrs Thoume—Yes, I think it is more than adequate. I think it is exceptionally well run. I
submit constitution and compliance plans to ASIC, and I know how rigorous they are. I submit
applications for dealers’ licences and, again, the criteria for the acceptance of individuals to
actually become an RE is very high. I think their surveillance is down to how many staff they
have available. I think their surveillance is very good. Their seminars are informative. I have
great regard for them. I heard a comment from someone earlier about prospectuses. A
prospectus is subject to a due diligence committee before it is submitted to ASIC. I think the
due diligence committee, which normally includes one solicitor or possibly two, should be
sufficient to ensure that it is factually correct. I do not see that ASIC should have to review the
prospectus. They will reject them; it has happened. It happens from time to time, so obviously
they do have a level of review. I honestly do not think it is their responsibility.

   CHAIR—I want to follow on with your assertion that you feel that all is well. I will read
from the report of the Rural Industry Research and Development Corporation with regard to the

Tuesday, 20 March 2001                                   SENATE—References                                        E 373

impact of tax driven financial investment. The corporation reviewed these types of investments
going back to 1983 and ended up with a subset of 39 ventures. I will read you some of the
corporation’s findings. The report states:

For the 21 ventures for which the quantity of funds raised was unknown, eight ventures collapsed one or two years
following commencement, so it could be assumed minimum subscription, at least, was achieved. For two ventures the
trustee company either had no records about the venture, and it is unknown if the venture commenced. For 11 ventures
the trustee and management company were unable to be contacted and the progress of venture is unknown.

Information regarding project timing was compiled for 21 of the 39 ventures, and it was found only six ventures
proceeded according to the schedule stated in the project prospectus. Fifteen of the 21 ventures fell behind schedule for a
number of reasons. Reasons why ventures fell behind included:

•    adverse climatic conditions influencing quantities produced (storm, drought)
•    poor performance of the project manager; higher than anticipated input costs
•    venture was not technically sound
•    lack of funds.
The report then goes on to discuss the physical performance. It states:

These results indicate not many ventures perform very well physically, and it is common for ventures to perform well
below initial expectations.

The report then goes on to discuss assessment of project management. It states:

In general, project management was rated as either very poor or average.

The report then goes on to discuss the returns to investors. It states:

A total of 18 ventures were able to be assessed, and 11 of the 18 performed poorly ... Of the 18 ventures for which returns
to investors were assessed, ten of these ventures have, to date, failed to make any returns to investors. Taxation benefits
are likely to have been realised by investors, however no additional benefits by way of distribution payments were made
for these ten ventures. Most projects did make distribution payments, but returned considerably less to investors than
forecast in the prospectus. Based upon figures provided, annual distribution returns were typically less than 50% of that

I think that is something that needs to be thought about seriously in respect of people proposing,
to us at least, that all is well in the prospectus investment management industry.

    Mrs Thoume—I would like to make the point that a lot of that is historical prior to 1998.

    CHAIR—Is this?

    Mrs Thoume—A lot of that is historical prior to 1998.

    CHAIR—No, a lot of them are actually since 1995.

    Mrs Thoume—Are they?

  CHAIR—Yes. The document is available and you can access it on the Internet. Most of the
ventures that I was talking about are since 1995. I would like you to consider that, and maybe
you would like to provide us with a response in writing.

E 374                            SENATE—References            Tuesday, 20 March 2001

 Mrs Thoume—Yes.

 CHAIR—Mr Thoume, thank you for your submission and your verbal evidence.

                 Proceedings suspended from 1.20 p.m. to 2.12 p.m.

Tuesday, 20 March 2001                 SENATE—References                                    E 375

FITZ-JOHN, Ms Valerie Ruth, Tax Consultant, McKays Chartered Accountants

McKAY, Mrs Lesley, Partner, McKays Chartered Accountants

McKAY, Mr Murray Ranald, Partner, McKays Chartered Accountants

  CHAIR—We will resume and get these proceedings under way because we are substantially
behind time. We want to allow at the end of the session for as many people as possible to
provide us with their personal circumstances and involvement in these things. The committee is
operating in subcommittee. We need to approve and publish these submissions: Nos 861, 862,
863, 864 and 400A. There being no objection, that is so ordered.

   I now welcome to the table the witnesses from McKays Chartered Accountants. We have
received your written submission. Are there any additions you wish to make to the written
submission? I understand you have provided us with an in-confidence document, and we will
treat that as such. If you have no other written additions you wish to make to your submission, I
invite you to make an opening statement in respect of it. We request, again, that you keep that
relatively brief.

  Mrs McKay—We thank this committee for the opportunity to speak today. We do not intend
to refer directly to our submission, which you have already received. Our first point relates to
dissolving the current debt situation of our many clients who have invested in projects before
the current system of the ATO product rulings became available, and our second point relates to
the lack of protection of, and the accountability to, participants in such projects.

   On the first matter as background, from 1997 to 1999 we acted as tax agents for over 800
individuals who had already contracted to participate in a range of agricultural, mining and
research projects. These clients were referred to us by a financial planner and they have now
received amended notices of assessment going back up to six years, leaving them with often
massive tax debts, which they dispute, and a full recourse loan in some cases. So far we are
aware of four suicides directly caused by this situation—thankfully not our clients. Two of our
clients have gone bankrupt and another into part 10 administration.

  Clients rely on professional advice from licensed financial planners, on a registered
prospectus containing an expert’s opinion on the project’s viability and on a tax opinion from a
suitably experienced firm of accountants. In some cases, additional tax opinions were sought by
the financial planners to further reassure investors. In addition, in 1999 we obtained an
independent tax opinion from another firm of Perth lawyers, which again fully supported the
deductibility of the business expenses being claimed for the major project, the Base Metals
Exploration and Prospecting Project, which we will refer to as Base Metals.

  Most clients have lodged objections to the notices of amended assessment through a Perth
legal firm. In our opinion, it is extremely unfair to impose a penalty of 50 per cent, 10 per cent
or even five per cent on the tax in dispute when the matter has yet to be decided by a court of
law. Furthermore, no interest should apply. The ATO should not issue denials of objections for
each individual taxpayer until a test case is resolved by the courts to prevent further expenditure

E 376                                  SENATE—References                 Tuesday, 20 March 2001

by participants on appeals. These individuals had taken every reasonable step to assure
themselves that the deductions claimed were allowable under the law at that time.

  As the ATO is now offering negotiated settlements on certain projects, some parties feel
pressured into settling their disputed debts on the basis of cash outlaid, which then prevents
them from participating in a successful court decision in the future if that should occur.
Settlements should be able to be amended in the event of a successful outcome for test cases.

   We have estimated that the outcome achieved under the present ATO settlement guidelines
would be almost identical to allowing the tax deductions previously claimed and then taxing
participants under the existing legislation on the expected future income or on the insurance
recoveries or on the debts forgiven, if that occurs. It is extremely unfair that the ATO are trying
to differentiate projects in the way they allow or disallow settlement. We have the ludicrous
situation of having most clients in one or more of six projects. Of these, the tax office will not
agree to settlement for three but will agree to a cash basis settlement for the other three, with a
penalty of 10 per cent for one of those and five per cent for the other two. To the taxpayers,
there were no differences between these projects from a tax perspective. The ATO should be
required to allow consistent settlements on all projects.

   We firmly believe that the ATO should pursue the loss of revenue with the promoters and
project managers who have received the money. In accordance with the prospectus, this should
form assessable income in their hands. There should be no leakage of revenue where what is
claimed as a deduction by one person is assessable in the hands of another. Despite the claim—
now denied yesterday—by a tax officer that the money from an early livestock project has gone
to the Cayman Islands, the ATO should issue an assessment of this income and place the onus
on the recipient of the money to show why it has not been taxed.

  In fact, yesterday we received a fax from the tax office confirming that they were actively
pursuing tax assessed on management fees and interest received by a project manager for which
deductions have been denied to our clients. This smacks of double dipping. Another tax officer
has indicated that the ATO are seeking recovery of lost revenue from taxpayers because the
project managers are just too good at hiding the income.

   Documentation has been sent to some of our clients from following up a newspaper advert of
a company trading as Resolutions Holdings, a director of which is Mr Clive Ross previously of
the tax office. In this document he purports to offer a settlement on disputed tax debts which is
far better than available through other means. He refers to dealing with the tax office ‘at the
highest level’. If it is true that he can negotiate at a higher level and achieve a better outcome
than we could, then this amounts to preferential treatment of certain taxpayers and therefore the
tax office is not adhering to the principles of natural justice.

  In the Tax Ombudsman’s comments on self-assessment in the Main Camp report, he refers to
taxpayers’ ignorance of the system despite publicity and education by the ATO. We contend that
neither they nor their advisers are ignorant of the obligations of self-assessment, but many of us
disagree with the unfairness of the outcomes that it produces. The taxpayers took every
reasonable step to reassure themselves as to the deductibility of the project expenses and under
self-assessment they are required to do no more.

Tuesday, 20 March 2001                 SENATE—References                                    E 377

   Moving on to our second point, we would like to address the issue of participants’ control
over the management of the project. We have submitted already today a copy of the audited
financial statements of Base Metals which shows no income, no expenditure, no assets and no
liabilities for the two years to 30 June 1999. Despite inquiries of the manager, we have been
unable to obtain an explanation of where participants’ funds of $105 million have gone nor have
we been able to obtain accounts for the year to 30 June 2000. Furthermore, the income and
expenditure statements provided to participants to include in their year 2000 tax returns were
again mostly ‘nil income’ and ‘nil expenditure’. Copies of these were attached to our original
submission. This sort of reporting, we believe, is unacceptable. Under the management
agreement in the prospectus, the participants are permitted to discharge the manager but they do
not have the information in order to do this.

  These projects are being marketed to a wider public and not to a small group of well informed
investors. We therefore believe that participants should receive fully audited accounts similar to
those of a public company, including a consolidated report of that entire project that clearly
shows the use of all the funds that have been raised. In addition, a 14-day cooling off period
should apply, as is the case with some insurance policies, to allow them to discuss the proposal
with their accountant or other independent adviser.

  The tax office is attacking Base Metals because they contend that its financing arrangements
amounted to a round robin. However, on re-reading the prospectus yesterday, I cannot conclude
how potential participants would have been able to discern this. If the fault also lies in the
subsequent failure of the project manager to expend the sums received in the way it was stated
in the prospectus, then perhaps this amounts to misrepresentation—and again potential
participants could not have known that this would happen. Participants were not advised by
their financial advisers that they would not be entitled to deductions if their funds and
borrowings were not used in a tax deductible way. We therefore submit that there is inadequate
protection for participants in any such project.

   Referring to the ATO ruling 2000/8 paragraph 8, despite product rulings now being available
on those projects, the ATO will still deny a tax deduction claimed where the sums are not
expended in the appropriate way as stated in the prospectus. As the ASIC has changed the way
it handles prospectuses, there is a misconception that any prospectus registered with the ASIC is
approved by them. We have a letter to a potential participant that demonstrates how the
salesman has misused this misconception—and you have a copy of that. The public should have
the right to assume that a prospectus meeting all the requirements of lodgment with the ASIC is
acceptable to both tax and regulatory authorities, assuming that the use of funds as stated in the
prospectus is adhered to. There is a further failure on the part of the trustees of the project who
have been charged with protecting the rights and interests of participants in ensuring that funds
raised were expended in the appropriate way.

  However, individual participants are not in a position to recover damages from these entities,
having first to deal with the issue of a tax office aggressively pursuing them to return money
they do not have. The introduction of the product ruling system is welcome. However, the lack
of uncertainty over deductions being allowed which still exists, and the lack of adequate
reporting and control, will deter taxpayers from seeking to invest in the growth of the Australian
economy. That concludes my opening statement, thank you. We will take questions.

E 378                                  SENATE—References               Tuesday, 20 March 2001

  CHAIR—Thank you very much. You refer to a letter that you say has been used to
misrepresent ASIC’s role in registering prospectuses.

  Mrs McKay—There is a letter on a financial planner’s letterhead which you have there
which was sent to a client which refers to the prospectus having been submitted to the ASIC,
and the conclusion from that letter is that it is approved by the tax office also.

  CHAIR—Yes, that is right.

  Senator COOK—The word ‘approved’ is underlined in this letter.

  Mrs McKay—I believe that is right.

  CHAIR—With regard to the Northern Rivers project and the outline that you gave in respect
of their financial reporting that has not happened, I understood you said you have sought to
make contact, or have made contact with them.

  Mrs McKay—That is the Base Metals project I was referring to.

  CHAIR—Yes, Base Metals Exploration and Prospecting Project.

  Mrs McKay—Sorry, you referred to Tea Trees.

  CHAIR—There are so many of these things sometimes you get a little confused with names.
Yes, the Base Metals project. I understood you to say that you have endeavoured to contact
them, or have contacted them with regard to information with no success?

  Mrs McKay—Yes.

  CHAIR—What response was given?

  Mrs McKay—I will pass it to Murray; he has dealt directly with them.

   Mr McKay—We have had correspondence with the managing director of Base Metals and in
it he has endeavoured to explain how, on a unit-by-unit basis, $12,800 has been a tax deduction
per unit. In their initial newsletters the figure used was 9,899 participants, and in subsequent
correspondence that has been changed to 8,244. The $105 million that we referred to is arrived
at by multiplying the 8,244 participants by the $12,800. The project managers received a total
of approximately $33 million in October following the year of sale to the participants and, of
that, $6.6 million approximately would be interest, leaving $26.6 million in cash. In the
prospectus they refer to a contract to spend $18 million on exploring for gold and other base
metals. In late 1999, a newsletter was issued saying that there was a balance of $6 million worth
of cash, of which $3 million was going to be spent to buy out the remaining rights to the land,
and an independent report was prepared. The independent report actually states that the value of
the project left has now a likely value of approximately $1.1 million. So that $1.1 million, plus
the $3.6 million in cash left, leaves approximately $500 per participant out of the $12,800 they
invested in the first instance.

Tuesday, 20 March 2001                SENATE—References                                  E 379

  CHAIR—This is for a project that appears to me to have commenced in February 1998?

  Mr McKay—Yes.

  CHAIR—In your opening statement you made mention of the fact that the tax office had
declared ineligible the deductions claimed because of a round robin financing arrangement. Are
you aware of the structure of the round robin financing arrangement? Is it a non-recourse loan?

  Mr McKay—No, it is a fully recourse loan. The reason that the tax office give for it being a
round robin arrangement is that the participants own the shares to the finance company, and the
original details in the prospectus was that there were redeemable preference shares held by Base
Metals. The supplementary prospectus of which you have a copy subsequently changed that,
and now there is external finance through a Sydney mortgage company, Laton Corporate Pty
Ltd, I believe.

  CHAIR—Given the nature of the circumstances thus far, that in excess of $100 million has
gone west—or somewhere—north, south or east, I cannot understand the basis upon which a
supplementary prospectus would even be allowed to proceed.

  Mr McKay—The supplementary prospectus was issued in June 1998.

  CHAIR—Sorry, it was, yes.

  Mr McKay—One of the other things in there is a greater breakdown of how the $12,800 is to
be expended. That followed a phone call from me to the directors of the project asking for a
breakdown of the original figures— which you also have a copy of—because approximately 40
per cent of the funds were just given as sundry expenses.

  CHAIR—Just to go back to the issue of the round robin arrangements that were knocked on
the head by the tax office, you said they knocked them on the head because the investors were
shareholders in the finance company. Where did the money come from? Was it envisaged that
the finance money would be raised only as a result of the tax deductions?

  Mr McKay—That I do not know.

  CHAIR—One has to assume that the money would have had to come from somewhere?

  Mr McKay—Exactly. If participants are claiming $12,000 per unit and the prospectus is
showing that that is the amount of money that will be spent on the project—admittedly there is a
small profit element of I think $600—then one assumes that the entire monies will be spent in

   CHAIR—Yes. I am rather intrigued as to how if it had proceeded—it did proceed, I assume,
in the initial stages?

  Mr McKay—Yes.

E 380                                  SENATE—References                Tuesday, 20 March 2001

  CHAIR—When did the tax office knock them off?

  Mr McKay—We received the letters around March last year.

  CHAIR—So it proceeded with a round robin financing arrangement up until March or
thereabouts last year?

  Mrs McKay—That is what the tax office is claiming has occurred. We have been unable to
get the information. To return to your original question, we have faxed back and forward to the
project managers on numerous occasions on behalf of our clients trying to track down the
money trail and we have not received satisfactory answers.

   CHAIR—I am just trying to understand how you establish a full recourse loan on the basis
that you would have had to borrow the money from somewhere. I am saying this with limited
knowledge and only from what you have said, but how did they proceed to get funding in the
first instance? They had to do it by one of two means, I think: first, they had to borrow the
money; or, second, they had to wait for the deductions claimed to come in and actually become
the finance.

  Mr McKay—The $33 million in cash was initially financed through Base Metals, which was
a public listed company.

   CHAIR—Thank you. In terms of your submission and the criticism you make about tax
professionals and advisers, et cetera, do you think that there ought to be, in addition to some
tightening of the law in respect to their conduct, any underwriting—that is, public liability
insurance—for the advice that they actually give to investors so that there is a capacity for
investors to pursue these matters legally, and that that ought to form part of their licensing

  Mr McKay—I had always assumed financial planners would have public indemnity
insurance. It was just a natural assumption. Not being a financial planner, this is something I
just assumed.

  CHAIR—I am not fully aware of whether they do or not. It certainly seems it is very difficult
for anyone to take any course of action against these people—and likewise for promoters and

   Mrs McKay—May I also make the comment that the taxpayers have to lose first before there
is a loss that they can then pursue against other people, so they cannot take action against the
financial planners now because there are no damages to claim yet.

   CHAIR—Yes. If you were in the room earlier you would have heard me read out findings of
a report that alleged that very few of the schemes were successful and that ultimately people lost
their money. As you point out, there should be no loss to the revenue: what is claimed as a
deduction by one should be considered as taxable income in the hands of another. Given that we
know that there are many unsuccessful ventures, as you said, the law should be tightened, but
shouldn’t it also be the case that these things should be better underwritten than they currently

Tuesday, 20 March 2001                  SENATE—References                                     E 381

   Mrs McKay—Yes, we agree that there need to be tighter controls, and perhaps some form of
trust should be set up such as in the tourism industry so that, if there are losses incurred, then
the investors have the right of recourse against some publicly funded body or they should be
funded out of a levy on the project promoters and managers.

   CHAIR—I assume you may have looked at a number of prospectuses. One thing I have
noticed in many prospectuses is that, essentially for the same sort of product, they often have
totally different explanations for the product. Do you think it ought be the case that much of the
information that is required to be put in prospectuses ought be standardised so that it is more
easily understood by potential investors?

   Mrs McKay—No, I do not believe that is necessary. I believe that the public who are
investing in these prospectuses ought to be able to rely on the experts’ opinions that are
contained in there, and if the experts are wrong then they should be the ones who stand the
liability as well. An individual taxpayer should not be expected to have expert knowledge of
something that they are going into of this nature. It is a different scenario to investing in a small

  CHAIR—Why wouldn’t a prospectus company shop around for an expert opinion until they
got the expert opinion that they wanted?

  Mrs McKay—That may be the case. I do not have any knowledge of that.

  CHAIR—I cannot recall having read a prospectus that had an adverse expert opinion.

  Mrs McKay—That is because the ASIC would not accept it.

  CHAIR—So there is a real prospect of that happening?

   Mrs McKay—One would have to hope that a prospectus would not be accepted by the ASIC
if it did not pass the appropriate tests.

 CHAIR—Wouldn’t that cause the prospectus company to say to an expert, ‘Here are a few
more dollars if you write a favourable opinion’?

  Mrs McKay—I suppose, as you say, there may be shonks out there. I cannot really answer
that question.

  CHAIR—Thank you. Senator Chapman, do you have any questions?

  Senator CHAPMAN—They do have liability as they do in other things. People giving an
opinion are liable under the act. Going to your criticism of the conduct of some financial
planners, are they licensed financial planners or are they tax advisers, or are they simply
salesmen for the particular promoters of schemes? Who in particular are you referring to there?

  Mrs McKay—We have submitted the name in camera previously of the financial planners
that we are dealing with, and we understand that they are licensed financial planners.

E 382                                  SENATE—References                 Tuesday, 20 March 2001

  Senator CHAPMAN—Was this conduct widespread?

  Mrs McKay—I am afraid I do not know the answer to that. We only dealt with that particular
instance where we were asked to act as accountants for this particular financial planner.

  Senator CHAPMAN—From your experience, do you believe that this behaviour is
symptomatic of an aggressive tax planning culture within the financial advisory sector or is it
just pockets in the industry?

  Mrs McKay—I would imagine it would be quite prevalent.

  Senator CHAPMAN—We have also heard from various sources that among the more
aggressive promoters there is quite a deal of heavy networking together. Are you aware of that
sort of network operating?

  Mrs McKay—No, I am not.

  Senator CHAPMAN—Are you aware of any initiatives taken by the financial services
industry to address the sort of unscrupulous behaviour that you have identified?

  Mrs McKay—I understand that the financial planners have been subject to investigations by
the ASIC in the past, but we do not know the outcome of this.

  Mr McKay—I might add that we welcome the change to the designation of the financial
planning industry such that, with grandfathering provisions, people now all have to obtain
qualifications through the Diploma of Financial Planning. I take that to be a good sign.

  Senator CHAPMAN—You are talking about the CLERP 6 proposals that are to come in

  Mr McKay—Yes.

  Senator CHAPMAN—Do you believe that taxpayers are not sufficiently well informed
about the nature of the self-assessment system?

  Mrs McKay—Taxpayers rely on their advisers. From my experience, the accountants that we
deal with make their clients fully aware of the situation and, in our case, we certainly did advise
our clients that, when you claim the tax deduction, the tax office has the right to go back up to
four years and investigate. We make that clear both verbally and in writing at the time that we
send their copy tax returns to them.

  CHAIR—It is six years under Part 4A.

  Mrs McKay—We do not tend to refer to that, because we are assuming that our clients are
not trying to evade tax.

Tuesday, 20 March 2001                           SENATE—References                                     E 383

  Mr McKay—In relation to that, for the last two years that we were dealing with a financial
planner, we had all clients sign a declaration that they had gone into the project not for the
purpose of minimising tax.

  Senator CHAPMAN—Apart from the upgraded requirements that will be introduced with
the CLERP 6 reforms, do you believe that there are any other initiatives required to deter or
punish aggressive scheme promoters?

   Mrs McKay—We believe that the remedy is required more on the subsequent disbursement
of funds by the project managers. That is where I believe the main focus needs to be. It is not
that the prospectuses are in any way incorrect but, if they are not following through on what is
promised in the prospectus, then some measures have to be applied to the people who are failing
to adhere to those promises. That is why I believe the regulation should occur.

  Senator CHAPMAN—So the issue is the application of funds raised?

  Mrs McKay—I believe so. If they are not following what is in the prospectus then they are
misleading the community.

  Senator COOK—Earlier you referred to the audited accounts of the Base Metals Exploration
and Prospecting Project and, just to be sure on exactly what you are referring to in those, I have
in front of me your supplementary submission. On page 6 it has the audited accounts,
performance and distribution statement for the year ended 30 June 1999, and it states:

No revenue or expenses were either derived or incurred during the financial year.

For the statement of financial position as at 30 June 1999, it reads:

No accumulated funds existed at the end of the financial year.

For the statement of cash flows for year ended 30 June 1999, it reads:

No statement of Cash Flows has been made out, as application of Accounting Standard AASB1026. Statement of Cash
Flows would have no material consequence.

Is that what you were referring to?

  Mrs McKay—Yes, it is.

  Senator COOK—Can you tell us why your clients, as far as you are able to say this, got
involved in this and other schemes in the first place?

   Mrs McKay—They were looking for an investment to produce taxable income in the future.
They believed that, by investing in something that had been promoted to them by licensed
financial planners, they would be able to benefit from income in the future.

  Senator COOK—Let me ask you a harder version of that question. Were they looking to
minimise their tax or were they looking to make an investment?

E 384                                              SENATE—References                         Tuesday, 20 March 2001

   Mrs McKay—They were looking to receive a refund that they could invest in the business,
but the predominant purpose was to make a business investment which would produce income
in the future. That is what we discussed with all of them at the time. We made it very clear to
our clients that you cannot invest in something to gain a tax refund.

  Senator COOK—You made it clear that they should not invest in something for the
dominant purpose of gaining a tax refund?

   Mrs McKay—That is exactly what we said to them.

  Senator COOK—Without going into individual cases and you do not need to be precisely
accurate about this, can you give us a ballpark figure of what your clients stand to lose now?

  Mrs McKay—It varies very widely. We would have some clients with a tax debt in the
region of $2,000 to $3,000. Some of them may have tax debts as high as $150,000—there
would be a lot in that area.

  Senator COOK—Given your familiarity with your clients’ financial position, are they,
proportionate to their income and assets, large debts for them?

  Mrs McKay—Yes, they are. They mainly arose because they invested in successive projects
year after year. So it was not as a result of a one-off investment in one year, but because after,
say, 1997 they found that it was a successful way of investing. They then wanted one in 1998
and then 1999, of course, as well.

  Senator COOK—Looking at it from the point of view of your clients’ financial position,
how would you characterise that?

  Mrs McKay—In many cases it is absolute total devastation for them. It means the loss of
their home, the loss of their marriage. As we put in our earlier submission, there have been
marriage breakdowns because of this. I think probably the worst thing for them all is the
smudge against their character. They are labelled as tax dodgers and they resent it enormously.

   Members of the audience interjecting—Hear, hear!

  CHAIR—I know that this is emotional for all of you in terms of the context, but I would
appreciate it if we could, in terms of the clapping, et cetera, keep that to a minimum. Thank you.

   Senator COOK—As minimal clapping is approved.

 CHAIR—I know it does not take long to clap, but we do have some time constraints and we
would like to hear from the witnesses at the table.

  Senator COOK—In your written submission, No. 847, on page three and at point three of
your submission, the heading is ‘The ATO’s approach towards and role in relation to mass
marketed tax effective schemes’. You go on to say this:

It seems to us extremely unfair that the Tax Office are now offering a settlement to clients ...

Tuesday, 20 March 2001                           SENATE—References                                               E 385

And then that section runs on, and I am sure you are familiar with it, and states:

... Clients are now faced with the situation of having had their obligations to the deductions denied. Having been advised
of this in writing the Tax Office have the right to start immediate recovery action ...

As I understand what you are saying here, you make the point that effectively your clients are
being blackmailed into—I am trying to paraphrase your words; I am not expressing our opinion
about this—reaching a settlement which they do not want and which they regard as being
against their legal right for fear of this thing dragging on and the cost building up and, at the end
of the day, being faced with a bigger settlement. Is that what you were saying?

  Mrs McKay—Yes, Senator, that is very correct.

 Senator COOK—How many of your clients are you aware of that have reluctantly or by
whatever attitude gone down this route and started to negotiate or actually settled?

  Mrs McKay—I would like to pass this on to Val who has been dealing with this on my

  Ms Fitz-John—I do not know the exact figures but it would be somewhere in the region of
about 20 at the present time who have started down the road to settlement, and we have an
untold number who are still considering that.

  Senator COOK—And what was the attitude of those 20 to it?

  Ms Fitz-John—Their attitude is mainly one of resignation. They just want to get on with the
rest of their lives now. They want to put this behind them. They see this as being a finalisation
of the problem.

   Senator COOK—Let me ask you this other question. It may not be possible to give a very
clear answer to it but I will ask the question and see if there is one. Are these people in the main
that do not have the capacity to legally fight the case and therefore are writing it off because of
lack of means as the cheapest way out of the problem? Is that the sort of client that we are
talking about, or is it all sorts of clients?

   Ms Fitz-John—It is all sorts of clients but in the main it would be clients who are sick and
tired of paying out all the time to different legal firms, et cetera, for fighting funds, and they do
not want to keep on paying, they just want it finished.

  Senator COOK—Earlier I asked some other witnesses did they see any virtue in having the
tax office’s taxpayers’ charter brought into law as legally binding on the tax office and as a code
that they are required to live up to rather than as a set of principles they aspire to. Do you have
any view about that?

  Ms Fitz-John—It would be a very nice thing to have, but I think it took something like five
years for the present one to be written so I cannot imagine how long it would take to write a
legal one. I also think that it would cost in resources for the tax office if we legalise the taxpayer
charter, and you may also restrict the tax office in their efforts against taxpayers who are really

E 386                                  SENATE—References                Tuesday, 20 March 2001

rorting the system if they have to have laws whereby they have to apply before they can go
ahead and do something, perhaps. I would more like to see the special tax adviser to the
Ombudsman fully resourced, for the person in that position to be seen to be independent as well
as being independent, and being able to put to the parliament different penalties that the tax
office would have to apply.

   Senator COOK—That is a very useful answer because I do not know what is the right thing
to do here. I am trying to test it because if you were able to say, ‘We’re not going to get this
legally drafted; we’ll take what is there and legislate it as binding,’ you immediately run up
against the same problem that you are in now: it still costs taxpayers a lot of money to
prosecute. Then you build in, in order to reduce to reduce that cost, a bureaucratic system of an
Ombudsman or something such as that to filter out the easier matters. I do not know whether
you are just building a bureaucracy that has no real teeth at the end of the day and whether it
would be better to do something else. So you think the Ombudsman’s approach, as long as that
is more independent and seen to be independent, is a better approach.

  Ms Fitz-John—Yes, I do. I think the commissioner should be accountable to somebody other
than the parliament.

  Senator COOK—What is it about the Ombudsman’s role now that you would change?

 Ms Fitz-John—At the present time I do not think the Ombudsman has sufficient powers to
make the commissioner do anything. They can only report in parliament.

  Senator COOK—So you would actually make the Ombudsman’s conclusions binding on the

  Ms Fitz-John—Yes, something similar to that.

   Senator COOK—Are you aware of any other arrangement anywhere else in the world where
this applies, where there has been this sort of problem? I am not suggesting you should know.

  Ms Fitz-John—Thank you for that. No, I do not know of any other.

  Senator COOK—The problem for us in this inquiry to a large extent is how do you make big
institutions accountable and how do you properly regulate a very volatile field that has grown
almost overnight—or grown pretty rapidly—so that you have a safe enough distance from it
without overburdening regulation to enable it to achieve its optimum growth but also protect
people from being victimised or exploited in it? That is the classic problem of government. At
the end of the day we make decisions about these things and we are often accused of never
getting them right—and probably we do not—but we have to make a judgment, and your
experience of this I think would be invaluable.

   Looking at some of the points you made in your submission about the regulatory authority, I
think you made a remark that it was not at all clear to people reading, or looking at, some of the
prospectuses for the first time as to what was the nature of the scheme that they were being
invited to join. What changes would you make to ASIC, if any, that would give them the power
to make that information obvious to anyone who was a consumer?

Tuesday, 20 March 2001                  SENATE—References                                    E 387

   Mrs McKay—If I could just go back a bit there because I do not quite agree: what I was
trying to say was that, on the whole, the participants in these ventures—if I can take the case of
Base Metals, a lot of the people who invested in that particular one were miners and they
invested in it because they had—

  Senator COOK—That is miners as in ‘er’ not ‘or’?

   Mrs McKay—Yes, underground miners—high wealth individuals who have had a
knowledge of the industry but, even with that knowledge, they could not be expected to
understand the financing arrangements in there. That is why they have to rely on the experts,
such as the investigating accountant’s opinion that is in there. As I said before, I do not honestly
think there is anything wrong with the prospectus as it stands. It is a reasonable document; it
does meet the existing legislation requirements. It is the post-operative, if you like, that is the
problem. There is no control over what happens afterwards.

   CHAIR—How do you deal with the issue of growth projections, yield projections and
returns, et cetera?

  Mrs McKay—There is really no difference between that and a company that puts up a
prospectus to be listed on the stock exchange. They are all projections as well and they all have
to have an investigating accountant’s report to check that the calculations and the assumptions
are reasonable. But the follow-up to that—

  CHAIR—But ASIC does not do that—

   Mrs McKay—No, I am saying that the investigating accountants do that. Their role in the
prospectus is to ensure that the assumptions and calculations are reasonable. Thereafter, with a
listed company, you have quarterly results on the stock exchange that makes them keep to their
projections or account for it if they do not. You do not have that, for example, in a joint venture
project that has no identifiable legal entity—it is ungoverned. I do not think our existing legal
structures appropriately monitor that kind of entity.

   Senator COOK—On this point, if you can carefully take me through it: what would you do
if you had the power to make sure that that loophole was covered?

  Mrs McKay—I would requisition consolidated financial reports on a regular basis so that
they were required to state what has happened to all of the funds that have been invested and to
show clearly that they are abiding by what they stated they would do in the prospectus. Nobody
expects them to make a profit every time. I know this has already been said today several
times—you cannot go into business and guarantee that you will produce a profit for your
investors. But they must aim to do what they say they are gong to and, if they do not, then there
must be appropriate consequences and penalties for the project managers.

  Senator COOK—Would you suggest to us that we should consider a recommendation along
those lines?

   Mrs McKay—I would like it very much if you did. May I make one more comment to

E 388                                  SENATE—References                 Tuesday, 20 March 2001

   CHAIR—I just have one more question relating to your response. How would you do that in
the case where, for instance, like your metals project, there may be no money against which any
claim can be made?

  Mrs McKay—But the money must have gone somewhere.

  CHAIR—That is true; it must.

  Mrs McKay—It has not vanished—somebody has it.

   CHAIR—I think there is plenty of evidence to suggest that not many people know where a
lot of the money has gone, including the Australian Securities and Investments Commission. I
am saying, insofar as taking account of what you say, you should have a process which has a
regime of penalties for people if they do not do what they said they would do in respect of the
prospectus reportings, but if there is no money there, because the money has been taken
offshore or people have disappeared, how would you deal with the circumstances? The
investors would still confront the same problem.

   Mr McKay—What would happen if a director of a publicly listed company did that? The
situation is the same—or it should be the same.

  Senator COOK—They are liable.

  Mr McKay—They are personally liable. These are basically public entities and they should
be treated as such.

  Senator COOK—Are you suggesting to us that we should make a recommendation along
those lines?

  Mr McKay—Yes. That would include all the reporting of a public entity.

   Senator COOK—This is my final group of questions. In Kalgoorlie yesterday, we had a
roving microphone in a very big, well-attended meeting. A lot of people who were investors got
up and made speeches about their personal circumstances. Those personal circumstances, as I
characterised earlier—and I do not know if you were here then—came as a cry from the heart
about how they were trying to plan for their future and how they did not expect to get caught
like this. Now they are, and they are stigmatised as tax avoiders. That was not their intention;
they were doing prudent things to protect their future livelihood and that of their families. That
is how they saw what they were doing. Some of them went to the trouble of bringing personal
references about their good character, their role in the community and their history of
community service to prove that they are front and centre nice people.

   After hearing all the stories, the first thought in their head was, ‘If it sounds too good to be
true, it probably is and we shouldn’t do this.’ What they said swung them on the deal was that,
when they looked down the page and they saw professional accountants or lawyers signing off
on this and saying that this was kosher, they said that it must be all right, and then they moved
into it. That places on the professions that advise in this area a huge weight of responsibility to
maintain a proper standard of ethics and good conduct. Is there anything that you would like to

Tuesday, 20 March 2001                 SENATE—References                                   E 389

say to us about how you see the profession’s ability to deliver that and whether there are any
checks and balances that we should consider?

  Mrs McKay—The first comment I would like to make is that I believe they are correct and
they did the right thing. They have done nothing wrong. They had every right to invest in those
projects. If what had been in the prospectus was done, they should have been entitled to their
tax deductions, and that was on that basis.

  Senator COOK—So the advice was right?

  Mrs McKay—We believe so. As for the second part of your question—what accountants
should do and bear as responsibility—going back to the self-assessment rules, I think it is
reasonable to expect that any accountant would make that information available to their clients,
and I believe that is done. Most people do understand self-assessment. However, I have to say I
do not agree with self-assessment as a system. I think it produces unfair outcomes. I think that
you should have certainty over whether or not you can claim something. That is where I believe
there is a major fault. We set the standard in this. Britain followed us in self-assessment, and
they are now in the same situation—when you lodge your tax return, you do not actually know
whether what you are claiming is going to be allowed, and it is not fair.

  Senator COOK—And if you get caught out later you are in double jeopardy.

  Mrs McKay—You have penalties and interest, even when you have done everything you
possibly could to ensure that you were doing the right thing.

   Senator CHAPMAN—Mr McKay, you indicated earlier that there was a need to impose on
the promoters, directors, of these schemes the same sorts of provisions that apply to companies
in terms of financial reporting and personal liability. Correct me if I am wrong, but I understood
that when the Managed Investment Act came into place those sorts of responsibilities were
placed on the single responsible entity.

  Mr McKay—To a large extent those have been implemented. However, for businesses such
as the one that we have been talking about today, there is a grandfathering provision which they
are claiming. I have not personally checked whether they are correct in doing so, but they claim
that they are not required to have a responsible entity prior to the year 2003.

  Senator CHAPMAN—So they are avoiding that responsibility in that way.

  Mr McKay—Absolutely.

  CHAIR—I thank you for the written submissions and the additional information that you
have provided to us, and for your attendance here today. Your information and evidence will be
quite useful.

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[3.06 p.m.]

NORTON, Mr Richard Stanley, Partner, Norton and Smailes

  CHAIR—Welcome. We have not received a submission from you and I understand you do
not wish to make any opening statement, so we will proceed to questions. What was the basis
for your opinion that claimed the deductions in the Oracle scheme were legitimate?

  Mr Norton—The basis was the case law which applied to deductions under similar schemes
in the past, a review of the legislation and an understanding and experience of the
commissioner’s treatment of similar schemes at the time.

  CHAIR—Can you give me some examples of the case law to which you refer?

  Mr Norton—I could not remember all cases, but there was Lau’s case, Emmakell’s case and
Brand’s case. There would be numerous others.

  CHAIR—Can you tell me, in respect of the Lau case, for instance, how the findings support
the Oracle scheme?

  Mr Norton—It is a long time since I read Lau’s case and, in fact, it is a long time since I read
Brand’s case. The sorts of arguments which were raised by the commissioner in Lau’s case are
very similar to the sorts of arguments which one applied one’s mind to at the time in looking at
these investments—namely, that the taxpayer could not be carrying on a business because there
was a manager who could be appointed. From memory, in the Oracle case, the appointment of
the manager was optional. That was one of the issues raised in Lau’s case. There was also the
argument that the expenditure was of a capital nature, not of a revenue nature; that prepayments
were not incurred when they were paid; and that expenses were not incurred when contracts
were signed. Those are the sorts of issues which our firm anticipated might be the questions
which one should ask in evaluating this information memorandum.

  CHAIR—Did you qualify the opinion that you gave?

   Mr Norton—I am not sure what you mean by that, but I have a copy of the opinion here. We
certainly pointed out that the opinion was based on the assumption that matters would proceed
as outlined in the information memorandum. We stated that we could not be taken to know
anything about that and that we were not predicting that they would so proceed. We stated that
if the commissioner took a different view to ours that he could impose penalties and disallow
the deductions, and we also stated that the tax law and its interpretation and practice was a
matter of considerable complexity. This was in 1997—and, looking back, it actually seems
relatively simple compared with what it is today.

  CHAIR—Would you be prepared to provide the committee with a copy of the opinion?

  Mr Norton—Certainly. The copy I have with me has a few handwritten marks on it but I
could get one from the actual information memorandum.

Tuesday, 20 March 2001                 SENATE—References                                    E 391

  CHAIR—That would be good. Do you still believe that the deductions are allowable despite
the ATO’s action against the scheme?

  Mr Norton—I believe that, and I believe that the tax office at one stage was taking a similar
view in the course of their audit of Oracle. In fact, I remember being in the Oracle offices in
Sydney at some stage when the tax office was auditing it, and the tax officer in charge of the
audit said to someone from Oracle, ‘It is pretty clear that there is certainly substantial business
being carried on here.’ This was some time after the information memorandum. That position
seems to have changed because it is certainly not reflected in their subsequent position paper, in
which they took the view that there was no business being carried on.

  CHAIR—With the assistance of hindsight, do you believe that Oracle was a scheme that
pushed the boundaries of the law to the limit?

   Mr Norton—Not at all. Based on the information memorandum—which is all that I had seen
at that stage—I thought it was pretty straightforward.

  CHAIR—As I understand it, Oracle no longer exists as a company.

  Mr Norton—That is not my understanding.

  CHAIR—Would you be able to assist the committee with any information as to how we
might be able to contact them?

   Mr Norton—Certainly. I could give the committee their contact details, and will do that at a
later date.

  CHAIR—I appreciate that.

  Senator CHAPMAN—I understand that, as well as doing so for Oracle, you provided the tax
opinion for a scheme that has received a tax office product ruling.

  Mr Norton—’Project’ is my preferable word.

  Senator CHAPMAN—Project—whatever you like.

   Mr Norton—I am not 100 per cent sure that I identified all the opinions we have provided
but I certainly think we have identified all of those that we have put in information memoranda
or prospectuses. The opinions we provided were for Oracle. We provided another one for a
project, which was not the subject of a product ruling, called the Austvin project. That is a
project promoted by a public company growing grapes in South Australia. I think that company
was subsequently taken over by Simeon wines, which is a publicly listed company. I have heard
that the investors in that project have been notified by the tax office that the deductions will be
disallowed, notwithstanding the fact that grapes were being grown and, as far as I know,
harvested. I have also been told—without knowing myself—that matters have in fact proceeded
in accordance with the prospectus but that there was a so-called limited recourse loan involved
in it, and for that reason they have apparently treated them with the same broad brush that they

E 392                                  SENATE—References                 Tuesday, 20 March 2001

have treated other projects. In addition to that, we provided an opinion for a project which has
had a product ruling to a company called Plantation Equity Services Ltd. Their project is known
as the West Coast Paulownia Project No. 3, and they have had, I think, at least two
prospectuses—or one subsequent to the other.

  CHAIR—Do you know when they received their product ruling?

   Mr Norton—I do not know. I think the product ruling had not yet been received when we
gave our first opinion, but when we gave our second opinion it had. I think the first opinion was
in April 1999 and the subsequent opinion was in February 2000. I think the product ruling was
issued some time after 26 May 1999.

  Senator CHAPMAN—Does that project differ significantly from Oracle?

   Mr Norton—In structure and with the benefit of all the sorts of things that the tax office says
about similar projects, the difference is probably confined to the financing. The tax office would
say that the paulownia project is full recourse financing and they would say that the Oracle
project is limited or non-recourse financing. Apart from that, the opinions were given at
different times. In the one that we gave to the paulownia project, we referred initially to the
1997 draft ruling, and possibly that had become finalised. We referred to that draft really and
apart from that, in essence, there was not a great deal of difference.

   Senator CHAPMAN—Do you believe there is an inconsistency on the tax office’s part, in
effect, allowing that later project, the paulownia project, but disallowing the Oracle project? Or
does the difference in financing make it sufficiently different that they are justified in taking a
different position?

   Mr Norton—In my view the difference in financing should not justify a different position. I
am not aware of any suggestion that it should. In fact, even in the commissioner’s draft ruling, it
is not stated that the existence of limited recourse financing is something which will itself cause
deductions to be disallowed. The commissioner in the draft ruling and in the ruling said that it is
just something that they will look at, as they will look at many other factors. By no means have
I surveyed this in nearly as much detail as perhaps some of your other witnesses, but as far as I
know, they are not acting in accordance with that ruling. They are disallowing deductions across
the board as soon as there is limited recourse financing.

  Senator CHAPMAN—Do you have any involvement with any of the investors or the
projects in the dealings they have had subsequent to these rulings with the tax office or any of
the preparation for court cases, or anything of that nature?

  Mr Norton—We are not involved in preparation for court cases; we have been involved in
drafting objections for other projects. I do not think we have drafted objections for any of these
projects. We have given advice to Oracle subsequent to the raising which took place.

  Senator CHAPMAN—You indicated that the paulownia project and the Oracle project were
only different in relation to the financing structure. What is your view of the position by the tax
office as expressed in tax ruling TR 2000/8 in June 2000 with regard to non-recourse funding
and round robin funding arrangements?

Tuesday, 20 March 2001                 SENATE—References                                   E 393

  Mr Norton—I am sorry, I am not sure that I understand the question.

   Senator CHAPMAN—Do you agree with the tax office’s view that non-recourse funding
and round robin arrangements do not, in fact, exclude a project from a tax deductibility

  Mr Norton—I do not think that is the view that they express in TR 2000/8. I certainly agree
that the existence of round robin financing and limited recourse financing should be taken
account of in evaluating overall the tax consequences and particularly the commercial
consequences. The existence of financing of that nature is largely the reason why we almost
always never advise clients to enter into projects such as these, the reasons being from a
commercial point of view rather than from a tax point of view.

  CHAIR—But you did give a positive opinion in relation to Oracle. Did that not have this sort
of finance?

  Mr Norton—We gave an opinion that the expenses referred to in the opinion were tax
deductible. We certainly did not give an opinion that it was a good thing to invest in.

  Senator COOK—Have you been surprised at the attitude of the tax office, given your
reading of the law?

   Mr Norton—With respect, that is a very broad question. The tax office’s attitudes have
progressed as time has gone on in relation to what they call aggressively marketed schemes
from mild disapproval and auditing, and one would expect them to have done that, to a blanket
rejection of all of what they see as aggressively marketed schemes, not only in relation to
agricultural projects or managed investment projects but also more recently with things such as
controlled superannuation schemes where they have issued rulings and seek to go back on those
rulings. The view of the tax office today to research and development syndication appears to be
markedly different from what it was when they were issuing so-called binding private rulings in
the mid-1990s. I suppose it is not surprising how it has evolved. If you asked me in 1997 would
we reach the stage we have reached now I would have certainly been surprised.

  Senator COOK—Are you saying that at the time you gave your opinion about some of these
schemes you did not anticipate that it would evolve to this attitude from the tax office that we
are now witnessing today?

  Mr Norton—Yes. I did not anticipate what appears to be a blanket indiscriminate rejection of
the managed investment tax deductions.

   Senator COOK—Would you then identify the issue of what you have phrased as the blanket
rejection of deductions as being the issue that was not anticipated originally, or are there other
ones as well?

   Mr Norton—I think it is the major issue which was not identified. It has been the tax office
attitude which is the major issue.

E 394                                   SENATE—References                 Tuesday, 20 March 2001

  Senator COOK—That is the major issue, but are there any other elements of their approach
that you would identify as different from what you would have anticipated?

  Mr Norton—No. If we are talking about the attitude of the tax office, that is the major
surprise, the major unexpected and unforeseen situation.

  Senator COOK—In view of that, what would you advise now? If you were presented with
one of those schemes now, being aware now of the approach being taken by the tax office, what
would you advise?

   Mr Norton—In respect of these projects which were not the subject of product rulings, of
which there were two—one is Oracle and one is Austvin—the advice I would give now would
be, based on case law and the reading of the legislation and even on tax office ruling TR 2000/8,
the expenses should be deductible. However, it is a matter of fact that the tax office will
probably seek to disallow the deductions. So instead of saying that there was a possibility that
the tax office might seek to disallow the deductions, we would say that there was a certainty that
the tax office would seek to disallow the tax deductions. Apart from that, there has been a little
bit of case law since then such as the Merchant case. The Brand case was already decided. The
Merchant case has basically confirmed our opinion as being correct in my view. I could not
really as a lawyer advise any differently.

  Senator COOK—As a lawyer giving an opinion on these schemes, did you ever later on
become an investor in any of them?

  Mr Norton—Certainly not.

  Senator COOK—So you did not put some of your own money in?

  Mr Norton—No.

  Senator COOK—Yesterday in Kalgoorlie we had representatives of a law firm appear before
us and they canvassed a wide range of issues. I will not go through them now. We also had
before us a letter from a QC whom the committee had asked questions of. The QC had
essentially replied, as I recall it, that the company that was marketing one of these schemes was
not his client; that the solicitors that briefed him were his clients; and that the information being
sought was legal professional privilege between him and his client—that is, the briefing
solicitors. He did not address in his letter the fact that his advice was later on used in a
prospectus. My understanding is, and you might wish to confirm this, that he is right in saying
that his client is the solicitor and not the firm that briefed the solicitor that sought the QC’s

   Mr Norton—I am always very cautious about giving legal advice without having a chance to
refer to the authorities and consider the issues, but there is a substantial and widely accepted
view that the barrister’s client is the solicitor and no-one else. There have been some
developments in the area of negligent advice, particularly in the eastern states. The NRMA case
is probably the most recent one.

Tuesday, 20 March 2001                   SENATE—References                                     E 395

  Senator COOK—If I were to promote a scheme and if I briefed you, then you would go and
get a QC’s opinion and come back and tell me and, if I were to publish that opinion, the client
of the QC is you and not me. Is that the way it works?

  Mr Norton—There is a substantial body of thought that says that is the case, although there
might be people who would argue about that.

  Senator COOK—So it is contestable?

  Mr Norton—I think so. It depends on what you mean by client as opposed to who is paying
him—that is well known; that is the solicitor.

  Senator COOK—The solicitor is paying him.

 Mr Norton—Who does he owe a duty to? That is more debatable, as was shown in the
NRMA case.

  Senator COOK—I am trying to wrap a layman’s head around this. It seems to me that, if the
opinion is obtained for the purposes of putting on to promotional material or on to a prospectus
then, irrespective of the route by which it is obtained, the purpose for which it is obtained
indicates the direction of the duty of care.

  Mr Norton—Do I agree with that; is that the question?

  Senator COOK—That is the question.

  Mr Norton—Again, there have been recent judicial pronouncements that say counsel have a
duty of care to people other than the solicitors briefing them. It certainly was not the solicitors
who were suing counsel in the NRMA case.

  Senator COOK—Thank you, Mr Norton.

   CHAIR—Mr Mark Leibler, who is considered to be an eminent tax lawyer, has stated to this
committee that, in large measure, the flourishing of these mass marketed schemes can be
directly attributed to bad professional advice. In particular, he criticised tax practitioners for not
advising their clients of the potential risk of the ATO moving against mass marketed
arrangements. What is your view about that?

   Mr Norton—From a personal point of view, we did so advise everyone that in our opinion
there was that potential. From the point of view of a general comment on Mr Leibler’s general
comment, I would have thought that a cautious lawyer would have advised that there was a
prospect that the tax office would move to disallow deductions. I would have thought that it
would be by no means remarkable if a lawyer had left that part out of their opinion, given the
state of the law in 1997. I would disagree with Mr Leibler—Mr Leibler has been around a very
long time in Australian tax law and he has lived through many so-called tax avoidance waves.

  Senator COOK—We keep seeing him at our committee.

E 396                                  SENATE—References                Tuesday, 20 March 2001

  Mr Norton—I am not sure where he stood on some of the earlier ones and where he stands
now, other than what I have read in the press. I do not know the gentleman, although I am
obviously aware of who he is.

  CHAIR—I thank you for that comment. Mr Norton, I thank you for appearing before the
committee today and responding to the questions that we have asked of you. I think you
indicated earlier that you might be able to provide us with a copy of the opinion that you gave in
respect of Oracle, and that would be appreciated.

  Mr Norton—And the contact?

  CHAIR—Yes, and the contact, which we seem to having a little bit of difficulty with. We
greatly appreciate it. Thank you.

Tuesday, 20 March 2001                   SENATE—References                                     E 397

[3.31 p.m.]

ATKINSON, Mr Stephen Lee, Partner, Wilson and Atkinson

WILSON, Mr Frank Cullity, Partner in Charge of Tax Division, Wilson and Atkinson

  CHAIR—Welcome. You have provided the committee with a brief written submission. Do
you wish to make any opening statement in addition to it?

  Mr Atkinson—Yes, we do. Wilson and Atkinson currently represents more than 8,000
investors in over 25 projects. These investors have more than $1.4 billion in tax deductions
disallowed by the ATO. Our firm currently has six cases in the Federal Court to challenge the
ATO’s disallowance of tax deductions in these projects. A further six cases are currently being
prepared to go before the Federal Court, and a number of cases are currently lodged with the
Administrative Appeals Tribunal. It is anticipated that a trial date for the first case will be in
August this year.

   Our firm has always believed that the decided case law on this entire matter indicates that the
ATO may be completely wrong and unjustified in its actions to disallow taxpayer objections.
The majority of previous cases decided up to this point in time in the Federal Court in respect of
similar types of projects have subsequently found like deductions disallowed by the ATO to be
valid and allowable. In these circumstances, our firm believes that it is unconscionable for the
ATO to seek recovery action pending the outcome of these test cases which are imminent and
likely, in our opinion, to be successful.

  CHAIR—Mr Wilson, do you wish to make any comments?

  Mr Wilson—No.

  CHAIR—We will proceed to questions. Can you tell the committee the names of the
schemes or projects for which you have provided tax opinions. Can you also tell the committee
whether or not all of those schemes have been disallowed by the ATO.

  Mr Wilson—I have not come prepared with the number of tax opinions we have given over
the last 10 years in relation to tax affected projects. However, I can tell you that I can read out to
you the 25 projects that we are currently representing. I can tell you that, in relation to one of
those, we were the solicitors for the project manager and we have subsequently been engaged
on behalf of investors in relation to that project. We did not actually give the tax opinion for the
project. That was provided by two QCs—one from Melbourne and one from Sydney.

  CHAIR—I would still like to know about the tax opinions that you have provided for a
number of schemes, and maybe I can bring it forward to 1995. Perhaps you can provide us with
any information as to whether or not all or only some of the schemes or projects for which you
have provided tax opinions have been disallowed by the ATO.

  Mr Wilson—A very small proportion have been disallowed by the ATO.

E 398                                  SENATE—References                 Tuesday, 20 March 2001

  CHAIR—Are you able to identify the number? If you wish to do that on a confidential basis,
you may.

   Mr Wilson—I would probably prefer to do that on a confidential basis, for the sake of the

  CHAIR—Yes. In your submission you make reference to a decision of the full Federal Court
of Australia which goes to the Lau case and which you claim deals with the issue of limited
recourse loans. Could you elaborate on that particular case for the committee? As you then
proceed to allege that that set the law, could you also elaborate on your written submission as to
how the Lau case relates to IT2195 in 1985, fill out your argument with regard to why the law at
that time, as it appears is the case, should continue through, and, as much as you can, inform us
of your argument about why the tax office is wrong.

   Mr Wilson—I think Lau was decided by the full Federal Court in 1984, and that case
involved limited recourse financing and a project that was a commercial failure. The full
Federal Court found in a unanimous judgment that, notwithstanding the arguments run by the
ATO in relation to limited recourse financing, the fact that excessive fees were allegedly
charged and the fact that the project was a commercial failure, the investor concerned was
entitled to his deduction under section 51(1), which is the precursor to section 81 that we now
live with.

  Following Lau’s case, there were subsequent cases decided by the Federal Court. In
Emmakell’s case, which was a failed tea tree project, similar arguments were run by the ATO.
Brand’s case, which I think was in about 1995, was about a failed prawn farming project. In that
case, the investor actually paid cash, but similar arguments were used concerning the lack of
commerciality and the excessiveness of the fees, and the full Federal Court found that Mr Brand
was entitled to his deduction.

  Following that, in February 1999, in Merchant’s case the Federal Court found that there had
been an investment in a failed pine plantation project which involved round robin limited
recourse financing. The court actually found that the round robin had not gone around and no
funds were actually advanced and that the investor was entitled to a deduction and was carrying
on a business under section 51(1).

   They are four cases of the full Federal Court that, in our view, have clearly confirmed that the
ATO is wrong. I might add that in none of those cases did the ATO run part IVA, which they are
running in these cases, but I can say that in relation to Merchant’s case, part IVA was raised by
the ATO and dropped before we got into court. Our firm actually represented the taxpayer in
Merchant’s case. In Lau’s case, which was run before part IVA was implemented in 1981, even
though the case got to court later, the ATO sought to run section 260, which was the precursor to
part IVA, the general anti-avoidance section. I cannot be quoted on this, but they either
withdrew section 260 or it did not get up. In our view there are sound reasons why we and
others believe that the ATO are wrong in their view. I listened to the evidence of Mr Norton and,
if I were asked to give an opinion now, I would say exactly the same thing; that is, with those
ingredients, a deduction is allowable under the law, but with quite unequivocal certainty that the
ATO will disallow—that is, if you involve limited recourse financing in a round robin.

Tuesday, 20 March 2001                 SENATE—References                                   E 399

  CHAIR—Would it be the case, then, that for most legal practitioners in looking at
prospectuses and in providing tax opinions that they would base their opinions around those
same sorts of matters? Would they take into account case law?

   Mr Wilson—In giving an opinion, whether it is in a prospectus or not, you would ordinarily
as a lawyer take into account decided case law based on the legislation itself. You would look at
the legislation itself. You would look at ATO public rulings. You would take all those matters
into account.

  Mr Atkinson—You would also base it on the assumptions given to you by the promoters in
the project in terms of what they are going to do.


   Senator CHAPMAN—I asked you this morning in relation to those clients who had relied
on your opinion when making their investments that you are now representing in actions
relating to the tax office whether you were prepared to take that work on their behalf on a pro
bono basis or, if not on a pro bono basis, on what I would in layman’s terms call a success fee
basis. I am not sure that I generally support that sort of activity on the part of the legal
profession because I think that leads to a litigious society, but I think in this case that is
something that might be considered by those who gave advice on which investors relied and
now find themselves in this situation.

  Mr Wilson—I was not here this morning. Unfortunately I think you have a flawed
assumption, and that is that we gave advice to Servcom in relation to their tax status. We did

  Senator CHAPMAN—To whom did you give advice?

  Mr Wilson—We did not give advice to any people or promoters in Servcom before it was
marketed and sold. We gave no advice whatsoever in relation to Servcom until the ATO and
other law enforcement agencies, I understand, raided Servcom. Some Servcom representatives
came to us and asked us whether we could assist them. We had nothing to do with it.

  Senator CHAPMAN—Thank you for that clarification. Are there any projects on which you
did give tax advice that you are now representing in any of their dealings with the tax office?

   Mr Wilson—There is one in that list out of the 25. I feel no obligation to do work on a
success fee or pro bono basis or whichever way you choose to put it. At the end of this matter I
firmly believe that our opinion will be vindicated and that we will be found by the court to be
correct. I would assess any position after that.

  Senator CHAPMAN—The tax office seems to have adopted a blanket approach to these so-
called mass marketed schemes to the extent that if there are any differences between them they
are only relatively minor variations in relation to both the projects and the circumstances of the
investors or participants. What is your opinion of the ATO’s view in that regard?

  Mr Wilson—In my view they are wrong.

E 400                                    SENATE—References                 Tuesday, 20 March 2001

  Senator CHAPMAN—If you believe they are wrong, what differences do you think they
should be taking into account?

   Mr Wilson—They have adopted in my view a blanket approach. If you look at position
papers which the ATO issues in relation to projects which they disallow you can essentially
change the name, insert the name of the new project, and you will come up with all the same
reasons and all the same factors and all the same accusations. There does not seem to be a
sufficient degree of discrimination in their audit approach to the projects in my view. Some of
the projects which I think Mr Norton has referred to—and there are many others—are currently
existing and producing and are very commercially viable. Others are not; they have failed for
different reasons. I believe some of the projects have actually failed because of intervention by
the ATO.

  Mr Atkinson—I would like to add to that and to my comments this morning on the use of the
position paper. This is really the first indication to anyone that the tax office is going to disallow
deductions in the relevant project. They are very standard documents and I think the evidence
that was submitted this morning backs that up. The relevant point to also make is that the sheer
number of disallowance that the tax office has done in the last 18 months in terms of resources
indicates that it would be a physical impossibility on their part to do an independent and
detailed examination of each project on its own merits before proceeding to disallow the
deductions. And we believe this should occur in every situation.

  Senator CHAPMAN—Have you been involved in seeking product rulings since the new
approach? I was not quite sure whether that was covered. And have you been successful in
gaining positive product rulings in relation to any projects?

  Mr Wilson—Yes, in quite a number.

  Senator CHAPMAN—How do those projects differ in any way from the projects that are
under attack?

  Mr Wilson—To put it simply, the financing arrangements.

  Senator CHAPMAN—So it is all to do with the non-recourse loans and the round robin

  Mr Wilson—Yes.

  Senator CHAPMAN—Could you just clarify the difference in the new funding
arrangements with the new projects; all those projects have received positive product rulings?

  Mr Wilson—You will not get a product ruling unless there is a full recourse loan and the
funding comes from, in most cases, a source independent from the promoter.

  Senator CHAPMAN—So it will still be accepted under a loan arrangement—

  Mr Wilson—Yes.

Tuesday, 20 March 2001                  SENATE—References                                    E 401

  Senator CHAPMAN—but there has to be full recourse available to the debt?

  Mr Wilson—Yes. In fact, under a product ruling financing arrangement, you will often see
an argument run by the ATO that the leverage to tax deductions is so high under the limited
recourse arrangements that you put in $10,000 in cash and you get a $30,000 deduction,
something like that. Under a product ruling project which has funding which is approved by the
ATO, you can get an interest only loan from the bank and put in no money and get a $40,000
deduction and pay interest only. So in fact the leverage from the funding arrangements which
are approved can be significantly greater than that which is being disapproved by the ATO in
these projects. Obviously, the difference is that you have to repay the $40,000.

  Senator CHAPMAN—You have liability for the $40,000.

  Mr Wilson—Yes; but there is much greater leverage available under the new projects
available than under some of the old ones.

  Senator CHAPMAN—What is your attitude to the current regulatory framework as in place
through the management and investment act, the Corporations Law more generally and
particularly the coming CLERP legislation that will relate to investment advisers and so on? Do
you think that is adequate or do you think there are holes in that that need tidying up?

   Mr Wilson—I cannot comment so much on the financial advisers; that is not my field.
Certainly it is a very highly regulated, perhaps overly regulated, field. It is regulated by the
ATO; it is regulated by ASIC in some detail. What everyone wants to see are successful projects
that benefit the country. But I think if you put the microscope on other business ventures that
start at the grassroots, such as mining exploration, generally the capital is raised on the stock
market. If you look at the failures and successes, I think you would find that the managed
investment projects stack up quite well. I do not think it requires any more regulation than any
other form of what is effectively capital raising.

  Senator CHAPMAN—What effect does the removal of the 13 months rule have on these

   Mr Wilson—It has not had a great effect. It means that the services have to be provided in
the same year that you get the tax deduction. It has meant that projects effectively have been
brought forward so they are marketed early in the financial year right up to the end of the
financial year. I do not think it has had a great effect on the projects.

  Mr Atkinson—Just on that point, I would like to reiterate my comments this morning: with
respect to what people describe as the less desirable elements in these projects, I believe that the
solution lies in the Corporations Law through the duties that directors have in public companies
to their shareholders and investors and also through the duties that financial advisers have to
properly and completely advise their clients in respect of their investments before they go into

  As I said this morning, I do not believe that the way to try to remedy the fraudulent or bad
projects is through a tax solution. It really is quite separate. The tax relates to the investors
insofar as it relates to the promoters and how they handle the income they receive—that is a tax

E 402                                            SENATE—References                        Tuesday, 20 March 2001

question. In terms of the promoters or directors in companies making representations, whether it
be forecasts or fees or justifying those fees or advisers who put people into these projects, that is
a corporations issue. It is not a tax issue. To the extent that the tax office would have you
believe that in some implied way they can control that, vet that or cure that by doing what they
have done in the last two years to participants in the projects by disallowing their deductions,
we as a firm believe that that is not the way that you do it. We believe that is a fundamental
distinction that should be made today.

   CHAIR—Just on your last comments, do you think that maybe the ATO and the ASIC ought
to work more closely together in determining their courses of action in respect to those things?

   Mr Atkinson—No, I do not, because they have different charters and different roles to play.
If they in a general sense worked more closely together, to me the danger is that that would
increase the risk of this problem that seems to be a theme throughout the last few years with
managed investments. Under their respective legislation, the tax office and ASIC have quite
clear and distinct charters. They are separate and I think they should remain separate; otherwise
you will have a blurring of their responsibilities in situations like this. I believe that the clearer
their responsibilities are and the clearer they operate within their jurisdiction, then the more
likely it is that the remedies that are available to both those respective organisations—the tax
situation on the one hand, and the Corporations Law and the compliance on the other hand—
will be met. If you try to have a marriage there, you blur the distinctions, and we believe that a
lot of the confusion that has occurred in the last two years on this entire matter will continue to

  CHAIR—Could we just come back to the Lau case. The tax office, in its submission to the
committee, in part did not disagree with you but, in referring to non-recourse debt, it said this:

Section 82KL of the 1936 Act covers, inter alia, certain tax effective investments funded through non-recourse debt.
Where section 82KL applies, the deduction otherwise available is disallowed.

I have to say that I have not read section 82KL. I am just wondering whether you have and
whether you have an opinion on that statement.

   Mr Atkinson—Well, 82KL was definitely run by the ATO in Lau’s case and was
unsuccessful. Section 82KL is a specific anti-avoidance section directed at things such as
limited or non-recourse financing. They were unsuccessful in that case because the court would
not accept that, at the time the investor went into the project, it was foreseeable that he would
not have to repay his loan. Section 82KL operates when you have a deduction which is not
matched by the liability and you can see that the tax benefit is going to exceed effectively your
risk. But the court said in Lau that we are not prepared to say that, at the time that the investor
went into this, it was foreseeable that he would not have to repay his loan. So that has been run
before and lost.

  CHAIR—I think that is what they actually say in their next paragraph, although they do not
say that they lost. The submission reads:

TR 2000/8 makes it clear that where it is reasonable to expect that an investor will not have to repay a loan, and the sum
of that ‘additional benefit’ along with the ‘expected tax saving’ from the investment exceeds the investor’s tax deductions
incurred under a tax avoidance agreement, those deductions will be disallowed under section 82KL.

Tuesday, 20 March 2001                   SENATE—References                                     E 403

I think that is what you are saying; is that right?

  Mr Wilson—Yes.

   Senator COOK—Thank you, Mr Wilson, for anticipating some questions I may have by
listening in on the evidence given by Mr Norton and answering those in advance. I think you
endorsed his evidence as I recall?

  Mr Wilson—Yes, in respect of what I would have done if I were asked to provide an opinion

  Senator COOK—If I can take you one step further with that line of questioning: essentially
the way it presents itself to me is that legal opinions were given at the time which anticipated
actions of the tax office, which later changed and which would now require you to qualify your
opinion and, instead of alerting people to possibilities, to warn people of a new attitude. That is
roughly is, isn’t it?

  Mr Wilson—Yes.

   Senator COOK—Just taking that at face value for the moment, it says clearly that the
attitude of the tax office has changed. In this whole discussion, that seems to be a point strongly
made by everyone. What we lack is a motive. Why did it change, do you think?

  Mr Wilson—I can only go on what you and everyone else has read and observed. It would
appear that the ATO were alerted late into the piece about the level of deductions that were
being generated by these projects and saw it as a revenue raising possibility to attack them. I am
just going on what the commissioner is on record as having said and on what I have gleaned.
Certainly, everyone knows that the projects involving the financing techniques that the ATO
now abhors were being publicly marketed and distributed going back to at least 1994. It was not
until 1998 that they moved.

  Senator COOK—We will ask the commissioner directly what his motive was in changing it,
but you are representing some of those who are on the receiving end of this. It is the
commissioner’s statutory obligation to protect the revenue, but there are ways of doing it. Why
would he not have foreshadowed a change and grandfathered in the existing schemes if he was
concerned about the revenue haemorrhaging? That would be an action open to him, would it

   Mr Wilson—Entirely. I think a lot of people are wondering why that was not done and why
there was not an announcement saying, ‘We’ve looked at these arrangements. We now consider
that our view has changed and we do not accept these arrangements. Anything marketed after
this date bearing those financing arrangements will be disallowed’—rather than going back four
or six years.

   Senator COOK—I would be interested if you have any comment to make about this
question of retrospectivity. It strikes me that retrospectivity is an issue—I welcome any
confirmation or disagreement from Senator Chapman on this—that is pretty well settled in
terms of the Senate’s attitude. That is, there is a relatively bipartisan view that retrospectivity in

E 404                                    SENATE—References                  Tuesday, 20 March 2001

these matters is not something that you engage in. It is not something that you close the door on
absolutely forever and a day because there may be exceptional circumstances. But it seems to
me that the prevailing attitude and common view of government senators, opposition senators
and the minor parties is that this we do not legislate retrospectively.

  Senator CHAPMAN—That is wherever the legislation is detrimental to citizens.

  Senator COOK—Yes.

  Senator CHAPMAN—You might retrospectively legislate in a positive way but not

   Senator COOK—If citizens were carrying out an act which was legal at the time then you
would not reach back and retrospectively wipe out that legality and penalise them. That is a
relatively bipartisan view, and the commissioner would be aware of that. Yet it would seem, on
the face of it—and I am reserving a deeper consideration for my contemplation of all of the
facts—that that is what he has done by regulation and that would be in contradistinction to the
prevailing legislative view. This is what it seems to me. Do you disagree with that? Is this
something that concerns you?

   Mr Wilson—I agree with you; I think the impact is exactly the same. It has been taken to
another level because, as we say and as Mr Atkinson said in his opening statement, there are a
number of test cases before the courts. I think it is unconscionable and pernicious that the
commissioner should be out there attempting to take recovery action and bankrupt people
pending the determination of these test cases, which are likely to find that a large majority of
these people do not owe the tax office anything. It is a pyrrhic victory for a taxpayer if, after
being bankrupted and having his life destroyed, the commissioner finds that, ‘Actually, all this
time you had done nothing wrong. Sorry. Here is your money back.’ However, there is very
little prejudice to the commissioner, in our view, if he were to simply wait another six months
for these cases to go into the court, and then see what the court says before taking action. He is
taking action on the assumption that he is correct and, in our view, it is a flawed assumption and
there is no prejudice in waiting. I personally cannot understand why he is doing it.

   Senator COOK—In the evidence we had immediately after lunch from McKays Chartered
Accountants—and I hope I am not misrepresenting them—it was said that a number of their
clients are in negotiations to settle their outstanding liabilities, as defined by the tax office, and a
point of settlement would be to close their account by payment of the negotiated outcome and
waive legal action. In the event that legal action is successful, are those people able to reopen
the negotiations and claim what they would have got had they held to the legal action?

  Mr Wilson—No, not in my view. If you do not lodge an appeal after your objection is
disallowed you lose your legal rights. That is your next challenge, and you have waived it.

  Senator COOK—Would you advise those people to be heedful of the legal action and wait,
or not?

Tuesday, 20 March 2001                 SENATE—References                                   E 405

  Mr Wilson—You have to look at each individual project but, in the case of our projects, we
are strongly of the view that people should not be settling on the current terms being offered by
the ATO, and that they should await the legal action.

  Senator COOK—I understand that your firm is involved in some of these test cases. Are
they of the nature of what I might understand to be a class action?

   Mr Wilson—I think you could loosely call it a ‘class action’. We have a large number of
investors who jointly fund a legal action. A representative test case is selected, we put it in to
the Federal Court and we then hope to get the assistance of the commissioner to expedite that
litigation through the Federal Court. The other investors’ appeals are held pending the outcome
of that lead case.

   Senator COOK—Can you just tell me where it is all up to and what the timing expectation
is? Are you in the situation in which you have an agreement with the commissioner about what
the issues that have to be settled at law are, what the vehicle will be, when it might proceed and
whether action will be taken against people meanwhile?

   Mr Wilson—As Steven said, the first case is likely to be heard in the Federal Court in
August. I would suggest that, by the end of this year, at least six should have been heard in the
Federal Court. They are across a cross-section of cases and that should give a fairly
representative view of what the court believes is the correct interpretation of the law and
whether the commissioner is right or wrong. In terms of that time frame, that relies obviously
upon the cooperation of the ATO to ensure that the cases do move through quickly. We are very
anxious to have these moved quickly through the courts and we are hopeful that the ATO would
be of the same mind—certainly on the public record they are. But we have no agreement in
relation to recovery action; to the contrary, all our clients are receiving letters of demand from
the ATO and shortly, I believe, legal action will ensue against them, notwithstanding that they
have appeals in court.

  Senator COOK—So are you making overtures to declare a truce until the issue is settled or

  Mr Wilson—I do not know who else we can write to. We have asked the tax office and we
have asked the commissioner personally—we have written to him.

  Senator COOK—What does he say?

  Mr Wilson—He says no.

  Senator COOK—So there is no agreement.

  Mr Wilson—There is no agreement. We have asked the ombudsperson who seems inclined
to accept the ATO view on all occasions and we are getting no redress or joy from that
particular person.

  Senator COOK—So that I can be clear about this, is it something that you would put to us
for our consideration that we should, as a recommendation, suggest this course of action?

E 406                                  SENATE—References                Tuesday, 20 March 2001

  Mr Wilson—Absolutely.

  Senator CHAPMAN—In relation to the Servcom issue, didn’t you at an earlier stage have
an agreement from the tax office that there would be a stay of execution in a test case and then
they reneged on that agreement?

  Mr Wilson—Yes, correct.

  Senator CHAPMAN—Could you perhaps just enlarge on that a bit?

   Mr Wilson—Yes, that is an interesting one. Very early on we approached the ATO to fund
some representative cases under the test case litigation program where Commonwealth funding
is available when there are issues of great importance.

  Senator COOK—This is the sort of thing I had in mind.

   Mr Wilson—They gave that an Adam Gilchrist bat over mid wicket for six and said, ‘No
thank you.’ We then said to them, ‘Well, look, why don’t we get together and sort out an orderly
fashion to go to court?’, and we received agreement. That was on the basis of putting forward
10 or 12, from memory, that would be test cases within a certain time frame. We presented to
them six within that time frame. The idea of getting 12 was so that you would end up with one
man or woman standing when you got to court. They have a view that people fall away, yet on
not one of our cases that have gone to court has anyone ever fallen away. But notwithstanding
this, we put forward six.

  At that time, we received advice from the ATO senior officer who was dealing with this that
you—being our firm—are much more ready for litigation than we are. The next thing we heard
was we were called to a meeting and we were told that the whole deal was off and they no
longer wanted to be involved in this orderly approach to litigation, and we were staggered. I do
not know why because most of their actions up until that stage should have told us that we
should expect something like this. Nevertheless, we said, ‘What’s the problem?’ and they said,
‘The commissioner is not happy with the progress in other cases.’ We said, ‘Wouldn’t it be
sensible to take it out on the people involved in those other cases and not the people that we are
dealing with?’ and they said, ‘No, we just want to withdraw from this,’ and then gave, in my
view, a lame excuse that we had not got 10 or 12 or whatever it was to them within the period in
question. It turns out that out of the six that we put forward to them they had not even
considered any of them at the time they told us that we did not have 12.

   If we had continued on that process I am sure Servcom would have been in court and just
about dealt with by now, but because of that the whole thing fell into disorder and we are now in
the Administrative Appeals Tribunal debating and negotiating who are going to be the test
cases. We have got one gentleman who was prepared to go to court on this 1½ years ago and is
still there, but through their action we are now down in the AAT sending letters to and fro about
who are going to be the six test cases. That is indicative, in my view, of their approach.

  Senator COOK—Mr Chair, I have a number of other questions. I will be fairly quick with
you, Mr Wilson. What you have described is a delaying approach by the commission.

Tuesday, 20 March 2001                         SENATE—References                                              E 407

  Mr Wilson—I am not saying he has done it to delay but it has resulted in delay.

  Senator COOK—I want to know this: as far as your clients are concerned—if you are in a
position to answer this on their behalf—as a consequence of that delay, has the pressure from
the tax office to negotiate a settlement waiving future legal claims intensified?

  Mr Wilson—Yes.

  Senator COOK—So without going to motive, which is probably impenetrable, although we
could speculate about it, the effect of the delay by the tax office is to intensify this negotiation
and wipe out potential beneficiaries should your legal action succeed. That is the point?

  Mr Wilson—Correct.

 Senator COOK—Can you give us a rough quantification of what is involved here? How
many people?

  Mr Wilson—In Servcom or—

  Senator COOK—Affected by this.

  Mr Wilson—By this Servcom case or by—

  Senator COOK—Probably that is a question for the tax commissioner. We would have to
ask him.

  CHAIR—About 57,000.

  Mr Atkinson—Senator, if I could come in here, the last sentence of our opening statement
says—and I will quickly read it:

In these circumstances we believe it is unconscionable for the ATO to seek recovery action pending the outcome of test
cases which are imminent and likely to be successful.

We believe it is unconscionable for two main reasons. One is because of the current legal
position that we have alluded to today, as has Richard Norton. Two is that we believe it is also
unconscionable given the ATO’s conduct in the last five to 10 years in terms of proceeding on
the basis that many of these projects and the investors in them were entitled to tax deductions.

  Senator COOK—Okay. Who are your clients? Are they the investors or the projects?

  Mr Wilson—The investors.

  Senator COOK—I understood, in answer to the question of whether further regulation is
required here, your answer was essentially no, and I think Mr Atkinson made the distinction
between what is being said by the tax office or the attitude of the tax office and the responsible
organisations, ASIC and the AFP, in terms of fraud, and you have been very conscious to press
that difference. But there are clear cases at least in evidence before us of people who have been

E 408                                   SENATE—References                 Tuesday, 20 March 2001

placed in difficult circumstances by a less than adequate representation of what was, on the face
of the evidence we have received, their entitlements and expectations. So if there is no case for
any further regulation, the law is adequate and we should not disturb it. But there are cases of
people who have been cast into hardship by a less than adequate presentation of the facts. What
is missing?

  Mr Atkinson—I believe that is a subjective opinion. I can only give my opinion on it. I
personally believe that the laws and regulations are there and that the problem has been an
enforcement problem.

  Senator COOK—So that is what is missing.

   Mr Atkinson—I believe so, yes. I believe that was said in answer to the Chair’s question
before about the blurring of the roles between ASIC and the tax office, that if it has not caused it
it certainly has not helped that resolution. I believe it could be argued that there may need to be
more regulation. I personally do not believe so, but the point, as I have made a number of times,
is that that lies in the hands of ASIC.

   Senator COOK—I am not making a case for regulation. I am asking for your opinion
because you are a professional in this field. Your answer seems to be that there ought to be
stronger enforcement of the existing law rather than a change in the nature of the existing law.

   Mr Atkinson—Yes. For, with all projects, as I have said, at the end of the day, if it is a public
company, a responsible entity, directors of that company have clear and very onerous duties as
directors not to mislead and to provide accurate and complete and full disclosure in respect of
their projects in terms of forecasts and in terms of justifying their fees, et cetera, and if they do
not do that then they are subject to the Corporations Law.

  CHAIR—Just on the question of forecasts, ASIC would say it is not their responsibility to
make an assessment of the forecasts or assumptions contained in the prospectus. Should that be
the case?

  Mr Atkinson—That again is an opinion. We were there when ASIC gave their submission to
the committee. It really comes from, I believe, a question of resource allocation.

  CHAIR—They say that the law does not require them to do that, and one has to take that at
face value. That is their interpretation of the laws that govern them. What I am asking you is do
you think that the law ought to require them to make an assessment of the forecast.

  Mr Atkinson—In an ideal world the answer to that is yes but, practically speaking with the
volume that goes through their offices, it would be impossible for them to do that in my
opinion. The way that that has been approached is to have a self-assessment situation where you
put the onus back on the responsible officers in the company that is giving those forecasts. If
they cannot justify them or they cannot substantiate them, then they are subject to the
Corporations Law. The problem is that it is an ‘after the event’ situation—I think that is what
you are saying. If ASIC had unlimited resources, then I think they would say that they would
prefer to go back to the pre-1989 situation where they did vet and check the prospectuses.
Although I do recall that the relevant officer who gave his submission to you in Canberra said

Tuesday, 20 March 2001                SENATE—References                                  E 409

that, even in that situation where they were pre vetting the prospectuses, it was physically
impossible to spend the time to analyse the forecasts—not only in managed investment
schemes, as they are now called, but also in all types of security type arrangements where there
is a prospectus.

   CHAIR—I think the circumstances pre-1989 was due to the technology in terms of how
information might be made available on forecasts. I think that has changed substantially in the
last 10 or 11 years and it is far easier for people like ASIC to make assessments of forecasts
because of most of the information being readily available on the Internet. It clearly is not
working because there are clearly many prospectuses out there that contain—one could even
say—false and misleading forecasts. I think that is a major problem, and self-regulation does
not seem to be working in that respect.

 Senator COOK—I have one closing question, and it is the same question that I asked Mr
Norton: as lawyers offering advice on these schemes, is either of you investors as well?

 Mr Wilson—I have invested in a number of projects which have given tax deductions and
which are remarkable and very good commercial successes.

  Mr Atkinson—And I am the same.

  Senator COOK—Thank you.

   CHAIR—I thank you for your written submission and for appearing before us today. The
information that you have provided us, particularly in respect of the legal matters, will prove
somewhat useful to us, and we appreciate you taking the time to be here.

                     Proceedings suspended from 4.18 p.m. to 4.38 p.m.

E 410                                         SENATE—References                      Tuesday, 20 March 2001

MEREDITH, Mr David Peter, Director, Resolution Holdings

  CHAIR—Welcome, Mr Meredith. Do you have any additions to the written submission that
you would like to make?

  Mr Meredith—Yes, I do. I am appearing on a personal basis and I put in a submission under
my own name. I have some items I would like to add. I have already given Mr Sands some
copies of that document. I believe that he is arranging some copies for the members of the

  CHAIR—Thank you. Do you wish to make an opening statement? If you do, I would
appreciate it if you could keep it relatively brief.

  Mr Meredith—If I can direct your attention to my submission to the Senate inquiry, which I
believe you have copies of. On page 18, I made a comment in that document—I am sorry, firstly
go to page two of my submission.

  Senator COOK—On my copy of your submission page 18 is an attachment, Part E. It is a
copy of a taxpayer’s response to an ATO letter.

  Mr Meredith—I am sorry, did I say page 2 or page 18?

  CHAIR—Are you talking about page 2 of the letter?

  Mr Meredith—It is on page 2 of the letter. In paragraph 2, I made this comment:

In broad terms, references to ‘the Commissioner’ in this submission, do not necessarily imply personal action on his
behalf unless he is specifically referred to. Rather these references incorporate the ATO as a whole.

I wanted to say that I do not want to get personal in this but, for the purposes of my comments, I
will refer to the commissioner incorporating the ATO.

   My comments are focused primarily on the maladministration of the ATO, rather than
anything else. Other matters relating to deductibility will arise from that view. A key concern
that I have is exactly as was mentioned by Frank Wilson earlier—the blanket approach of the
ATO in dealing with this issue. Put simply, the ATO campaign has no boundaries of geography
because it is all over Australia—in rural, metropolitan, mining and business areas. It has no
boundaries of types of investors; anyone is involved in this from all parts of life, including
retirees. It has no boundaries of quality of product either because there are products involved in
this which have commercially failed and there are others that continue to earn money.

   Unfortunately it seems to me that what we have now is a commissioner who is issuing what
are tantamount to judicial notices, even though he is not a judge. He is effectively creating
retrospective rules, which are tantamount to legislation, without being in parliament. He is also
issuing some punitive measures in the form of penalties without any of the safeguards and
restraints that police and public prosecutors have to operate under to go about their duties.

Tuesday, 20 March 2001                           SENATE—References                                               E 411

  In terms of my personal submission, I would now direct you to page 18 of my material and
note that I have made some comments there in my letter to the commissioner, which states:

I note in the Letter that you have invited me to ‘include any further information about your individual circumstances that
may help us in resolving this matter in a fair way.’

I responded in time to that notice that I received from the commissioner. Yet in the freedom of
information material that I have received, he has still charged me 50 per cent penalties. There is
no explanation of why that has occurred.

  In terms of his invitation to let him know about my personal circumstances, you have a
complete copy of the submission I put to the commission on 11 August—a few dozen pages. I
must tell you that to this date I have received no acknowledgment or answer to that letter at all.
Importantly, buried in that letter on page 32, as is in my submission, I waived my rights to
exclusion from a future tax debt under the four-year rule, as a measure of good faith, because
my personal view was that, if ultimately a judge determined that these amounts were not
deductible, I was more than happy to accept whatever debt arose from that.

   The freedom of information section sent me back a copy of my submission, which was
unmarked, by the tax office. I do not believe they are aware that I made that waiver of my
rights. I saw that as being an effort in good faith, on my part, to explain that I felt that there was
no reason for the commissioner to have to amend my assessments because he was not exposed.
I was running out of time, and I was prepared to waive my rights. That has not been dealt with
at all.

   The material that I have provided to the committee now includes copies of documentation
which concerns a number of investors. I have obtained copies of those over the last two months,
which I think illustrate my point about the administration of the tax office and how this is
affecting investors and your constituents. In one instance, a lady sent us her documentation
relating to part IVA determinations for Budplan, where she received an amended assessment of
zero. There does not appear to be a lot of thought put into that by the tax office, and you have
copies of that. We have another lady who has received contact from the ATO. She has received
part IVA and amended assessments, despite investing in the Frankland Valley project and not
borrowing any money, which was the prime issue of the difficulty that the commissioner had.
She paid the entire fees in cash and she still received exactly the same treatment.

   We have a document from Kamisha which indicates to us—and we met with Kamisha
management in Melbourne two weeks ago—that they are very concerned at the approach of the
ATO in the legal action that was pending in the Administrative Appeals Tribunal where the tax
office rejected the first member of the AAT because he was an investor in a film project which
was not associated with Kamisha. A few days before the case was listed for hearing, the ATO
also rejected Deputy President Black because he had an investment in a vineyard. My advice is
that Deputy President Black was not required to declare that investment, which indicates that
the information came from within the tax office. I think there are some questions about secrecy
provisions and privacy arrangements there.

E 412                                               SENATE—References                        Tuesday, 20 March 2001

  In my activity at the moment with groups of investors I have encouraged people to exercise
their rights under freedom of information. On the 15th of this month some of our investors
received a letter, and I will quote from one section here:

The number of documents encompassed by your request is voluminous and this Office is inclined to claim that, in its
present form, it would be an unreasonable diversion of the Office’s resources to process the request.

I see it as appalling that they walk away from their freedom of information obligations when
information becomes available which is significant.

  On that point, my freedom of information file came through late. It came through as 70 pages,
most of which was material I had sent to the tax office. One key document you have got is a
copy of an adjustment to taxable income, signed by Lois Hoffman, saying that she has made
adjustments to my taxable amount returned by the taxpayer because of the part IVA
determination. It indicates there that there has been a change of thinking in the tax office. In the
case of the Satcom electronic commerce services franchise which I am involved in, the
commissioner has accepted that the expenses are deductible because part IVA, of course, cannot
apply if there is no acceptable deduction.

  I also have a copy of a letter here from Deputy Commissioner Jim Killaly dated 11 March
1998 regarding employee reward plans. He states in this letter to a tax consultant in Sydney:

We have examined the material in relation to your arrangement and can confirm that we agree with the tax consequences
outlined by Mr Carnovale—

another ATO officer—

in his opinion. Accordingly, we will not be auditing your clients as part of this current project.

That turned out to be turned over and the clients were indeed audited on that basis. If I can note
the Senate committee Hansard dated Monday, 11 December, First Assistant Commissioner
Kevin Fitzpatrick made this comment, speaking about issues of fairness, that fairness:

... is reflected in our embrace of the taxpayers charter.

I find difficulty in that comment given what has been happening with regard to the taxpayers
charter. I think it is the first time I have heard a strangulation being referred to as an embrace. I
also have a note here which I think is very important. It is a note to a solicitor here in Perth, and
you have a copy of this document. I would ask the committee to keep this confidential. We have
provided you with a copy of it, but the taxpayer wants us to keep that confidential and for it not
to be for open distribution. I have asked Mr Sands if he can do that.

  CHAIR—Mr Meredith, the documents that you have provided us with all contain the names
of the people that are involved.

   Mr Meredith—Correct.

Tuesday, 20 March 2001                           SENATE—References                                                E 413

  CHAIR—What authority, firstly, did you have to provide them, and, secondly, because we
will obviously be making them public documents, I am looking for a direction from you as to
whether all of the names ought be removed from the documents.

  Mr Meredith—The last document to which I am referring now is the one that—

  CHAIR—I know which one you are referring to. I am asking about all of them.

  Mr Meredith—No problem.

  CHAIR—So there is no problem with the people whose names appear upon these documents
having these documents published?

  Mr Meredith—That is correct.

  CHAIR—You have written authorisation to that effect?

  Mr Meredith—I am sorry, no. I cannot say we have written authorisation. We have verbal
authorisation from the taxpayers.

  CHAIR—I think in the interests of the people who are named in these documents that the
committee will accept the documents on the basis that we will have the names removed from
the documents.

  Mr Meredith—Fine.

   CHAIR—With regard to the last document you referred to, I assume that is the 2 January
letter of this year?

  Mr Meredith—Correct.

  CHAIR—That is provided on a confidential basis?

  Mr Meredith—That is correct.

  CHAIR—Please continue.

  Mr Meredith—The last document is from Michael Bersten, Assistant Commissioner and
Deputy Chief Counsel. Once again, referring to Hansard of 11 December, in discussions
concerning delays in test cases, Senator Watson asked, ‘Why the slippage?’, speaking about
why these dates had gone out. Mr Bersten said:

They were decisions of the court. Our applications have consistently been to have that matter heard as soon as possible.

We contend that that is incorrect. This last letter is actually a letter to the solicitors of this
taxpayer offering to pay the taxpayer’s legal expenses if the taxpayer withdrew from legal
action concerning the Budplan project. In these issues, we have a number of documents, and

E 414                                          SENATE—References                       Tuesday, 20 March 2001

there are many more out there and more coming in, that illustrate that the administration of this
whole campaign is doing as much damage as the campaign itself.

   With the Australian Aloe Project, its investors have been told that their deductions are denied
because they are not primary producers. On the ninth of this month, most of them received
letters from the tax office inviting them to claim under the Diesel Fuel Rebate Scheme because
they are primary producers. They are now in the position where, if they go ahead with this
advice, they run the risk of having their claims denied, reversal and penalties. It is just not
working out at all. I suspect that this letter was tabled this morning, but it is evidence of a
position paper on the aloe project where, in one of the paragraphs, internal tax office file notes
had been left here. I think it reveals the way that thinking is going in the tax office. It is a
section on large up-front deductions, and in brackets it says:

(are we being too accusatory in saying that the arrangement is enriching the promoter at the expense of the revenue? I
think we will get lots of flack from him if we put it that way. Not sure what we could say instead if we do change it—
maybe ‘an arrangement substantially funded at the expense of the revenue’—standard words as used in other papers. I am
happy to stay with them)

Finally, the most vital dimension in all of this stuff, I really believe, is the human dimension. I
am sure that in Kalgoorlie last night you had plenty of that information coming your way. I have
no doubt that the source of this campaign and all that it turns and twists on rests with the ATO.
However, I believe that the responsibility for allowing it to continue rests with all of us—and, in
particular, our representatives in the parliament. I do not believe this issue has any party lines
whatsoever. I believe that this afternoon and tomorrow morning there will still be phone calls
made and there will still be debt collection people contacting investors. Oblivious to the
pending test cases that have been spoken of so often here and oblivious to the rights of natural
justice, people will still be facing house sales, bankruptcy or worse. I ask the committee, if it is
possible, to issue an interim request endorsing what Frank Wilson said earlier: that the
commissioner at least cease all of his recovery action until a judge can make a decision on this

  CHAIR—May I go to the letter you referred to as evidence of a delaying tactic on the part of
the ATO insofar as test cases are concerned? I am not sure that I read that letter in quite the
same vein as you do. It would appear to me that the ATO are actually saying that there are a
number of test cases that will be heard at a particular point in time and that they will meet the
legal costs on the basis that that person await the outcome of other cases. Can you provide me
with any additional information as to whether this case was to have proceeded prior to the other
cases mentioned?

  Mr Meredith—I am advised that that was the case, and I will get that information for you.

  CHAIR—I would appreciate that. You will understand that, as I said earlier, we really have
to deal with the facts. When, with some of these matters, we receive documentation when we
are proceeding with a witness, it is somewhat difficult sometimes to take account of it.

  Senator CHAPMAN—What is your view of the disclosure requirements of prospectuses?
Do you believe that they should be improved by pointing out the fact that, under self-
assessment, the ATO’s initial acceptance of a deduction does not mean that it has been approved

Tuesday, 20 March 2001                          SENATE—References                                              E 415

and that the ATO can later do an audit and effectively disallow that deduction after the refund
has been received?

   Mr Meredith—There are two issues there: the disclosure of tax measures in particular or
disclosure of forecast returns, or the structure of an investment. I think prospectuses are
sufficiently detailed provided we can rely on the quality of the information that is there. I do not
think we really have any option but to rely on the quality of legal and accounting opinion which
is put into prospectuses. I am not aware of any tax effective product covered either by a
prospectus, or a disclosure document in the case of a franchise, where a tax deduction has been
guaranteed and I think that would be most foolish. I do not believe that that is anticipated by
promoters; I do not believe it has been anticipated by legal advisers. But, to be fair, it could be
said that some investors take very little care on their investments too, whether they are tax
effective investments or otherwise, and tend to rely purely on the advice of their adviser.

   Senator CHAPMAN—You claim that there had been consultation between the developers
and promoters of these projects and the tax office in earlier years which effectively gives the lie
to the tax office’s claim that they only became aware of the problem during 1997. Can you just
give more information about the detail of those consultations that occurred in those earlier

  Mr Meredith—Yes, I think I can. Are you referring to my written submission?

  Senator CHAPMAN—Yes.

  Mr Meredith—Whereabouts in that?

  Senator CHAPMAN—On page 5 you say:

The ATO has stated in various public forums that it only became aware of the proliferation of these types of investments
... during the course of 1997.

This claim is difficult to believe, as there is ample evidence of ongoing consultation between the ATO and the industry
well before ...

   Mr Meredith—In the last section of my submission I did note that I was part of a lobby
group in Perth some three years ago. We actually held meetings with the ATO to discuss how
we could bridge the gap between the ATO’s emerging view and the industry. It was clear in
those discussions that investigations of tax effective products had been going on for some time
in the form of not necessarily audits but reviewing documents—reviewing funding agreements,
contracts, et cetera. Furthermore, in meeting with various clients, we found that numerous
clients had had audit action by the ATO from as early as 1995 where their investments had been
audited and documents had been reviewed closely by tax office personnel.

   I forwarded to the Senate inquiry six weeks ago a couple of case studies on that particular
issue. One particular investor—and I can provide further details later on if you wish—was
audited in 1995 in the Main Camp project. That audit took two months. It had nothing to do
with his car expenses or anything; it was focused on the documentation of the investment. In
January 1996, he received a letter approving his deduction and paying him interest and his

E 416                                   SENATE—References                Tuesday, 20 March 2001

refund. Last year, he received a position paper, part IVA determination amended assessments,
penalties and interests. That was for the investment that he had been audited for.

  Senator CHAPMAN—I think there is a distinction to be drawn between saying that the tax
office had some awareness of these projects and was investigating certain aspects of them and
saying that there was ongoing consultation between the ATO and the industry well before
1997—they are two separate issues. There may be some interrelationship between them, but
they are two separate issues.

  Mr Meredith—I do accept that. I believe that I can give you evidence and provide you with
documentation of managers who have negotiated with the ATO prior to those years with various
schemes and have told the ATO what they are planning to do. They have put in applications for
private rulings, et cetera.

  Senator CHAPMAN—Do you think the extent of those consultations would have given the
tax office a full picture of the nature and scale of the projects and the revenue implications

   Mr Meredith—I cannot answer that. I do not know. I think it can only be answered by
looking at the evidence and the documentation that was provided where whoever was reviewing
it would be able to ascertain that the funding arrangements, the contracts involved, the specific
aspects of the tax act that were applied had been fully advised to the ATO.

   Senator CHAPMAN—The tax office asserts that it is obliged to penalise participants in
schemes for two reasons: first, to lock in future taxpayer compliance; and, secondly, to ensure
fairness to the rest of the community, particularly people who elected not to invest in such
projects. Do you believe there is any validity to those claims by the tax office?

   Mr Meredith—I think it is absolute nonsense. The real penalty in the community is the fact
that these investors—investors such as me and thousands of others who are in far worse
circumstances than me—will be far more a drain on the community in terms of social security
and other benefits down the road if these bills are made to stick.

  Senator CHAPMAN—What is your view of the ombudsman’s expressed concerns about the
growing risk to participants, especially in relation to the Main Camp project, should the test
case strategy fail and whether, as an alternative, investors should take account of the tax office’s
settlement guidelines and procedures?

  Mr Meredith—I have to say first that I have a jaundiced view about the ombudsman,
Senator. Once again, I do not want to get personal on this but I do not believe the
Commonwealth ombudsman responsible for tax, Ms McPherson, has any chance—however
professional she is—of being seen as being independent. She is far too closely linked to the tax
office. I just think it is insane that we have a very important public individual, which many
people depend on in this country, so closely linked to the body that has been complained about.
She is under an unfair burden of believability. It would be insane to ever think that it would
happen in a police force or police service anywhere in the country or any other area.

Tuesday, 20 March 2001                 SENATE—References                                  E 417

   Having said that, the reports published by the previous ombudsman—who to the best of my
recollection was from private industry—seemed to be far more incisive, and the reports made
sense. And I do not believe that we can take a great deal of confidence in that area. The
ombudsman’s report on the Main Camp project is a good example of that. There are some issues
in there that relate to flagrant conduct by the commissioner that we should not just put up with,
but there are no remedies listed. There is confirmation that the commissioner has breached the
charter—which I have heard staff here in Perth describe in a new term that I have heard as ‘not
black letter law’—and no remedies attached to it. This charter appears to be a document that is
so important to our safety, yet it has been completely ignored.

  CHAIR—Mr Meredith, in your submission you say that you have a unique view on this
particular industry because you are an investor in tax effective products, you have acted as the
national marketing manager for tax effective investment, you have recommended tax effective
products to retail clients since 1987, you have been an original member of an industry lobby
group, and you say that you have been unfairly selected by the ATO for special treatment—

  Mr Meredith—Deluxe versions.

  CHAIR—Resolution Holdings are organising a campaign to endeavour to assist taxpayers
and you are enlisting taxpayers through a process that is cited on page 2 of a document that I
have. It says that you contact Resolution Holdings immediately for a copy of a detailed
document and registration forms and you send in your registration form as soon as possible.
You commit to pay 20 to 25 per cent of your amended assessments into a solicitor’s trust
account to be paid to the ATO only if we achieve a favourable settlement. With regard to the
people that you are endeavouring to enlist to conduct the campaign, have any of the investment
companies, which have had tax rulings given against the investors in those companies,
contributed to or are contributing to Resolution Holdings?

   Mr Meredith—Yes, but indirectly, in one instance only. We requested three fund project
managers to make a contribution to our AD(JR) action—our action under the Administrative
Decisions (Judicial Review) Act. We have noted that in discussions with investors. We pegged
that amount at $7,500 and have asked them to contribute that to kick off our campaign, which
we started in December of last year. One of the promoters has provided that money and it went
directly to the legal firm that is running our AD(JR) action. Only one has contributed to it.

  CHAIR—What happened to the other two?

  Mr Meredith—They have not contributed.

  CHAIR—Did they refuse to contribute?

   Mr Meredith—One promised, and has not. The other advised us today that they are unable
to at this stage.

  CHAIR—On the basis of the number of people that may have already taken up this offer,
how many different schemes have they been involved in?

E 418                                     SENATE—References                  Tuesday, 20 March 2001

   Mr Meredith—On our register at the moment, we have investors that have investments in 49
different projects.

  CHAIR—And you have got a contribution from only one in 49 with regard to assisting these
people who, for all intents and purposes, are the backbone of these investment companies.
Indeed, these investment companies, I might suggest, would probably not exist if it were not for
these taxpayers.

  Mr Meredith—That is correct.

  CHAIR—Do you think that is a fair situation?

  Mr Meredith—No, I do not. There are three individuals who are involved in Resolution
Holdings: two of us are investors with a major tax problem, which we have decided to handle
by taking some action. We went out and recruited a man who took early retirement from the tax
office in June last year. We felt that he had special knowledge and brought special capabilities
and insight to be able to help us in our activity. We specifically did not want to turn this into a
project manager owned initiative. It is an investor’s initiative, which is why we went to some
project managers initially to kick off the first part of our action.

  CHAIR—I appreciate that.

  Mr Meredith—We are now in a position where we are funding that legal action internally.

  CHAIR—And I appreciate that. But I still go back to my point that the investment
companies only exist in the main because of the moneys that they have received from investors.
At the end of the day, under the current law, it is the investors who will wear it if any legal
action fails. It could fail because of insufficient funds. I again put it to you: is that a fair position
to have investment companies taking in respect of the circumstances that many of their
investors find themselves in?

  Mr Meredith—It is probably not.

  CHAIR—Thinking ahead, in the future, if investment companies are challenged at law—
which is inevitably going to be the case—do you think there ought to be a legal requirement for
those people to make a contribution towards defending the interests of their investors?

  Mr Meredith—That is a very broad question.

  CHAIR—You can answer it broadly if you choose to do so.

   Mr Meredith—I will answer it broadly all right! It would be wonderful if that were the case.
I can only speak as an investor. How long is a piece of string? That is a very difficult question to

  CHAIR—I am asking you whether or not you think it ought to be a legal requirement for
companies. You have tens of thousands of investors here, and you cited 49 companies for which

Tuesday, 20 March 2001                  SENATE—References                                    E 419

participants have signed up to your fighting fund, or campaign, and only one of them—just
one—has made a contribution. Yet, the salaries and the profits of all those companies have been
derived from the investors.

  Mr Meredith—I do not know—I can see a huge tin of worms there. It would be nice if it
was, but I can see it being very difficult. To be fair, we have not asked every one of those 49
investment managers to contribute to this fund.

  CHAIR—I might suggest that you do.

  Mr Meredith—All right.

  CHAIR—I would be interested in their response. With regard to the circumstances that you
outlined from a personal point of view—and I am just trying to recollect what you said in
respect of your correspondence with the tax office. I understood you to say that the
commissioner did not respond.

  Mr Meredith—Correct.

  CHAIR—And that you subsequently sought information under the Freedom of Information

  Mr Meredith—That is right.

  CHAIR—And that what was returned to you was your own submission.

  Mr Meredith—Primarily.

  CHAIR—And that you received no other correspondence, tax minutes or discussion
documents that might have referred to or dealt with it?

   Mr Meredith—After receiving a letter from the tax office that they were reviewing 1,450
documents and that they were going to charge me $600, I got 70 pages. I saw that as an attempt
to dissuade me from pursuing it. I paid the deposit anyway and was contacted by the tax office
and told that they had difficulties deciding what they could and could not send me. We asked
them to send what they felt they could and leave the rest on advisement, and I got 70 pages. As
I said, most of it was my own submission. The other parts of it related to copies of delegations
given to tax office staff by the commissioner, Mr Carmody, which we had asked for, and some
very heavily edited notes which mentioned my name on two occasions. There was nothing to do
with the decision taken to send me a letter, the decision taken to issue part IVA or the decision to
amend my assessments.

  CHAIR—Have you endeavoured to raise those issues further with the tax office?

  Mr Meredith—Yes. I have written back to the commissioner and requested that he fill in the

E 420                                    SENATE—References                  Tuesday, 20 March 2001

 CHAIR—I now move to the documents that you provided us with today. Please explain to
me again the relevance of the first letter, and of subsequent documents.

  Mr Meredith—The first letter is from a lady, a retiree, who invested in Budplan and claimed
a $6,900 tax deduction. Her income was virtually zero. A deduction was denied and she
received a reassessment for zero dollars. Her income was increased to $7,071 as a result of the
part IVA determination.

  CHAIR—So they included something that never really existed in the first place. Is that what
you are saying?

   Mr Meredith—Yes. It gets back to that blanket approach. We know people who have been
reassessed, who were not investors, because the tax office got their lists wrong. One of my close
friends passed away two years ago and, to be fair, his estate received an assessment. The whole
process was exactly the same as it would have been if he were alive and kicking. I have resisted
going and pinning it to his tombstone in Karrakatta.

  CHAIR—And with regard to the second letter?

  Mr Meredith—That is about a lady who, with her husband, invested in Frankland Valley.
They invested with no borrowings whatsoever. They did not take advantage of the borrowing
arrangements that were available with the project. They still received Part IVA determinations
and amended assessments. I am sorry that the remainder of the documentation is not attached to
that, but I will make that available to the secretary.

  CHAIR—What about the third letter?

   Mr Meredith—Yes, it is stapled to another one. Regarding the Freedom of Information Act,
part of what we are doing in Resolution Holdings is letting people know exactly what their
rights are for dealing with these things. As no-one seems to be having any success in getting the
tax office to explain why they are being assessed and amended, we have encouraged them to
take advantage of their rights under the FOI Act. This is the response that our participants have
started to receive now.

  CHAIR—Can you indicate to me or provide the correspondence that actually went to the
ATO with regard to their assertion that their request is broadly framed and the documents are
voluminous? Can you give us an idea of specifically what was asked for?

   Mr Meredith—Yes, in general terms I can tell you, and I will send you a copy of that. I can
tell you that the letter is identical to the letter that I sent, and the letter that the first 50 or 60
participants in our project sent, to the freedom of information section. That was answered quite
differently. It appears that the volume of documentation is getting a little too heavy for the tax
office to deal with at this stage, but I will send you a copy of the request letter.

  CHAIR—The next one is actually yours, isn’t it?

  Mr Meredith—That is correct.

Tuesday, 20 March 2001                 SENATE—References                                   E 421

  CHAIR—With regard to Satcom, how was Satcom actually financed?

  Mr Meredith—It was financed with a total initial first year franchise fee of $30,000—
$20,000 of which was made available by the vendor, or by the franchisor, under a limited
recourse loan. Investors contributed $10,000 cash, and some of that was under finance as well
over a payment period within a calendar year. The remaining $20,000 was financed from a
limited recourse loan. Those loans, of course, were covered by debt forgiveness provisions at
the end of the 10-year franchise period.

  CHAIR—Is Satcom still an operating company?

  Mr Meredith—That is a pretty fuzzy question, I am afraid. It is and it isn’t. Satcom’s
business appears to have been transferred to another business here in Perth. There were actually
three franchises marketed by Satcom. The first one is earning upwards of $1½ million a year, I
believe. It is earning quite well. The second one is defunct and the third one has been a
commercial failure at this stage. We know that there are some assets in there, but franchisees are
looking for some relief.

  CHAIR—In the first part of your response you said that you believe the Satcom business has
been transferred to another company, to another owner.

  Mr Meredith—Yes.

   CHAIR—Taking into account the requirements under the law, I am not sure—because this is
a franchise arrangement, isn’t it?

  Mr Meredith—Yes, it is.

   CHAIR—It may be that my assumption is incorrectly based, that the law may not cover it
from an investment point of view in respect of managed investments per se, but I would have
thought that the investors—the franchisees, in this case—would have had some say as to the
transfer of the business.

   Mr Meredith—My personal view, and I am not a lawyer or an accountant, is that I do not
believe they would. By transfer I mean sold—the franchisor would have sold it. As long as the
franchisor maintains its responsibilities to the franchisees, in some ways ownership is not an

  CHAIR—Has the franchisor maintained his or her obligations to the franchisees?

  Mr Meredith—In the case of the second two franchises, I do not believe he has. That is my
personal view.

  CHAIR—Does that mean that he or she is in breach of the law?

  Mr Meredith—I do not know.

E 422                                  SENATE—References                 Tuesday, 20 March 2001

  CHAIR—What about with regard to the one that is making money?

  Mr Meredith—The franchisees are receiving their dividends on a regular basis.


  Mr Meredith—Yes, they are.

  CHAIR—So he seems to be still meeting obligations there.

  Mr Meredith—Correct, but that one has been denied as well. All the deductions have been
denied in that one.

  CHAIR—I am wondering whether or not this person is meeting their obligations under the
law in so far as one defunct and one failed commercially.

  Mr Meredith—My understanding is that the entity that has purchased the franchisor’s
business has that responsibility and is attempting to perform the franchisor’s roles. It would be a
question of judgment as to whether that has been effectively discharged or not.

  CHAIR—Thank you, Mr Meredith.

  Senator COOK—I have a couple of questions. Firstly, in terms of the class action you are
organising on behalf of investors, have you had any discussions with the Australian Managed
Investments Association, which is similarly doing that on behalf of their associates, to see
whether there is a possibility of joint action between both of you?

   Mr Meredith—Yes, we have been in touch with them on several occasions when we first
started this AD(JR) action which is an action within the Administrative Decisions (Judicial
Review) Act. We actually contacted Wilson and Atkinson and suggested that maybe the fighting
funds could contribute to that. That turned out to be not appropriate because we felt that the
direction we were taking was different. It is certainly not a questioning of deductibility in the
legal action we are taking. The legal action we are taking relates to the commissioner’s conduct
and to his actions under the Taxation Administration Act and the charter. We felt that it was
important that the investors who joined Resolution Holdings were determining the course of
their legal action, so we were not associated with the Wilson and Atkinson move there.

   We met with AMIA probably about a month ago now and cleared some air over some
misunderstandings between the two of us. Essentially, we are taking different directions. We are
looking for a package that will either have remedial action to the taxpayers as far as the AD(JR)
is concerned or a settlement on what we believe will be acceptable terms to the taxpayers that
are associated with us, so we did not see that there was a large degree of common ground,
although I can assure you we have sent them information and they have sent us information too.

  CHAIR—Is there any conflict between what you are doing and what they are doing?

Tuesday, 20 March 2001                 SENATE—References                                    E 423

   Mr Meredith—I do not generally believe so, other than to say that it is the very strong view
of Wilson and Atkinson, as Steven and Frank said earlier on, that they are going to win the test
cases. I guess that is a value judgment that people need to make. What are the consequences
there of a win or a lose? I can only speak for myself. I made the decision to get involved in this,
in Resolution Holdings, and get this cranked up back in November-December because the
biggest concern I had was that this bill was on the table every day. And quite frankly, I am sick
and tired of waking up with it sitting there. You would know, from the things you were told in
Kalgoorlie yesterday, that it is creating great pain up there. I am not prepared to wait whilst the
unreasonable delays continue to occur in the test cases. I would rather pay a portion of it now
and, if the test cases win down the road, I just want the next several months of my life without
this around my neck.

  Senator COOK—I make no judgment about what the right way to proceed is. That is for the
people involved. You said at the beginning of your oral evidence that you endorsed what I
thought Wilson and Atkinson said about the need to speed up this process. Or we should make a
recommendation to the tax office if we were of a mind to encourage them to design the test
case, have the matter settled and all these issues put aside until that is determined.

  Mr Meredith—Yes.

  Senator COOK—So which is your preference—to negotiate the outcome or to proceed in
that direction, the one that I have just indicated?

   Mr Meredith—As far as I am concerned, the first one that succeeds is the best one. That is it.
I am not prepared to leave any stone unturned in my personal circumstances to get this fixed
one way or another—stopped, slowed down, reversed or whatever. One of the tax office
executives from Perth is here in the audience and he had a copy of our document about six
weeks ago. So they know where we are going. We just want to speed the whole process up. It is
taking too long.

  Senator COOK—You said in your oral evidence as well, with respect to aloe vera, that the
tax office initially held that members of that scheme were not primary producers.

  Mr Meredith—Correct.

  Senator COOK—I did not quite catch what the rest of it was, other than that somehow or
other the same individuals were invited to apply for the diesel fuel rebate because they were
primary producers.

  Mr Meredith—That is correct.

  Senator COOK—Who invited them?

  Mr Meredith—The tax office. The letter is dated 9 March 2001—I will leave a copy with
your secretary—signed by Mark Jackson, Deputy Commissioner, Excise.

 Senator COOK—Is there any indication in that letter as to why Mr Jackson thought they
were primary producers?

E 424                                 SENATE—References               Tuesday, 20 March 2001

  Mr Meredith—No, there is not.

  Senator COOK—Was there any indication in the letter or the communication from the tax
office about members of the scheme as to why they were not primary producers?

  Mr Meredith—No, I have not got those documents, other than that was the—

  Senator COOK—Do you know if the tax office offered an opinion as to why they were not
primary producers?

  Mr Meredith—I understand they did. I have not got those documents. That was the grounds
for denying the deduction.

   Senator COOK—Do you happen to know whether or not the definition of primary producer
is different in respect of the Diesel Fuel Rebate Scheme as it might be in respect of taxpayers?

  Mr Meredith—No, I do not know that.

  Senator COOK—We will look into it, thank you.

  CHAIR—Thank you, Mr Meredith, for your written submissions and the documentation you
have provided to the committee, and for your responses to the questions we have asked.

Tuesday, 20 March 2001                 SENATE—References                                    E 425

[5.27 p.m.]

RYPER, Mr Lawrence Edwin (Private capacity)

  CHAIR—Welcome. Is there anything you would like to add to the capacity in which you are

  Mr Ryper—I am an electronics tradesperson, but I am appearing on my own behalf.

   CHAIR—We have received a written submission and a supplementary written submission
from you. Would you like to make any opening remarks in respect of the submissions that you
have made in writing to the committee, without reading them out given that we already have
them? We do have a supplementary one, so you might like to address any remarks contained in
the supplementary document.

  Mr Ryper—I have received three amended assessments for two projects that I invested in,
namely Satcom and Oracle. Satcom was marketed as an Internet based software service
provider for accounting firms and Oracle was a direct marketing and training events organising
company. On page 4 of my supplementary submission, I have detailed some of the treatment I
have received from the ATO as a taxpayer.

  CHAIR—Would you like to go through that?

  Mr Ryper—Yes. Initially, when I invested in Satcom, I rang the ATO to discuss what the
implications were. I discussed the scheme at length with a tax officer. The ATO told me that
they were not in the business of saying whether something was a legitimate deduction or not
and it was up to me to seek a legal opinion. They explained the self-assessment and suggested
that I check the viability of the scheme, legal opinions, accountants’ opinions, and the legal
qualifications of the person giving the opinion. They also explained that if I did these things and
went through a CPA, this would be due diligence and if, at a later date, it was not found to be a
legitimate deduction, there would be no penalty, but the deduction would be disallowed.

  Subsequently, I checked the qualifications of the legal opinion from Robert O’Connor, which
was supplied to me from Satcom. I called the Law Society shopfront lawyer for advice. I called
the University of Western Australia legal lecturing department, and they said that Robert
O’Connor QC was an eminent QC and his opinion was one of the highest you could obtain.
There was no such thing as product rulings at this time. I asked my accountant for his opinion—
he is a highly respected accountant in South Perth—and he told me that it was a good

   I would like to go on to page 6. In August 1999, I received an amended assessment for the
years 1995 and 1996 for my Satcom investment. I was asked to repay the deduction and was
fined 50 per cent for tax avoidance and was charged 13.9 per cent daily compounding interest. I
made numerous phone calls to the ATO in Cannington and was told there was no freeze on
recovery action. I lodged an objection through Wilson and Atkinson to the ATO, and in phone
conversations with the ATO I have been threatened with recovery action if I did not pay
regardless of my objection. I have been advised by ATO officers to contact the ATO if the bailiff
arrives at my house to seize assets.

E 426                                  SENATE—References                 Tuesday, 20 March 2001

   On 1 October 1999, I had an interview with tax officer Mr Mark Beadle from the ATO’s
small business section in Cannington. The ATO were extremely reluctant to see me in person.
My wife, me and my two children aged six and four had driven the 1¼ hours from south
Mandurah to the ATO in Cannington. When we arrived at the ATO the security guards refused
to let my son use the lavatories unless we were met by an ATO officer first. After some debate,
my son and I were escorted to the facilities by a security guard. The security rivalled that of the
international airport, and this was more than a little bit intimidating for me and my wife and
family. After this we were interviewed by Mark Beadle, who, when face to face, was far more
helpful than over the telephone. He said he was concerned as well, but this was being driven
from high up and he could offer no real solutions. I detailed to him all the facts that I have
previously detailed. Our only option was to pay or go voluntarily bankrupt. We were offered no

   One of my workmates had received an amended assessment for Budplan and he had told me
that he had not received the same amount of fines or interest that I had received. He had
completed a schedule of earnings for his Budplan investment to the ATO and the ATO had
offered him a settlement package that required him to admit fault and gave him a discount. I
raised this with the ATO at the interview and they said this was for Budplan only and we were a
different situation.

   In November 1999, my accountant received a schedule to be completed providing details of
earnings and the information on the scheme, and I returned it on 10 December. Subsequent to
this, the fine was reduced from 50 per cent to 10 per cent. On 16 November 1999, I was given
the undertaking that recovery action would be frozen until the matter was resolved and the test
cases would be heard to make a determination. At this point I was told by the ATO that they
were eager to have a test case to decide the matter. My accountant received the disallowed
objection from the ATO on 24 November 2000 for Satcom. Coupled with this, recovery action
would take place before Christmas, unless I paid $526 to have an appeal lodged in the
Administrative Appeals Tribunal and entered into a fifty-fifty debt agreement. If I did not lodge
an appeal with the Administrative Appeals Tribunal, my legal rights would be forfeited by July
2001. The ATO at this stage could have frozen recovery action until the test case determination.
They did not.

   I sold my car, furniture and any non-essentials that I could and managed to raise $22,000
before Christmas. On 31 January 2001, I received another amended assessment for Oracle, and I
have objected to this as well to the ATO. I have been told that no discount will be offered by
completing a schedule for Oracle in the same manner that Satcom was. The years 1995, 1996
and 1997 are the only years I have participated in projects. I have paid 50 per cent of the
assessment to hold off recovery action, and this has caused me severe stress—it has nearly cost
me my marriage. I have been working two jobs for the last two years, averaging 60 hours per
week to pay this debt. I have let the ATO know about the stress and depression via mail and I
have made a formal request that the interest and fine be remitted. I have been told this cannot
happen until the debt has been repaid in full. The interest is more than I can earn to repay and I
have been offered no discount or settlement. I am 31 years of age and have a wife and two
children to support. I have had to take leave from my present job due to the pressure caused by
this situation.

Tuesday, 20 March 2001                 SENATE—References                                   E 427

   I have not been informed by the ATO of their settlement policy. The stress is too much, and if
I do not get an outcome soon I do not think I will be able to continue under the present
circumstances. I have been made to feel like a criminal. I do not think the ATO should be
rewarded with interest rates of 13.8 per cent daily for stalling rather than going to the Federal
Court to get the test case determined. Due to the legal system, these delaying tactics are scaring
off people in similar situations to mine. The scenario I have been presented with is this: Wilson
and Atkinson lodged an objection in the Federal Court in December 2000; the first directions
hearing was in March 2001, at which a timetable was agreed between Wilson and Atkinson and
the ATO; the second directions hearing will be in July; the third could be in November; and we
may be in court before 2002. This will be before only one Federal Court judge, so the decision
will most likely be appealed and go to a full bench hearing of three judges. That would not
happen until late 2002 at the earliest. The fines and interest have accrued to a level that is so
daunting that bankruptcy is the only option for test case candidates and members. The ATO are
thus rewarded for procrastinating.

   As a taxpayer I feel I have been let down by the ATO in their duty of care. I feel I have been
treated badly. My rights as an individual have been abused, and my individual case has never
been heard. The ATO knew of this problem and in 1998 started issuing product rulings. The
ATO should not be allowed to charge interest, levy fines or disallow deductions for the cash fees
invested into these mass marketed tax effective schemes. As you are aware, I work in the
electrical industry as an electronics tradesperson. I rely on the advice of professionals. I
challenge anybody with commonsense to say that, after taking all of the above due diligence
precautions, I am a blatant tax cheat.

  CHAIR—Thank you. Given your evidence, I am not sure that I have any questions to ask
you. But, as somebody in the audience has pointed out, I am sure we will have some questions
for tax commissioner Carmody—and we would have had questions for the tax office anyway.
Clearly the circumstances that you have found yourself in are somewhat difficult. In your initial
submission you say that your accountant explained the financing arrangements and the non-
recourse loan. I understand that this was in 1995, so there was possibly no indication from the
accountant at that time that the nature of non-recourse loans could be challenged.

  Mr Ryper—I was told it was an opinion from Robert O’Connor and that that opinion was
one of the highest you could get.

   CHAIR—I understand that. Insofar as the other advice that you sought goes, I am curious as
to the tax office’s response to you when I think they said that they were not in the business of
saying whether something was a legitimate deduction. I think you may have said who you were
speaking with at the time. Do you remember who you were speaking with?

  Mr Ryper—No, I do not. At that stage I was a lot younger and probably not as experienced
as I have had to become recently. I thought that by ringing the ATO and asking for their opinion
I was fairly safe, and I took their advice on face value.

  CHAIR—They said to you to get your own advice.

  Mr Ryper—Yes.

E 428                                  SENATE—References               Tuesday, 20 March 2001

  CHAIR—And they said that that would be considered due diligence.

  Mr Ryper—Yes.

  Senator CHAPMAN—Following what the chairman said, they told you that, if you had
gone through that process of due diligence, even if there was a disallowance later, there would
be no penalties, and you would just have the amount disallowed. I note that subsequently you
had discussions with Mr Mark Beadle.

  Mr Ryper—Yes.

  Senator CHAPMAN—Did you raise that issue with him?

  Mr Ryper—Yes.

  Senator CHAPMAN—What was his response?

  Mr Ryper—He said that it was out of his hands, that there was nothing he could do and that
that would be for someone who made an erroneous claim in their tax deduction and went
through a CPA. If they were audited later on, they would receive no fines and no charges, but he
said that this was a far bigger issue and it was being driven from above him, and that there was
nothing he could do.

  Senator CHAPMAN—I notice you paid 50 per cent of the assessment.

  Mr Ryper—Yes.

  Senator CHAPMAN—You are also objecting to the assessment and proceeding as a member
of a group in the court case.

  Mr Ryper—Yes.

  Senator CHAPMAN—If the court case goes in your favour, I assume that the amount you
paid will be refunded.

  Mr Ryper—That is what I have detailed in one letter, but from some of the legal advice that I
have received from people they have said that if it went to a Federal Court decision and it was a
two to three decision of a full bench of the Federal Court, it could be challenged again in the
High Court and, if this was the case, that that money could be held until well into 2007.

   Senator CHAPMAN—I understand that, but at the end of the day, as some have been asked
to do, you have not signed away your rights?

   Mr Ryper—No. The hard part is that, if it gets to the point financially where they force me
into bankruptcy, if I did go bankrupt I would lose my legal rights, and that is only happening
because of the way the interest rate is accruing.

Tuesday, 20 March 2001                 SENATE—References                                   E 429

  Senator CHAPMAN—What is the current situation of Satcom?

  Mr Ryper—As far as I know, Satcom at the moment are still trading, and they are running a
company called Supply Search, which procures equipment via the Internet for people and, as
well, they were doing lands and title searches. They structured the company into three different
sections, and the section that I invested in has not paid any cheques.

  Senator CHAPMAN—It has not?

   Mr Ryper—No, not since 1997. I did raise this with them and they said the reason was they
were supplying accounting software to accountants to do direct lodgments and, because of the
people that they had who were writing the software, they had a lot of software problems and the
accountants rejected their software en masse and went to alternative software that directly
linked with the ATO to lodge tax returns.

  Senator CHAPMAN—So you only have an interest in that section of the business, not the

  Mr Ryper—Yes, the financial services section of Satcom.

  Senator CHAPMAN—Given all that, what is your view of Satcom as a business, leaving
aside the tax issue?

   Mr Ryper—As I detailed in my summary, I have been involved in computer programming
and communications for my whole life—in industrial electronics—and originally when I heard
of Satcom the ideas seemed very good to me. It seemed as good an idea as investing in
Microsoft or Yahoo, or anything else that involved communications or the Internet. I invested
with the company because I genuinely thought that this was the beginning of the Internet; the
average person in the street did not realise the way it was going to boom and the rate at which it
was going to boom, and these people were directly linking up accountants with software that
did title searches and directly lodged tax returns. I genuinely thought that these guys were going
to make a dollar and that it would well and truly pay the loan. At the time they offered me that
loan, I thought that they must have had a pretty good idea of the financial returns; if they were
going to forward me $20,000, they would think that the business would perform well enough to
pay that loan back.

  Senator CHAPMAN—You say that the tax office discounted the fine because you provided
them with information on Satcom.

  Mr Ryper—Yes.

  Senator CHAPMAN—I assume that you are talking there about the penalty tax?

   Mr Ryper—Yes. The penalty tax was 50 per cent, and they reduced it to 10 per cent because
I provided a schedule of the earnings that I had made and the deductions that I had made for
Satcom for the previous years.

E 430                                  SENATE—References                 Tuesday, 20 March 2001

  Senator CHAPMAN—Did they reduce the interest charge?

  Mr Ryper—No.

  Senator CHAPMAN—The information you provided on Satcom was only about your own

  Mr Ryper—Yes.

  Senator CHAPMAN—It was not about the company as such.

  Mr Ryper—No.

  Senator CHAPMAN—Do you know what the grounds were for your being selected as a test

   Mr Ryper—No. I fronted up at Wilson and Atkinson, asked them, and went through the
process. Anyone who objected was asked to talk to them about becoming a potential candidate
as a test case, and I mentioned to them that I had a belief about Satcom and that I was in the
computing industry—in industrial electronics—and I genuinely thought the business was going
to make money, and I think that is why they selected me at the time.

  Senator CHAPMAN—You said the tax office staff were very reluctant to see you in person.
Can you just elaborate on that?

   Mr Ryper—They were very reluctant. I asked for an interview on the phone and they said,
‘We would rather do all dealings with you over the telephone. We don’t want to see you in
person.’ I said that I would really like to see someone in person. As you could imagine, I would
be talking to an ATO officer and I would have my wife next to me asking the same questions. It
was very difficult, because it has caused a lot of stress and a lot of hardship. I thought the best
thing to do would be to sit in a room and take all my books, all my paperwork and all my
statements of assets and place them down in front of them and say, ‘This is my situation; I am
by no means well off and you are hitting me with this bill which is more than I own. There’s got
to be something you can do.’ I walked out of there and there was nothing they could do.

  Senator CHAPMAN—You said that the tax office has not informed you of its settlement

  Mr Ryper—No.

   Senator CHAPMAN—Has it given you any information on its debt recovery policy that is
intended to ease the burden of repayments?

  Mr Ryper—No.

  Senator CHAPMAN—So it has not given you any advice on those aspects at all?

Tuesday, 20 March 2001                  SENATE—References                                     E 431

   Mr Ryper—No. I have recently received a form to detail all my assets and liabilities and
return to them to try and get the fines and interest remitted. I tabled a letter to the ATO asking
that they do something to reduce the fines and interest because of the stress and hardship that it
is causing me. They have sent me this form to fill out which just details what I am earning and
what my liabilities are.

  Senator CHAPMAN—What was the nature of the way in which Satcom was marketed to

   Mr Ryper—I had actually heard of Satcom from engineering people that I was working with.
We were doing industrial electronics and instrumentation work and they mentioned that there
was this guy from the oil and gas industry, Ron Gallagher, who was starting this company that
would directly link up the tax offices to the Internet. I rang up Satcom and they said I had
missed out on the first release which was in Western Australia. You could actually take up a
training agreement and go out and sell their software. I was seriously considering doing that, but
I did not do it in the first year. In the second year, their release was in the eastern states. I did
speak about relocating and taking up their training and moving over to the east because I felt I
had the skills and expertise where I worked. But it was too much—my wife did not want to
move away from her parents and said, ‘We’d rather stay in Western Australia.’ The accountant
said to me, ‘They can run the scheme for you and if it makes money, it is going to well and truly
pay back the loan and in six or seven years time you will be getting big cheques.’ I genuinely
thought that, otherwise I would not have made all the phone calls and done the checks on Ron
Gallagher and Robert O’Connor.

  Senator CHAPMAN—So, in effect, your investment was done at your initiative. No-one
came to you and used aggressive marketing techniques.

  Mr Ryper—No, it was not like something in the financial section of the newspaper—you,
know, ‘Invest in this.’ I actually approached Satcom.

  Senator COOK—Going back to what you said about being advised by the tax office that if
you did a due diligence check then at a later date, if this was found not to be a legitimate
deduction, there would be no penalty, you have said that you cannot recall the name of the
officer who gave you that advice. Can you recall which branch of the tax office it was?

   Mr Ryper—There was a 1800 type number that you rang up and it would get you to a tax
officer to make general inquiries to the tax office. It was more than just one phone call actually;
it was a phone call followed up by another phone call. I was naive and did not really quite
understand what self-assessment meant. As far as I knew, you filled out your tax returns and
that was it. I did not realise that you were assessing yourself; you just had to stay within the law.
They explained to me exactly what self-assessment was and said that so long as I had due
diligence and so long as I went through an accountant who was a CPA, I would be fairly well

  Senator COOK—This was an infoline type number that you rang?

  Mr Ryper—I actually spoke to a tax officer.

E 432                                 SENATE—References               Tuesday, 20 March 2001

  Senator COOK—Directly, or did they put you through to a tax officer after you made the

  Mr Ryper—They put me through to a tax officer, yes.

  Senator COOK—But your initial contact was through the information line set up to provide
taxpayers with information about—

  Mr Ryper—Yes.

  Senator COOK—Can you recall the date?

   Mr Ryper—No, I cannot. I have asked the ATO if they have any records of those calls. They
said that it would be on a different database and they would not be able to retrieve that
information anyway.

  Senator COOK—They do not log these calls?

  Mr Ryper—No. Not back in 1995, they did not.

  Senator COOK—Has the tax office indicated to you or are you aware of what section in the
tax office—if someone was sitting on an info line and got a call like yours—they would refer
that query to?

  Mr Ryper—No, they have not.

  Senator COOK—Do you happen to know whether there is any handbook for the info line
setting out what their instructions are on risk?

  Mr Ryper—No.

  Senator COOK—These are questions we can ask the tax office.

  Mr Ryper—I do know that in my case I was originally handled by the small business section
in Cannington. Now that is no longer the case; I am handled by the debt recovery section in
Moonee Ponds. Every time I have rung a number at the ATO, if the number is busy, I am put
through to another section, and the advice has been completely different from the advice that I
have received from Moonee Ponds. I give the same tax file number and the same information
and I get a different answer every time. A lot of people that I know in the same boat as me are
coming to me and asking me what has happened. The story is the same—it just depends who
you get on the day—so much so now that I write down the name of everybody that I speak to,
and the time, and ask for the same person the next time, and I just keep ringing the same
number until I get the same person, purely for that reason.

  Senator COOK—Do you keep notes of what the answers are?

  Mr Ryper—I have done since the amended assessment. I have kept detailed notes.

Tuesday, 20 March 2001                SENATE—References                                  E 433

  Senator COOK—If we wanted to see those notes you could provide them to us?

  Mr Ryper—Yes.

   Senator COOK—When you were given the undertaking that recovery action would be
frozen until the matter is resolved—an undertaking which was revoked just before Christmas
2000—can you give us any more information about who gave that advice?

   Mr Ryper—After I had seen Mark Beadle, I rang back on 16 November and I spoke to the
ATO. I had spoken to one of Wilson and Atkins’ solicitors, Daniel Velthius. Daniel Velthius told
me that an agreement had been made between the ATO and Wilson and Atkins that recovery
action would not take place. I rang up the ATO to confirm this. I did not speak to Mark Beadle
at the time, but they did confirm that yes, that had been agreed.

  Senator COOK—So that is documented by your lawyers and by your own—

  Mr Ryper—Yes. Unfortunately, I think the ATO might have been referring to their own
decision, not the court decision. They were referring to the objection that you lodge with the
ATO, and then disallowing the objection is apparently part of the process to enter into a test

  Senator COOK—When they revoked that advice in the letter that you got just before
Christmas last year did they give any explanation?

    Mr Ryper—There was a position paper from the ATO. It was very hard for me to
understand—it was very technical. I have taken it to a lot of other people and picked through it
a few times, and I do not think that most of your average taxpayers would be able to understand
it. But it did say that the commissioner had made his decision and that that was final.

  Senator COOK—In effect, that they had changed their mind?

  Mr Ryper—Yes.

  Senator COOK—Other than a reference to a position paper, they did not provide you—

  Mr Ryper—It just said that the case has been decided and that now recovery action will take
place unless I contact them within 30 days.

  Senator COOK—I am coming to the point that previously they had not given you an
absolute guarantee that recovery action would not take place.

  Mr Ryper—I had understood that the guarantee was until we went to court. And when they
sent this letter they said no, it was not when we went to court, it was when the objection was

  Senator COOK—And they meant by themselves?

E 434                                   SENATE—References                 Tuesday, 20 March 2001

  Mr Ryper—Yes.

   Senator COOK—You say you have been given test case status. That is not by the ATO; that
is by the group of lawyers that are taking this action?

  Mr Ryper—Yes.

 Senator COOK—You are aware of a capacity for the tax office to fund test cases where
matters of law—

  Mr Ryper—I found that out from the AIMA just recently, yes.

  Senator COOK—But that has not been offered to you?

  Mr Ryper—I understand that it has not.

  CHAIR—Thank you very much for the submission that you have provided in writing and
verbally and the response you have made to the questions that we have asked. As there are no
further questions, I will call the next witness. Hopefully, we will sort these matters out in the not
too distant future.

   I remind those present that we have a time limit in terms of this venue. We want to hear from
as many people as possible. As I have said, I appreciate that people want to applaud the
witnesses, but if you are going to clap, do it very quickly so that we can move on, because it is
important that we hear from as many of you as possible. Interruptions to the committee at this
time are only interruptions to your own opportunities at the end of the day.

Tuesday, 20 March 2001                   SENATE—References                                     E 435

[5.56 p.m.]

TAYLOR, Mr Geoffrey Alan (Private capacity)

  CHAIR—Welcome. Please expand on the capacity in which you appear.

  Mr Taylor—I appear as a participant in a project.

  CHAIR—The committee has received a submission in writing from you. Are there any
additional written submissions you wish to provide the committee with at this point in time?

  Mr Taylor—I will endeavour to summarise what I am about to say, but I do not have an
additional written submission at this stage.

  CHAIR—I now invite you to make an opening statement in respect of the submission you
have made.

   Mr Taylor—I am a small businessman. I have had 30 years involvement in politics, and I
suppose one of the reasons I am interested in what has happened is that I have never seen the
like, legally and constitutionally, of what the tax office is trying to pull off now. Until 28
October 1999, I knew as much about the tax law as anybody else did, and that was the point at
which I received the notice of reassessment. I confirmed with Mr Shawcross at the Cannington
tax office that in fact my response to the notice of intention to reassess had been completely
ignored, even though Mr Chapman had invited responses from people. I think at this stage,
given that all the notices of reassessment have gone out from the tax office, basically the tax
office have been completely incompetent because, by issuing the notices of reassessment
without first of all having regard to the responses, in terms of administrative law, they have
rendered void those notices of reassessment, and they are ultra vires because they lack
procedural fairness, which is a basic requirement of administrative law.

   There are really three areas of law with which we are concerned in this case: the first is tax
law; the second is administrative law, which David has talked about at some length; and the
third is constitutional law. We have talked a little bit today about retrospectivity, and I think
what we need to bring out is the fact that there are two ways to look at this. First of all, certainly
the tax commissioner can go back and look at returns which have been lodged in previous years,
and there is no real argument with the fact that the commissioner ought to be able to go back
and look at what somebody did four years ago in terms of the law which existed four years ago.
But we are dealing with a different situation here. We are dealing with things like tax ruling
2000/8, which was issued in June 2000 and which imposes additional elements of the offence.
For example, one of the things in it is the requirement that all plants be identified to the
participant. This actually introduces new law.

   It was my understanding that new law in this country is introduced in one of two ways. It is
either introduced by the parliament or it is introduced by the High Court. It is certainly not
introduced, in my view, by the tax commissioner. The tax commissioner is right out of court in
terms of constitutional law. What he has done with 2000/8 is to actually offend section 1 of the
Constitution, which says that the Parliament of Australia has the power to legislate. It certainly

E 436                                           SENATE—References                        Tuesday, 20 March 2001

does not say anything about the tax commissioner. I have just read a book by Len Deighton
called Winter and it describes what happened in the 1930s in Germany. What it says is:

It may be all trumped up. They do that sometimes, just invent some offence and let you try to prove you are innocent.

I think that is a fair description of what has gone on with us.

   Let us look at some of the other issues. I want to point a few things out. It is clear from the
Ombudsman’s report on Main Camp. I think all but three of the 20 recommendations can be
said to have general application. Only three really relate to Main Camp alone. One of the things
that the Ombudsman found is that the taxpayers’ charter had been breached particularly in
relation to providing people with adequate information on why the tax commissioner believed
they had breached part IVA.

   I had the chance to compare a few of the different position papers and it is clear, as people
have said today, that largely the position papers have come out of what I choose to describe as
sorcerer’s apprentice computers. The Sorcerer’s Apprentice piece of music is where they created
one broom and then it just bred and bred until they had so many brooms they did not know what
to do with them. And this is basically the system that has been used to issue the notices.

  So the problem we have is that even though in December the tax commissioner said to the
Ombudsman, ‘We accept what you have said about the standard of the notices in principle’, one
month later on 4 January, guess what! I received another notice of intention to reassess with a
position paper which is no different and which has had absolutely no regard for the criticisms
the Ombudsman had made of the standard of information provided in the position paper, so the
comments as far as part IVA are concerned are no better than they were previously.

  One of the issues that comes up in particular which has been mentioned earlier in the day—
and I just advert to it now—is the fact that one of the reasons for applying part IVA seems to
have related to round robin financing. Can I say that, certainly from my perspective and I
believe from the perspective of a large number of participants—and we do have a fairly well
established email network now—the large majority of project participants had no knowledge
that the manager, if in fact a manager did do this, was going to apply the finance in that way.
And yet, the tax office is now saying, ‘You are responsible for something under part IVA of
which you had no knowledge whatsoever.’

  People have talked a little bit about recovery action. Certainly the tax office has said, ‘We
tend to be strongly influenced by decided cases’. We have tried since we knew about it, in
October, to point out to them that they should have some regard to the Mochkin case where
Levi Mochkin won a case which said they would not be able to proceed with recovery until
such time as a decision had been made about his tax liabilities. Notwithstanding the Mochkin
case, the tax office has tended to completely ignore that and we know that they have gone
further to proceed with recovery against individual people.

  People have talked about using the Ombudsman and various things have been said, but the
point I would make is that consistently the Ombudsman comes back and says things like, ‘You
should seek ATO internal review.’ ATO internal review in my experience has been a nonsense.
In fact, when I have applied for review of a decision, what has happened is that the senior

Tuesday, 20 March 2001                   SENATE—References                                     E 437

officer who made the decision has actually referred it back to a junior officer to hear the appeal.
I believe there is a principle of administrative law which says that no-one shall be a judge in
their own cause and I certainly think that appeal from a senior officer to a junior officer is
clearly not appropriate. When I have queried this, they have said, ‘Well, Mr Peter Smith in
Canberra is just too busy to determine appeals.’

   Another issue that has come up during the course of today has been the question of self-
assessment. I think post GST we face about 13,500 pages of tax legislation as taxpayers.
Clearly, if I was to have an electrical tradesman come to my house and wire the house, if the
tradesman then came to me and said, ‘Please sign off to say that I, the expert, have wired your
house correctly,’ it would be laughable. But what self-assessment says is, ‘Notwithstanding the
fact that you have taken competent advice’—and you heard from Lawrence about the level of
advice he took—’at the end of the day, when your tax return goes in, you are supposed to sign
to say that the people who are expert in tax have filled out that tax return correctly.’ I suggest
this is a nonsense.

   In fact, just to perhaps highlight it, one of the issues that comes up, which is probably one that
many people encounter now that they run into capital gains if they have got shares, is the
question of the uplift factor. I am sure that if a registered tax agent particularly said to a woman
client sitting there in his office, ‘Have I got your uplift factor correct?’ he would probably get a
slap in the face. In fact, I mentioned uplift factor to a senior ATO official and he said, ‘Uplift
factor? What’s the uplift factor?’

   One of the issues that has come up is this question of the tax commissioner resiling from his
previous commitment to the Ombudsman to hold off pending test cases. The reason given was
that, if he did not do that, he would be in trouble because time lines would have expired under
the tax act. In fact, I know that he has been issuing notices in projects where he has still got a
clear 18 months before his time lines run out. His argument for resiling from his promise to the
Ombudsman is really quite empty.

  I want to come back just a little bit, because we have had this issue before of the private
binding ruling and we keep being reminded that the private binding ruling is simply something
that applies to the particular individual. I believe that the tax office has misused this to a degree.
Certainly private binding rulings were intended to allow people with unique circumstances to
seek a ruling.

   We know that in a lot of the projects—not just a particular project but a range of them—the
structures were essentially similar. As Senator Andrew Murray has pointed out, if the tax office
view that everybody should apply for a PBR was upheld, they would have been faced with, we
thought, 12,000 but we are now talking about perhaps 58,000 requests. So there is some logic in
this: if one person has been issued with a PBR for a particular type of structure and other
structures are quite similar then people generally are entitled to rely on that. One of the reasons I
say that is because the taxpayers charter says, ‘We behave with consistency.’ It seems that what
they are now saying is, ‘Our view of the tax law when we are asked for a private binding ruling
depends on how many people ask. If one person asks, we have one view; if five ask, we
probably have the same view; if 10 ask, we are thinking about it; and if 20 ask, well, it could be
a different story.’

E 438                                  SENATE—References                 Tuesday, 20 March 2001

  CHAIR—I am cognisant of the time. We are fairly well versed in the problems associated
with the issues of the private binding rulings, I assure you. It would be helpful to deal with
some more specific matters that relate to you because I would like to proceed to questions.

  Mr Taylor—I point out that the question of enforcing the charter has been brought up earlier.
I understand that, for instance, the public service charter in the United Kingdom—the public
service charter, not the tax charter particularly—is set up in a way which is enforceable.

  Senator COOK—Are you commending that model to us?

  Mr Taylor—My preference in terms of a model is to have a charter which the tax
commissioner holds his employees responsible for observing. Unfortunately, of course, that
does not work if you have a directive coming from the very top; somebody else obviously has to
do that. In this case I have asked the Public Service Commissioner to do that in terms of the
public sector code of ethics because it is clear that the directives on this matter are coming from
the very top, and there is obviously no way that the commissioner is going to hold himself
responsible for observing the charter.

   Senator COOK—My question relates to the British public service model that you are
referring to. The organising principle of that model is the theory that there is a client
relationship between the public service and the public. The model is about declaring principles
of how, by virtue of a contract with the public, the public service will deliver its services to
them; for example, when they will answer the telephone—after it has rung six times or
whatever—or what the length of time is before they reply to a letter. All sorts of performance
indicators get built into this so-called contract. We have to make up our mind about all these
things. Are you recommending that type of model to apply in the case of the tax office?

  Mr Taylor—I believe that the UK public service charter and the way it is enforced is worthy
of study in this situation. I also understand that as a result of significant problems—because this
was asked earlier in the day—that have occurred with tax administration in the United States
and in New Zealand, particularly in relation to the rights of taxpayers, that a significantly new
approach has been taken to taxpayers’ rights in both those countries. So in terms of looking
around for models, we might look to them. I understand that in New Zealand there was a
revamp of the situation with the internal revenue department because they pursued a man to
suicide over $84.

  CHAIR—On page 1 of your submission you refer to the tax office’s statement. You have a
view that the tax office has given wrong signals over a period of seven years, and interest
continues to accumulate in spite of its delays. Can you elaborate in terms of what in your view
are the wrong signals, particularly in relation to agribusiness schemes?

  Mr Taylor—Some of, shall I say, the wrong signals have been referred to earlier by David
Meredith. One of the other significant wrong signals, if you like, relates to 221D variations.
What the tax office has basically said is that these variations, when they are applied for and
granted, basically mean nothing: ‘Just because you have a 221D variation does not mean that
we have accepted that your deductions are legitimate.’ Firstly, I have great difficulty with the
idea that an administrative discretion which has to be exercised by the tax office is only
exercised by somebody who the tax office is effectively saying is brain dead. In other words, I

Tuesday, 20 March 2001                            SENATE—References                            E 439

believe that a 221D application requires the active application of a discretion, and for the tax
office to say that it does not is nonsense. Secondly, in a number of cases people have actually
been fully audited over the 221D application, only to have the 221D restored to them. Thirdly, I
have certainly seen letters from the tax office in fact inviting people to apply for a further 221D
variation for the succeeding year. We are led to believe by the tax office that all this went on,
but outside the collective consciousness of the tax office. It is really quite unbelievable.

   CHAIR—The tax office might also say with regard to the self-assessment system that you
are obliged—as many taxpayers actually did—to try to confirm that the purpose for which they
were seeking 221D tax relief was, in fact, legitimate. There just seems to be a bit of a catch-22
situation, which is a matter for us to sort out with the tax office, or at least to endeavour to. With
regard to the inconsistencies that you refer to on the part of the ATO, can you provide us with
any examples?

  Mr Taylor—Certainly the prime inconsistency that I think exists in this whole issue goes
back to the original private binding ruling issued in December 1992 for, if I recall correctly, Tea
Tree No. 2. That had no qualifications about part IVA. It did, contrary to recent comments that I
believe have come from Mr Peter Smith, consider a number of issues including whether people
were running a business or whether people were participating in a business. It considered the
method of financing. We have to assume that if it was issued by a deputy commissioner that it
carried some weight. As I think a previous person who gave evidence today said, inevitably the
law generally works by precedent. It is not unreasonable for other people, on the basis of their
knowledge of that ruling, to assume that in like circumstances the tax office would act

  For example, would every Aboriginal group in Australia need to go through Wik, would
every Aboriginal group in Australia need to go through Mabo, to establish what the law was on
land rights? Equally, does every taxpayer have to go through a PBR to establish what the law is
on project structure? So I believe, particularly in this area, the tax office is just being completely

   Let us have a look at the charter itself. I have got two charter booklets—No. 1 says that I have
rights of review under the Administrative Decisions (Judicial Review) Act. That sounds pretty
good until you read booklet No. 8, I think it is, which says you do have rights under the AD(JR)
but they do not extend to assessments. I would suggest that the primary problem most of us
have is assessments. So the promise of review under the act that we have in charter booklet No.
1, by the time we have read through to charter booklet No. 8, we have found we did not have a
right to review after all. I think we have had numerous other examples today of complete
inconsistency by the office, particularly perhaps in the evidence by Lawrence a bit earlier.

   CHAIR—This goes to the question of the consistency. You state:

I believe the Budplan private rulings were later reversed.

It is my understanding that the ATO did not issue private rulings in respect of Budplan.

  Mr Taylor—Where is that from, Mr Chairman? What I did say was that the director of
Budplan—by the way, I should say that my submission should have said Senate report not

E 440                                             SENATE—References      Tuesday, 20 March 2001

House of Reps report—attempted to obtain a private ruling and was still waiting 15 months
later. In fact, I have just heard of another couple who—

   CHAIR—You say earlier though—

   Mr Taylor—Where is that?

   CHAIR—Up the page. It says:

I believe that the Budplan private rulings were later reversed.

That is, where you have got subheading, ‘Seeking Private Rulings’, in the paragraph just before
that. I have to say that I am not exactly certain myself. I have probably two views at the
moment. I am not sure whether there was one private ruling issued to one individual. I know
that the tax office did not issue. This is confirmed by your next paragraph under, ‘Seeking
Private Rulings’. Whilst Mr Stotter did, I understand, apply for a private ruling to cater for the
whole project, he did not achieve that. I am not certain that there was not an individual private
ruling given. I will check that.

  Mr Taylor—I cannot comment on this at this stage but I do not at this stage withdraw that
comment. I will need to check it further.

   CHAIR—I appreciate that. I would also like you to confirm for me whether or not you said
in respect of a private ruling for Main Camp Tea Tree Project No. 2 that that private ruling took
account of the financial arrangements.

   Mr Taylor—It specifically referred to the fact that it had looked at the financial
arrangements. I have heard recently that Peter Smith claims that they were not given full
information. On the other hand, I am told that, in fact at the time, they were supplied with full
information and they knew precisely the form of the financial arrangements for Tea Tree 2.

   CHAIR—I have here a copy of a private ruling in respect of that and I cannot see where it
specifically refers to the financial arrangements used in the project. The only reason that I am
asking you about this is that, with regard to any evidence that we have to consider, I really want
to make sure that we are dealing with a factual situation. If there is another private ruling, as in
different from the one that I have before me, I would appreciate it if you also had a look at that.
It is important because, when we get to deal with the tax office, you have to understand that we
have to take all the evidence here at face value and we have to at least test its veracity or its
accuracy so that we are able to present to the tax office, and to any other witnesses that we may
call, questions that we believe are based on fact. That is not an accusation against you, I might

  Mr Taylor—Because of weight, I only brought this one book. But had I the other nine, I am
sure I could turn up the particular ruling that I am talking about which can demonstrate to you
that, within these submissions, it has got the other Tea Tree ruling.

   CHAIR—It is a fundamental question and that is why I am so interested in it. There is a
reference to the financial arrangements.

Tuesday, 20 March 2001                SENATE—References                                   E 441

   Mr Taylor—In respect of consistency of treatment, one of the reasons we set up an
Australia-wide email network for people who are affected was because we wanted to hear from
other people about their experiences. People were very isolated. Some of them were extremely
stressed. They lacked support and even access to good advice. That is why we did it. One of the
things that has done is to bring to light the different ways that people have been treated by the
ATO throughout Australia and highlight the way in which much of that is quite inconsistent. A
recent example from two days ago concerns the Profound Holstein Breeding Project, which I
think was in Victoria, where the tax office accused the taxpayer of being in a project where
there was non-recourse financing. In fact, Profound Holstein had full recourse financing.

  Senator CHAPMAN—Thank you for your comprehensive submission, Mr Taylor. It
certainly highlights a number of the issues that we need to examine. In your submission, you
point to the success of the projects in which you have invested. Have they actually generated
any income for you yet?

  Mr Taylor—Yes. I have been paid income now in two successive years. We had the income,
but we have actually forgone that income to fund a legal firm’s negotiations with the Australian
Tax Office.

  Senator CHAPMAN—So you are still a participant in those projects?

  Mr Taylor—I am. The particular projects I am talking about are actually in the New South
Wales government’s 2000 booklet which I think lists the 20 most successful new projects in
New South Wales in the year 2000—to the extent that the project was officially opened by
Premier Bob Carr.

   Senator CHAPMAN—As you are probably aware from more recent years, where the
practice of product rulings has been adopted, those projects that have been moved against in
terms of their tax deductibility have not been moved against so much on the basis of the
business arrangements of the projects and whether or not they have been successful in a
business sense, but really on the basis of the financing arrangements. How were your
investments financed? Were they financed purely out of the tax deductibility claims or were
actual funds committed by you?

  Mr Taylor—The projects were financed partly from a loan facility which was arranged and
partly from direct cash payments.

  Senator CHAPMAN—So you actually injected—

  Mr Taylor—I actually injected money into the—

  Senator CHAPMAN—Over and above what the tax refund was?

  Mr Taylor—Did I inject money over and above what the tax refund was? No. If I recall
correctly, the tax refund exceeded the initial cash outlay.

  CHAIR—By how much?

E 442                                  SENATE—References               Tuesday, 20 March 2001

   Mr Taylor—I cannot tell you off the top of my head, I am sorry. I do not have the exact
figures in front of me. I am not trying to hide anything; I just do not know.

  Senator CHAPMAN—What is your view of the tax office’s attitude to the financing
arrangements, as distinct from the business arrangements?

  Mr Taylor—It is interesting. Our project was limited recourse. In fact, I was told by my tax
adviser that there are probably three perfectly acceptable projects in Australia set up every day
which involve non-recourse financing, let alone those with limited recourse—ours was limited
recourse—and yet, for some reason, certain projects are attacked for limited recourse whereas
others which are non-recourse are not touched.

  CHAIR—Mr Taylor, thank you for the written submission and verbal evidence you have
given here today. It will add to the weight of the whole range of evidence we have now received
and assist us in our proceedings at some later date.

Tuesday, 20 March 2001                 SENATE—References                                   E 443

[6.32 p.m.]

EDINGER, Mr Robert John, Managing Director, Chalice Bridge Estate Ltd

  CHAIR—Welcome. Do you have anything to add to the capacity in which you are

  Mr Edinger—Chalice Bridge Estate is the responsible entity and project manager for the
Chalice Bridge Estate vineyard project.

  CHAIR—The committee has a copy of your written submission. Do you have any further
written submissions or additions to your submission that you wish to make at this time?

  Mr Edinger—No. However, I have provided you with some current photos of the project to
give you some idea of the quality.

 CHAIR—Would you like to make any opening statement? If so, please make it brief so that
we can move to questions.

   Mr Edinger—You have heard a lot of evidence from people who are participants in projects,
and I thought it would be of extreme benefit for you to hear what has happened to participants
in our particular project as a result of the way the project manager has been treated by the ATO.
The ATO has effectively not allowed the manager to even put submissions in relation to the
position paper that was issued to our growers in late January this year.

   The point I make is quite simply that the ATO has completely refused to talk to us, as the
project manager. We actually became aware that growers’ deductions had been disallowed when
one of the growers rang at 8 o’clock one morning and said that he had received the letter from
the tax office. I found this abhorrent, quite frankly. We were totally unaware that there was any
move to disallow deductions in relation to our project, and we were given no opportunity to
even review the position paper or to make any comments in relation to its contents. As I said in
my submission, there are some serious material errors of fact in that position paper that may
well have—given that they were able to be corrected—influenced the ATO’s decision in relation
to the disallowance of those deductions.

   I was directed to ring Jacinta Juttner of the Adelaide tax office, and did so, to discuss this
with her. On two occasions I was told quite bluntly—in fact, very bluntly—that they were not
prepared to talk to me as a representative of the project manager, that any problems in relation
to that position paper were purely between the ATO and the growers involved, and that if the
growers wanted to correct any errors of fact in that position paper then they would have to make
their own individual submissions. I find it absolutely disgusting, quite frankly, that the project
manager is not even able to make submissions on behalf of its growers and correct errors of

  Without wanting to go into all the nitty-gritty of this, and being mindful of time, I want to
give you a couple of facts in relation to what happened subsequent to this. Because the ATO
would not talk to us, we commissioned Bentleys MRI, chartered accountants, who had done all
the original tax advice on the project, to act for the growers, and they subsequently are in the

E 444                                   SENATE—References                 Tuesday, 20 March 2001

process of doing that. They wrote to the ATO three weeks ago and have not received a response
at all. They had authority from about 135 growers to act on their behalf. Upon checking this
afternoon, they still have not received a response at all. We have all these people sitting out
there. You have heard about all the stress, anguish and everything that has gone on, so there is
no point in my going into that. We have people who, maybe wrongly, have had deductions
disallowed based on that position paper, and we have not even had the ability to represent them
on those facts.

   The other interesting point in relation to this is that 11 allotments in our project were paid for
in cash—they were not under any means of financing whatsoever. The ATO have now allowed
those deductions in full. It would appear to me, quite simply, that by a simple representation by
those growers or their financial representative to the ATO, those deductions were permitted in
full, which would seem to me to literally blow right out of the water the whole ATO’s argument
in relation to their position paper in any event, because they have allowed the deductions for
growers who are participants and who have paid the fees the same as everybody else. Their
position paper goes on—you have probably seen it—for pages and pages about how the fees are
excessive and about how they are not in business and so on, yet they have allowed those
deductions straight up front.

   It would appear to me that the only issue on the table here between the ATO and the growers
is one of financing, given that the ATO have allowed the deductions already to a number of
growers for the full amounts they expended on the project. I want to focus on this finance issue
for a minute and talk about the errors of fact in the position paper that specifically relate to the
financing aspects, because all the rest you can now say is accepted by the ATO, given that they
have accepted those deductions for those growers. I just want to run through a few. You have
the position paper there.

   The ATO state that the finance company, which was an independent finance company, had no
relationship to the manager whatsoever. They state that the finance company is related to the
manager. That is absolute rubbish. There is absolutely no relationship between the finance
company and the manager, and there was no mention of finance whatsoever in the prospectus.
Each participant was totally able to get their finance from any source that they saw fit; in fact,
11 allotment participants actually paid for it in cash, by their own personal cheque. That is a
pretty material mistake in that position paper.

   They then make the point that the financier, Churchill Finance, borrowed funds from the
manager to finance participation in the project. Again, that is absolute rubbish. That is not the
case. The funds came from another source. Churchill Finance arranged their own sources of
finance to finance the participants. They make the point that the only funds that became
available from the growers for the project were prepayments of interest and loan repayments.

  Again, that is absolute rubbish. Apart from prepayments of interest and loan repayments to
Churchill Finance, they also paid $400 for their vines. They paid $300 for the initial rent and
continue to pay their rent each year. Each grower is responsible to make their own rent
payments each year, which they do. They paid for their own irrigation which is $1,740. They
paid for their own trellising which is $1,770 and approximately 65 per cent of the growers last
year paid their management fee of $1,800 even though they had the ability to finance that from
Churchill Finance. But 65 per cent of them actually paid that management fee themselves.

Tuesday, 20 March 2001                  SENATE—References                                     E 445

  In relation to the interest that is owed to Churchill Finance for those who finance through
Churchill Finance, over 50 per cent continue to pay their interest themselves rather than
capitalise that interest onto the loan as they have the ability to do.

   In the position paper, the ATO also contends that the participants or growers made a tax profit
out of their participation in the project. Again, that is not correct. In the first year, they had a
deduction of $18,395 and their actual cash expenditure was $15,879. Clearly, they did not make
a tax profit. The finance that was provided by Churchill Finance for those that chose to take it
had a range of options within it. The ATO are contending that all of that finance that was
received by Churchill Finance was non-recourse. That is totally incorrect. There are a
considerable number of growers who have a full recourse loan with Churchill Finance.

  CHAIR—The letter that you talk about went to all of them regardless of—

   Mr Edinger—Every grower, including the people who paid cash. They also make a
contention in the position paper that Churchill Finance has no redress to the borrowers for
interest payments. Again, that is totally incorrect. Apart from the fact that in excess of 50 per
cent of the growers are currently making their interest payments rather than capitalising them
onto the loan, Churchill Finance has the ability to invoice borrowers for interest payments any
time after year 2004 if the growers’ net revenue from the project is insufficient to pay
outstanding interest for that particular year or previous years. So clearly, the financier has
recourse to the growers.

  There was quite a lot of discussion about non-recourse, again throwing everybody into the
same grab bag, saying everyone had non-recourse finance. It is clearly incorrect. They also
make the contention in the position paper that there were no capital items paid for by the
growers. In fact, all the vines, irrigation and trellising and the rent have been paid for by
growers personally, not from loan funds from Churchill Finance as is contended in the position
paper. They actually did not even get the name of the project right, just for a little bit of levity.
They actually called it the Chalice Bridge 1998 project. In fact, the name of the project is the
Chalice Bridge Estate Vineyard project. So they did not even get the name of the project right.

   There are a whole lot of other issues here in relation to how people have been treated, but I
think you have heard all of the individual submissions. I was very keen to come along tonight to
talk to you about how a project manager had been treated and then how directly that impacts on
all of the growers who are participants in this project. You have seen those photos that were
taken last week.

  This project is the second biggest single planting of vines in Margaret River. It is absolutely
on target. As we speak right now, we have just started harvesting the rest of our chardonnay
grapes. The project is right on track to produce income for the growers this financial year. Until
we finish the harvest—we are only about one-third of the way through at the moment—I cannot
be 100 per cent sure we are going to achieve our targets, but every indication at the moment is
that we will achieve our prospectus forecast target for this first harvest. Everything has been
done the way that it was set out in the prospectus. Every vine is planted, everything is growing
and everything is happening 100 per cent the way it should.

E 446                                          SENATE—References                       Tuesday, 20 March 2001

   I just want to make a couple of points in relation to the projects that have received rulings
post Chalice Bridge being available to investors. Our project came out in May 1998. The first
product ruling was issued in January 1999, so we were not able to get a product ruling. I just
took the first project that got a product ruling and lined it up with Chalice Bridge and it is
structured exactly the same, in terms of its structure. The tax office spends a lot of time talking
about these excessive fees and how, because of that, everyone has a big tax deduction and they
are non-commercial. This project got a tax ruling—the Hillston Grove Vineyards Project. It was
actually PR1999/1, the first product ruling available. Let me just give you a comparison on a
per hectare cost for the first three years of the project. The management fees for Hillston Grove
were $131,340—

  CHAIR—Mr Edinger, could we get that in written form rather than you reading it out, firstly,
because of time constraints and, secondly, it is helpful from our point of view to have it in
writing so that we again can raise those matters with the tax office.

  Mr Edinger—I will just finish off. For Hillston Grove, $131,340 for the first three years was
the management fee; for Chalice Bridge it was $115,435. There is a $16,000-odd difference
between the higher fees for the project that got the product ruling versus us who have now had
the deductions disallowed.

   CHAIR—I have done enough research into wine projects to understand that there are some
significant differences.

  Mr Edinger—And I can show you ones that are over two times that.

  CHAIR—Yes, so could I.

  Mr Edinger—Who have a product ruling.


   Mr Edinger—On the financing aspect, I have heard a lot of talk about TR 2000/8, which was
the final product ruling in relation to TR 97/D17, the draft product ruling that was out at the
time. Clause 187 of this ruling talks about the different factors we have just talked about that are
in all these factors that they say are what have caused them to disallow the deductions for
Chalice Bridge. It says:

Each of these factors on its own may be insufficient to allow a reasonable person to draw the conclusion that the
dominant purpose was to obtain a tax benefit. However, a weighing of all these factors against the commercial elements
of the arrangements may produce that conclusion, particularly where the fees are grossly excessive.

That is obviously what they are applying to Chalice Bridge.

  CHAIR—Yes. How many participants are involved in Chalice Bridge?

  Mr Edinger—There are 594 grower allotments.

  CHAIR—Have all those people been issued with a disallowance notice?

Tuesday, 20 March 2001                  SENATE—References                                    E 447

  Mr Edinger—To my knowledge, I have only heard of one person who has not.

  CHAIR—Are you able to inform us why that one person has not?

  Mr Edinger—I have no idea. He is not saying anything, and I am not going to tell you who
he is.

  CHAIR— I am sure the tax office will note that. The project I think was marketed after
public statements from the ATO about its opposition to or its concern about mass marketed
schemes. We are having a little bit of discussion here as to whether it was before or after.

   Mr Edinger—I can tell you the project was structured strictly along the guidelines of TR
97/D17 which was the ruling subsequently finalised in 2000/18 and we got a full sign-off from
Bentleys MRI in relation to the fact that, because of that clause I just read out in relation to the
factors, they were extremely confident that Chalice Bridge would not fail as it relied on all the
points in TR 97/D17. We also had a sign-off from one of the top tax QCs in Australia that there
would not be a problem with the project. In fact that has been proved by the fact they have
allowed the deductions for 11 allotments, subsequent to the issue of their position paper.

  CHAIR—With regard to the submissions you have made, a number of the questions that we
had you have actually answered in your statement. The only thing that I would like to ask you to
do is provide us with information for a comparison so we have got the two projects—and if
there are others feel free to also provide those by way of information to the committee. It would
be appreciated if you could do that sooner rather than later and—

  Mr Edinger—Is that to the secretariat?

   CHAIR—Yes, to the secretariat. I would to thank you for the written submissions that you
provided and the verbal evidence you have given us here today. We will find, as we will with all
of the evidence, that it will provide us with some assistance in trying to draw some conclusions
in this matter. Thank you very much.

E 448                                  SENATE—References                Tuesday, 20 March 2001

[6.55 p.m.]

PAREKH, Mr Ashok, Chartered Accountant, Ashok Parekh and Co Pty Ltd Chartered

  CHAIR—Welcome, Mr Parekh, to the table.

  Mr Parekh—I am a chartered accountant from Kalgoorlie. I am here in my capacity as a
chartered accountant in a public practice. I am here also in my capacity as a business liaison
person for the Suicide Prevention Group in Kalgoorlie. I have got a letter here from the
Chamber of Commerce in relation to individuals.

  CHAIR—Mr Parekh, we have received a written submission from you. Are there any
additional written submissions you wish to provide the committee with at this time?

  Mr Parekh—No.

  CHAIR—Then I would invite you to make a brief opening statement in respect to the
submission you have made.

   Mr Parekh—I would like to specifically mention that my submission does not cover the
merits or demerits of tax schemes or whether or not they are legitimate tax schemes. I also have
not commented on retrospective legislation related to private rulings. I am on the ground level
living in Kalgoorlie dealing with the public, the everyday person.

  My submission relates to what I see has happened in Kalgoorlie with these schemes,
particularly the way they have been marketed, and their consequences. As a chartered
accountant in Kalgoorlie, I do work for over 3,000 clients. In the last four or five years, I have
publicly expressed concerns on certain matters relating to the marketing of these schemes. I
have been reported in newspapers—the Kalgoorlie Miner, the Golden Mail, the Sunday Times
and the Financial Review—and I have done TV interviews for the ABC and various news
outlets. There is no doubt that most of the people in Kalgoorlie and the Goldfields who got
involved in tax schemes were innocent victims who were informed by the promoters that these
schemes had the backing of the tax office and also had accounting firms’ and QCs’ opinions. In
places like Kalgoorlie and up north, there are people on high disposable incomes—50 per cent
tax brackets—because they work long hours, not just because they get higher pay rates. They
were very susceptible to these sorts of schemes.

   In my submission, in item 2, relating to a promoters summary, I have detailed how these
schemes worked. I was very critical in the past in relation to the way some of these promoters
sold schemes in Kalgoorlie and the tactics they used on husbands and wives. In most cases,
people were told that the schemes were legal and that they were approved by the tax office. The
promoters used various tactics, including mentioning people’s names, if they thought they could
sell the schemes. People like myself who went public on it were criticised by the promoters. As
I have said, my firm has over 3,000 clients in the Goldfields and we have had cases in which
people were told not to deal with the firm because we were against some of these schemes.

Tuesday, 20 March 2001                 SENATE—References                                    E 449

   There are a lot of financial advisory firms. We had one in Kalgoorlie called One Stop
Financial, which was a complete disgrace. I questioned the regulatory authorities in relation to
these sorts of operations being in Kalgoorlie. Generally, all accountants, financial advisers and
lawyers are giving clients different professional advice. In my submission I have asked that we
try and liaise with groups like the Australian Managed Investments Association, which is led by
George Gear, and Resolution Holdings, so that we can all work together towards a solution.

   The problem with the recovery of debts I have covered in my submission, particularly
relating to tax office recovery of debts and promoters. Recently in Kalgoorlie, one promoter was
trying to recover money from 600 people. Promoters are ringing up on weekends and making it
very difficult for them. In interviews with my clients, most informed me that they had contacted
the tax office and the Australian securities commission before they got involved in these
schemes. They stated that both places did not voice concerns regarding these investments. I
have been very surprised by the tax office allowing these deductions for many years without the
schemes being brought to their attention.

   Many investors were under the impression that the investments which had prospectuses were
approved by the tax office. Taxpayers resent the fact that they are considered to be tax cheats.
As far as they were aware, everything had been approved. In relation to who is liable relating to
some of these schemes that have fallen flat, it is certainly some of the promoters and financial
advisers. I have seen a lot of people in Kalgoorlie who are involved, and I have given you some
examples. For instance, at one police station in the Goldfields, nine out of 10 police officers are
involved. In January this year, I advised a person to seek specialist advice from a liquidation
firm. He has closed down his business, which has a state government contract, and he has put
both of his houses on the market, his wife has left him and he has gone bankrupt.

   In relation to the present situation in the Goldfields—you were there yesterday; I could not
make it because of a legal case here today—there are thousands of people who have invested in
tax schemes and who are suffering as a result of these investments. I have spoken to several
hundred people and confirm to you that they have had marriage split-ups due to their
investments, they have had to sell their houses to pay tax bills, they have become bankrupt or
are considering bankruptcy, and they have had suicidal tendencies over their financial position. I
confirmed with the legal centre, where I give voluntary advice at the moment, that it has had 16
letters from people in Kalgoorlie who are considering suicide. These people have had to cease
trading, or close their businesses in some cases, and they are unable to concentrate on work or
to sleep at night due to these financial problems. You would have heard yesterday from the
chamber of mines in Kalgoorlie relating to these matters.

  I have been personally involved in the Goldfields Suicide Prevention Committee and I find it
very distressing that this has happened. In my submission I recommend that the tax department
halt the issue of amended assessments, halt the recovery action, cooperate with the various
industries, give undertakings not to make people bankrupt, consider acceptable settlements,
consider amending penalties, and set up a specific debt recovery section which takes personal
involvement and considers the financial and social impacts.

  The Kalgoorlie community—and I do not know whether you were aware of this yesterday—
has produced articles and had them published in the papers relating to tax effective schemes in
which we included details of our federal members, state members, as well as the mental health

E 450                                      SENATE—References                    Tuesday, 20 March 2001

section and all those other things. I believe that time is of the essence while we have this
inquiry. People are suffering every day. It is essential that the government, in consultation with
various groups, takes immediate action. I honestly believe that unless something is done lives
and marriages will be lost. I would like to see all political parties take a bipartisan approach to
dealing with these problems relating to tax schemes. This is not a political issue but a serious
social issue with wide ranging implications for the people of Australia. I believe the tax
department should be very cooperative in that regard. I ask you, as senators, to look at the
human side. These people are innocent victims. They may have been naive but they do not
deserve to suffer these consequences. I hope that tax settlements can be reached in the future.

  CHAIR—Thank you. You have expressed concerns about some of the schemes. What
practice caused you to view these schemes with suspicion?

  Mr Parekh—It is not the schemes I am questioning, nor is it the actual viability of the
schemes; in Kalgoorlie we questioned the way in which they were sold. I would bring your
notice to appendix 2.2 of my submission. Brochures were handed out in all the mine sites which

Public notice. Stop paying tax from your hard earned pay! Too good to be true? Legally transfer your tax into
investments without any cash contributions.

The people who are out there—the miners and workers—did not really understand it. That is
what they were told, they believed it, and they invested with all the right intentions.

  CHAIR—Given the circumstances—and I am not saying that I in any way support this type
of advertising, because I do not—with regard to the person who posted the ad, and taking
account of the point made in the ad, ‘Legally transfer your tax into investments without any
cash contributions,’ what would your opinion be, from an accountant’s point of view, as to
whether or not that is achievable and whether or not it is legal?

   Mr Parekh—As a chartered accountant giving advice to clients, we always tell clients to be
careful. However, you have to look at investments. There are a lot of investments in Australia,
particularly negative gearing on property or shares and negative gearing of real estate property,
where you can get involved in investments where the return on your investments after the tax
situation is quite good. A lot of the people that I am dealing with are in the mining industry.
They are miners and hard workers and they do not really understand the principles relating to
what you are talking about. They are just hardworking people who were told that it was
approved by the tax department, were told it was legal and that everything was kosher, and they
invested in it.

  CHAIR—But if you were a tax officer reading this advertisement at first glance, you would
say that the scheme associated with this ad would have to be driven more from a tax
deductibility point of view than from any other.

  Mr Parekh—That certainly is the case, but—

  CHAIR—Likewise with the one in appendix 2.3.

Tuesday, 20 March 2001                  SENATE—References                                    E 451

  Mr Parekh—I would say that comment is right, but really, in places in the country you find
up north in Port Hedland, or Karratha or Kalgoorlie, people do not really understand that. We
are fairly simple people down here.

  CHAIR—You do not have to be simple people. The fact is that this is a very easy selling
tool. Are you aware of what schemes these ads were associated with?

  Mr Parekh—Some of them, I believe, were with Satcom, some with Oracle, some with Oz
Refunds. They are the main ones which were highly promoted in Kalgoorlie.

  CHAIR—In terms of other promotional activities besides the ones that you provided
examples of, are there any other promotional activities that would cause you concern?

  Mr Parekh—I am not sure what the question means.

   CHAIR—These examples relate to advertising either on the work site or in the local paper.
As I understand it, those two ads were in the paper and may have been put up on notice boards
at the work site. What I am referring to is activities like door-to-door salesmen.

   Mr Parekh—Certainly in the goldfields there was a very hard sell. You would have found
that out yesterday. There was a very hard sell with people down there. You had a lot of people
being approached, a lot of people being signed up in very strange circumstances: they were
going to camps where people were drinking and signing them up. I really could not believe that
this could happen in Kalgoorlie. In my submission in March 1997, I said that I wrote a letter to
the newspaper in Kalgoorlie, the Kalgoorlie Miner. I informed the tax department in August
1997. In 1998 I did an article for the Kalgoorlie newspaper, which was published, which led me
to be the focus of quite a few promoters giving me a hard time over my thoughts, but they
actually happened.

  CHAIR—You say you wrote to the tax office in 1997?

  Mr Parekh—I have given you a copy. I expressed my concerns.

  CHAIR—Yes, I know. Did you get a response from the tax office?

  Mr Parekh—I had a phone call back from the tax department.

  CHAIR—What did they say?

  Mr Parekh—They basically said, like many people have said, ‘We don’t really know what is
going on; we’re trying to look at it. We’ve just got no position on it.’ To me, in a situation where
people were claiming deductions, and people like myself as chartered accountants were asking
opinions, saying, ‘What should accountants advise clients,’ it was a quite difficult situation.

  Senator CHAPMAN—You said you are not questioning the actual business arrangements or
the financing arrangements, but you are questioning the vigorous promotion of the investment?

E 452                                  SENATE—References                Tuesday, 20 March 2001

   Mr Parekh—Yes. I could never give an opinion on the investments, and many chartered
accountants or tax agents, if anybody goes to them, will not give you an opinion on the
investment itself. It would be very difficult to. However, what we have had in the goldfields is
probably a lot different from Perth. You would have found out yesterday that there was a lot of
criticism of certain financial advisers and promoters. I have no criticism of the schemes
themselves; I could not tell you if they are right or wrong.

  Senator CHAPMAN—You say here in your submission that most schemes were promoted
by financial advisory firms who did not seem to have anyone regulating their operations. Are
these firms that do not come under the aegis of the Managed Investments Act or the
Corporations Law? If so, why not?

   Mr Parekh—That is what a lot of people are asking. The punters out there who invested in
these schemes are saying to themselves, ‘We thought we’d done everything right; we went out,
we rang the tax department, we rang the securities commission, we checked on the QC’s
opinions. We did everything right, but what have we done wrong?’ In relation to my comments
relating to some of the financial advisory situations in Kalgoorlie, the reason I was critical of
them is that they never let them know what the downfalls could be. They never let them know
what the investments were. They never gave them details. They signed them up on that basis.

  Senator CHAPMAN—I assume they are firms that come under the Corporations Law?

   Mr Parekh—I would not know. I am talking about, as I mentioned, that one in Kalgoorlie. I
think yesterday when Effie Harris addressed you in Kalgoorlie she would have mentioned the
suicide situation down there.

  CHAIR—We had many of those things identified to us. I think the submission that you have
made, both in writing and verbally, demonstrates that there have been a number of problems
associated with what the tax office knew.

   Senator CHAPMAN—What is your view of the actions of legal firms and others that are
taking test cases to court? Do you believe that is a prudent approach and in the best interests of
clients, or should they be seeking to settle?

   Mr Parekh—My personal opinion is that we are here today in 2001, and if every test case
has to be run, the 260 or 300, we are going to be waiting for seven years. We really need
something done straightaway about it and I do not think this is really going to be a legal issue
only; I think it is going to be a political issue. There are too many schemes involved. You can
run a test case for Servcom, for Budplan or whatever, but what about everybody else? The
politicians have to get their act together and say, ‘Look, we know that something has to be done;
we are not going to do retrospective legislation.’ As I have recommended in my report at item 2,
in a lot of cases the people involved have got the money. The example there was the person who
got $40,000; they received $10,000 and the promoter got $30,000. Now they will end up with a
$40,000 bill, plus penalties, plus interest. These people just cannot cop that. We are finding in
Kalgoorlie that our mining industry has been very badly affected, and the chamber of mines
would have told you that. People are out there working under very hard conditions. They are not
able to concentrate on work. We are talking about people’s lives being lost, marriages being
broken up.

Tuesday, 20 March 2001                SENATE—References                                  E 453

   The test cases should go straightaway, but I think there is a bigger issue than test cases. I
think the politicians in a bipartisan approach should say, ‘Okay. There has been mistake made
by the tax department. Maybe people have made a mistake themselves. Let us get together and
let us make their lives easier in the future.’

  Senator CHAPMAN—You referred to a class action being initiated by Phillips Fox against
promoters. Are you able to provide any more information on that?

   Mr Parekh—I just put that in there because I was aware that there was a class action against
certain promoters relating to some of these tax schemes. That is being done from Perth, I think.
I am not involved; I do not know much about it.

  Senator CHAPMAN—You do not have any detail of it?

  Mr Parekh—No.

  Senator CHAPMAN—Thank you.

  CHAIR—Thank you for your submission. After the adjournment we will have a roving
microphone and give as many of you as possible the opportunity to tell us your personal stories.

                     Proceedings suspended from 7.14 p.m. to 7.23 p.m.

E 454                                  SENATE—References                Tuesday, 20 March 2001

DOUGLAS, Mr Gray (Private capacity)

JONES, Dr Michael (Private capacity)

JONSHAGEN, Mr Bjorn Herluf (Private capacity)

O’SULLIVAN, Mr John (Private capacity)

POPHAM, Mr Edward George (Private capacity)

SACH, Mr Geoffrey Harcourt (Private capacity)

SANDERSON, Mr Julien Louis (Private capacity)

STEWART, Mr James Roderick (Private capacity)

WATTS, Mr Rodney Charles (Private capacity)

   CHAIR—This part of the proceedings will give individuals the opportunity to speak.
Obviously, we simply cannot have you all at the table because we literally will not have the
time. It would probably be like waiting for a test case outcome, which you do not want. We will
proceed with the roving mike. I have a list of people here who have given their names. In total,
there are nine. I would ask people to try to keep their comments as brief as they can. There are
particular matters, as I expressed earlier, that we are particularly interested in relating to how
people got involved in the investment and whether it was promoted to them. You might even
identify by whom the scheme was promoted to you, if that was the case. Some people have
provided written submissions to the committee. The first person is Mr Julien Sanderson.

   Mr Sanderson—I want to cover three areas: what I call background, outcome and
observations. My background is that I am an accountant. I am an associate of the Institute of
Bankers. I have been in banking, importing and exporting. I held a dealer’s licence in my own
right from 1985 through to 1999. A dealer’s licence was a full licence, which meant I could take
deposits, lend moneys and provide investment advice. I gave it away voluntarily in 1999.

  I bought some 13 acres of mainly pastoral land in 1994 and reviewed various options at that
time to grow trees—olives, grapes, fruit of one kind or another—and various herbs because I
was looking to provide something for my superannuation in the sense of trying to find some
future income. I decided on trees due to the fact that they are easier to maintain, they are
cheaper to set up and they do not require professional farm management. In other words, I could
do it myself. But as a consequence of that I became very much aware of the possibilities and the
costs of running the various acres of vines, et cetera.

   In 1997, I was approached by a very good friend of mine who asked if I could possibly have a
look at the Central Highlands Vine Project No. 3 prospectus. I said, ‘Yes, sure, I’ll have a look
at it.’ I had obviously heard about them. I had seen that they had been in operation for at least

Tuesday, 20 March 2001                  SENATE—References                                     E 455

two or three years previous to that. I had felt that some of them were a bit exotic, but at the
same time I had not done any reviews of them. I said I would review it. I got that prospectus, six
other vine prospectuses and two other blue gum tree prospectuses and I compared them all. I
also, in fact, even gave the Central Highlands prospectus to the Department of Agriculture here
in WA, because I happen to have a viticulturist friend there. I asked him to review the technical
report on it and give me his findings.

   As a consequence of that, I made a recommendation to my friend that I felt the Central
Highlands Vine Project No. 3 was not the best one. It was not the best one in my personal view
because it had very high management fees. They were untested vineyard management people, in
my view, although they were on project No. 3, so this was the third year that they had been
running these prospectuses. They were in a new wine area—which is in Orange in New South
Wales. They had fewer vines per hectare than anybody else. They had the highest grape price in
terms of their projections into the future and their vineyard expenses appeared to be on the high
side compared with any others.

  I advised my friend—this was in May 1997—to withdraw his money. Because I had carried
out this review—and in fact I have a sheet here—I suggested that he put it into the Austvin
vineyards prospectus, if that was what he wished to invest in. Just to give you an idea—this
summary of vineyard projects came out of their prospectuses—the Central Highlands per
hectare cost over two years from planting was about $145,965. There were ones as low as
$54,000 and $53,000, so you can see where my comments came from. This particular one,
Austvin, was around about $40,000 a hectare.

   I then said that, as per my trees that I had planted, it was a long-term investment and I thought
that I would put some money in. Now that I had done all this exercise, I felt that Austvin was a
worthwhile project to put into. Subsequent to that I have been, I suppose, proved right insofar as
it has now been taken over by Simeon Wines, which is a fairly large well-known publicly listed
vine company. Unfortunately, my friend is a bit shy of creating hassle and he did not change,
which was a bit of a pity. I invested in Austvin.

  As I said, the price per hectare compared very favourably with any of the others that were on
offer. It also compared very favourably with the price that I could have done it for myself. It
was professionally managed—therefore, as I had no time, that suited me. It was a fixed price
contract, basically, which again suited me. It was a 15-year plan with positive cash flow after
nine years and income after three years. For your information, in year 4, which was last year, 30
June 2000, it had exceeded the prospectus revenue by double. So I got something like a $6,000
cheque compared with their original prospectus forecast of $3,000. Their expenses were less
than their prospectus forecast by about five per cent. So I think that indicates that it was a pretty
successful investment from my point of view—and that is year 4.

  The interesting thing from that is that I have to put in my tax return the taxable income that I
have received. I am not allowed to claim the expenses, because the tax department has
disallowed them, which I find totally inequitable. It had limited recourse—not non-recourse—
borrowings with interest at commercial rates. I sent in my tax return that particular year—I
normally try to send them in fairly promptly—in July 1997 and I also sent in a 221D variation
notice. This was queried on 10 October 1997 and I responded and answered at some
considerable length in November 1997. On 20 June 2000, some 30 months later, the tax

E 456                                   SENATE—References                 Tuesday, 20 March 2001

department disallowed the expenditure. I consider that absolutely inexcusable. I believe that, if
they review a 221D variation notice, they should at least have the guts to come back to you
fairly quickly and say, ‘We’re going to disallow it.’ It took them 30 months to disallow it.

   As I understand it, they basically have now disallowed all off-spin farm investors. They
maintain that the dominant purpose was to obtain a tax benefit—they have given us a six-page
treatise about it all—plus expenses not wholly incurred in gaining the revenue. I have already
illustrated that I have had revenue in years two, three and four so far, which I think is pretty

  We then move on to the observations. I could be excused for thinking that the 1997 queried
tax return—variation notice—was an approval of the expenditures because I then claimed
expenditures in the following years, 1998 and 1999. Secondly, the management fees in the
hands of the recipients are in fact taxable. They are not given for free; they are in fact taxable.
The tax man is already getting his tax paid on the management fees, so therefore the expenses
should be allowable. Thirdly, farm management schemes have been available since the early
1990s, as I understand it. ATO, in my view, have a duty of care to close loopholes, especially
when they are widely advertised, as these all were, for many years. Potentially they have
entrapped many other people who have not been aware of exactly what goes on. I would
compare them with ASIC. ASIC, when they see a scheme which they do not approve of, come
down on it straight away. Why can’t the ATO? ASIC put out warning notices about share scams
and things like that. Why can’t the ATO do the same? I think it is inexcusable.

   Regarding the next point, non-recourse loans, in my view non-recourse loans are not
dissimilar to personal loans—they are non-recourse. Sure, they can put you into bankruptcy, but
if you do not have any money the bank goes without it. I am a banker and I know that the one
loan I would love to have is an investment loan such as this secured on the grape scheme. If I do
not pay I lose the vine. I think it is magic. Similar with the gum trees—if I do not pay on the
loan, what happens? The trees go back to the manager. It is a wonderful thing. I have a growing
investment increasing in value. My loan is fully covered—more than double, treble, or whatever
you would like to say. In the off-spin one, just as a matter of interest, all the way through, the
cash flow to year 15, will give me a net cash flow income of $70,000. I would love to have a
loan like that where, if somebody after five years did not pay, I then got $70,000.

   CHAIR—Because I am conscious of time, I would be interested if you could provide some
information to the committee about the project you have been involved in, particularly as it
relates to the commerciality of the particular project. You outlined some details verbally. I
would appreciate it if you could provide those details in writing to the committee secretariat.

  Mr Sanderson—Certainly.

   CHAIR—They would be of assistance to us when we come to address some of these matters
with the tax office and with the Australian Securities and Investment Commission. So I would
appreciate it if you could provide all of the relevant detail that you in part outlined. I would like
to ask you to make a final remark because, as I said, there are a number of people who would
like to make comment and tell us a story, and we would like to hear from as many as possible.

Tuesday, 20 March 2001                  SENATE—References                                    E 457

   Mr Sanderson—Yes, sorry, Mr Chair; I was trying to keep it as brief as possible. I suppose at
the end of the day I just feel that the tax office has been incredibly inefficient and has
mismanaged in not attending to these matters sooner in terms of putting a stop to them. To allow
them to have run for something like seven years before eventually starting to disallow them I
think personally is inexcusable for any person in this country.

  CHAIR—Thank you very much. I now call on Mr Bjorn Jonshagen. I am hoping that I am
pronouncing these names correctly.

   Mr Jonshagen—That was very good, thank you. Thanks for the opportunity to come here
and say a few words. I made a very detailed submission so I will not go over all the details in
that. I think basically what it comes down to, to me, is that these are very complicated matters.
To me, it comes down to fairness in the end. I made my first investment in 1994 and I think I
took a lot of care. I have outlined the care I took in my submission. I took advice first of all
from my accountant, whom I trust.

  I am convinced that I did follow the rules as they were in 1994. I am convinced that the ATO
knew about what was going on. I was provided with an example of a private ruling from a very
similar project. My point really is, as many other people have said here before, if there had been
indication to me in 1994 through all the inquiries I made that I was doing something illegal, I
would not have done it and I would not have continued to make further investments in 1995,
1996 and 1997. The last investment I made was in 1998 in the Chalice Bridge Estate that we
just heard about. After that I was notified that my Budplan investment was knocked back and I
have not made an investment since. I do not think it is fair what has happened to me.

  CHAIR—Mr Jonshagen, you have obviously been personally involved for a long time. How
did you get involved initially? Did you seek out the investment opportunities or were they
promoted to you?

   Mr Jonshagen—It was promoted to me through the accountant who was doing my tax
return. I was given the advice that this was an option for me. I could put money into this sort of
thing. Obviously, it had very important tax things attached to it, but so do all investments really.

  CHAIR—Would you be aware of whether or not the accountant was receiving any
commission for promoting the particular initial scheme to you?

  Mr Jonshagen—I was certainly aware of that, yes.

  CHAIR—That he or she was receiving was receiving commission?

  Mr Jonshagen—Yes.

  CHAIR—Thank you. Would you like to add anything further?

  Mr Jonshagen—What I would like to say is that I hope that the committee I am now in front
of will actually try to do something about it. I approached my local member of parliament. I live
down in Fremantle so it is Dr Carmen Lawrence. She has written a letter to the Assistant
Treasurer, Senator Kemp, and got a letter back. Basically that letter just says that there is not

E 458                                            SENATE—References                        Tuesday, 20 March 2001

much we politicians can do; we have given this to the tax department to run and, sorry, but we
cannot do anything. I have that letter and, at the end of the day, I do not think that is good
enough. This is a question of fairness; it is a question of who is in charge of this country really. I
guess I am pleading to you guys that this is a bigger issue than something that we can let public
servants run away with like that.

 CHAIR—I am sure that is uppermost in our minds. Thank you for the contribution you have
made. Mr Popham?

  Mr Popham—Thank you. What I am going to speak about very quickly, as it has been
covered today, is mainly the blanket cover, the inconsistency of the ATO, the misinformation
that they put in position papers and so on. I was brought up in agriculture; I am a forester and a
safety engineer. At the particular time, 1995, I was involved with my daughter and son-in-law in
a cattle-breeding project in Albany in Western Australia. We were trying to establish Dexters in
Western Australia mainly for the meat content. It did not have any fat and it was for the Heart
Foundation. In so doing, I was involved in speaking with other people and I became aware of a
cattle-breeding or embryo-breeding project in Tamworth in New South Wales.

  Incidentally, I had personally funded the project in Albany. My daughter was qualified
agriculturally to run the business. I had funded it by virtue of the fact that I put up the money
and that half of the profits would come back to me if she made some. It was possibly a non-
recourse/full-recourse loan, but it was a daughter—whatever you like to call it. It did not return
me any money in the final analysis, and perhaps the taxation department will disallow those
deductions on the basis of forgiveness of debt. Incidentally, they did allow all of those

   I became involved, after travelling to Tamworth, inspecting the property, doing a search on
the manager and his qualifications, having a look at the facilities and so on. The tax office, in
their explanatory paper, said, ‘This is not carrying on a business of cattle breeding.’ It so
happens that one day I assisted the vets extracting eggs from cattle and I observed what was
going on—it was quite interesting, actually. I considered I was carrying on a business. They
then say in this explanatory paper, ‘You were not able to identify your progeny.’ In fact, on a
subsequent visit I stood at the side of the main road and photographed some yearlings. When I
got home I found the ear tag was that of my wife’s cow. The ATO continually blanket these
things and say that they are law. They make their laws.

  A letter from R.A. Stewart, the Director of Investigations, when I made a complaint about the
Taxation Office, is very pertinent inasmuch as it states:

This can only be resolved through the normal review and appeal provisions of the Tax Legislation. For this reason, it is
suggested that to ensure your interests are properly protected, you should take advice on your rights of review and appeal
under the Tax Legislation.

His next statement is very pertinent:

Ultimately, these issues can only be resolved by the Federal Court.

My question to you is: what are you going to do about getting us to the Federal Court?

Tuesday, 20 March 2001                  SENATE—References                                     E 459

  CHAIR—I now call Mr Gray Douglas.

  Mr Douglas—I am an adviser in the field of managed investments and I do hold a proper
authority under a restricted dealers licence. I also have half my client base in Kalgoorlie. I agree
with Mr Parekh and others in some respects, but people keep mentioning Servcom, Oz Refunds
and Oracle and all those three investments that were offered are not registered prospectuses,
they are information memorandums. They do not go to ASIC. The people who did promote
those schemes do not require a proper authority to do so; therefore they are not under the
guidelines of a dealers licence. It is quite true that some of those people who aggressively
marketed those three particular investments lied to clients. They did say that they had tax office
approvals. I am saying this based on hearsay from some of my clients who were in meetings on
mine sites with these particular advisers.

   It is very unfortunate for someone like me who, for the last 21 months, has stood by my
clients and had virtually no income. I am about to lose both my properties and I am tarred with
the same brush when I have done everything by the book. When I started in this industry six
years ago, I did not require a proper authority; I did so in 1997 and I have operated under one
ever since. We have had to disclose to our clients exactly how much commission we earn.
Under the restricted dealers licence we can only give information relating to the prospectuses
that we provide those people.

   We also inform people that they can check with ASIC to make sure that I am a registered
proper authority holder. Many of my clients in Kalgoorlie are suffering from a lot of financial
strain. Unfortunately Mr Parekh does not get to see those clients because we have looked after
them totally. I am not a Western Australian originally. I never knew how good Kalgoorlie was
for income. A client from Perth referred me to Kalgoorlie to see a specific person. I have never
advertised in Kalgoorlie in the newspaper or on the radio. I have been involved in a campaign
that has done advertising since the product ruling came in, and that was with the Barkworth
group under their dealer’s licence, Barkworth Securities. I never went onto a mine site other
than to go and visit a client and actually look at what he did for a living. I have actually been
underground and have been alongside my clients and have become pretty good friends with
some of them.

   So not all of us out there advising people on managed investments are people with basically
no morals whatsoever. It is my belief that I have no legal right to represent or help my clients,
but I have done that on moral grounds for 21 months. Advisers are getting a bad name. But it is
not all of us; it is just some people out there. We are all getting tarred with the same brush and it
is not right. Those people dealing in those investments did not require a proper authority.

   CHAIR—Mr Parekh will be able to defend himself in that respect because he will have the
right to respond to your comments. I am not sure that he referred to all of you. From our point
of view, we know it is not all but there is a problem with a reasonable number.

  Mr O’Sullivan—You asked earlier in the evening why people went into these projects. I can
describe our situation. In the early 1990s we were fast approaching retirement and between us
we did not really have a very good super fund. However at the same time I was doing my
normal job I had a part-time business. I used that part-time business to put money into another
super fund apart from the super fund that I had with my normal employment.

E 460                                  SENATE—References                Tuesday, 20 March 2001

   The last time that I was able to do that was in 1992-93 and then the law changed and the only
super contributions that I was able to make that were tax deductible were through my main form
of employment. So I made a few inquiries about financial planners and went to what I thought
at the time was a very reputable firm. I was not able to salary package at the time, which was
another way in which people could add to their super fund. I did do that in my last year of

  The financial planner that we went to steered us towards various agricultural products and
Budplan. He emphasised the minimisation but he also indicated the possibility of reasonable
prospects in the future. I only wish that I knew of the six ones that you knew of that were
successful because, of the five or six that we invested in, I think only one is showing any real
prospect, which is very disappointing. The reason we took them on was that the projections
were very reasonable. If they had been anywhere near what they promised to be, this year we
would have received about $60,000. So we felt we were doing the right thing. It would be naive
of me to imagine that we would have got that much but, certainly, I thought we could have been
approaching about half that sum. In retirement that would have been very good. The fact that
they were tax effective was an incentive—there is no denying that. But I do not think that is
sufficient reason to go into these projects. If you just went in because they were tax effective,
you really would not be improving your position very much.

  I am amazed, surprised or bewildered by the fact that every project is trying to raise funds for
their day in court. It seems to me that there are certain underlying facets or common elements of
these projects that could, independent of the projects, be tested in court. Most of them involve
non-recourse loans and, for the life of me, I cannot see why that cannot, by itself, be tested. It
would save all this duplication, especially when you are involved in, as I say, about four or five
schemes, each one wanting money so that they can represent you in court.

   Just a couple of other points: I know of at least one person who was involved in one of the
projects that we have been involved in. We have been assessed and paid; he has not heard a
thing. Does this mean that when he does hear, he will have accrued a lot more interest or does it
mean, for some reason or other, that he has got away with it? I do not know. It just seems—

  CHAIR—I am not sure he would like me to answer it either.

   Mr O’Sullivan—No. I also offered to settle on a couple of projects that have not yet been
ruled on and the tax office declined. They said that they could not deliver any assessment on a
project which they had not yet looked at. My question here is that when I am assessed, say if it
is in a year’s time or something, will the money I owe from the time that I wrote the submission
be accruing interest at the rate of 13.9 per cent or whatever it is—compounding?

   I think that is about all I want to say, but I just note that Senator Chapman mentioned to most
of the participants earlier on in the day that only 30 per cent of money collected was going into
the actual projects and therefore they were doomed to failure. This is probably very true, but I
think that this is the problem of the promoters, not the problem of investors who went in in all
good faith. Apart from the financial planner that I was dealing with, I also spoke to my
accountant and he said he thought the investments were pretty good and he went into one
himself. So that at the time seemed to be good enough for me.

Tuesday, 20 March 2001                 SENATE—References                                   E 461

  CHAIR—Thank you very much. I now call Mr Geoffrey Sach.

  Mr Sach—I am a self-funded retiree. I have an investment in Main Camp Project No. 4 and
Central Highlands Project No. 2 and I am not a tax cheat. I feel that I undertook all the
necessary precautions before making an investment to ensure the viability and legality of those
projects. I will just refer to Main Camp. The Main Camp Tea Tree Oil investment provided a
prospectus which was lodged with ASIC on 11 April 1995. This, in my view at the time,
demonstrated that the promoters were complying with corporate law and the aims and
objectives were for a bona fide commercial, Australian regional scheme providing employment
opportunities and export potential for Australians.

  Main Camp provided an agricultural consultant’s report which, in summary, concluded that
the Main Camp project embraced sound production risk management and had significant
potential and commercial merit for an agricultural project—that was included in the prospectus,
which I read. An opinion of taxation implications formed part of the prospectus and was
prepared by Mr Stephen J. Rogers, partner in Court and Co., chartered accountants.
Accordingly, I felt confident that a chartered accountant’s advice could be relied on in regard to
the legality of tax deductions for a scheme.

  Personal Financial Planners and Licensed Dealers in Securities of 21 Stirling Highway,
Nedlands, introduced and promoted the Main Camp Tea Tree Oil Project to investors in Western
Australia. The investment was introduced to me by my accountant of Geers and Pucey Partners,
a certified practising accountant. I consider that I had been cautious and was entitled to believe
that the advice I received from these professional financial organisations could be relied on. I
was advised at the time the Main Camp projects were promoted that the chartered accountant’s
report on tax deductibility, according to the law at the time—in 1995—gave every indication
that the ATO would allow deductions. I have had a response from the ATO conceding that their
product ruling system had not been introduced during the time the Main Camp projects were
promoted. I feel that I, and other investors, have been harshly and unjustly dealt with by the
ATO due to its inefficient and ineffective self-assessment tax system as it relates to the Main
Camp project. The ATO would not have had to issue amended assessments if it had provided
guidelines to promoters. Furthermore, I suggest that the ASC should not have registered or
accepted the Main Camp prospectus if the tax implication sections were questionable.

   I would now like to address, under the terms of reference of the committee, the adequacy of
measures to promote investor understanding of financial and taxation implications of tax
effective schemes. These may be simple solutions but I put them to you for what they are worth.
Firstly, promoters of tax effective schemes must obtain a ruling from the ATO for their scheme
before it is promoted for tax effective purpose, that is, legal tax deductions. Secondly, the
Commissioner of Taxation must provide a ruling for taxation purposes to any promoter upon
application within a reasonable time and the promoter must publish ATO taxation rulings in his
prospectus for a scheme. Thirdly, promoters of schemes must also publish a prospectus which
must have the approval of the ASC. The ASC shall not approve of any prospectus in relation to
taxation implications unless the promoter of the scheme has obtained a clear and unambiguous
taxation ruling from the ATO. Fourthly, each prospectus for a scheme must display an
appropriate warning in large print on the first page of the prospectus advising that potential
investors are to seek advice from the ATO regarding allowance for tax deductions for a scheme.

E 462                                    SENATE—References                 Tuesday, 20 March 2001

   I go to your second terms of reference: the conduct of and accuracy of measures controlling
tax effective scheme designers, promotions and financial advisers. Firstly, scheme promoters,
financial advisers and designers must be financially qualified, recognised by legislation, and be
financially and criminally liable personally for promoting a scheme which does not have tax
deductibility rulings from the ATO or ASC. Secondly, no scheme promoter shall advertise or
promote a scheme in any publication or newspaper or the electronic medium unless they are
qualified to do so and unless the published prospectus has the approval of the ASC. Any
advertiser must ensure that the advertisement of a scheme has these approvals otherwise the
advertiser will commit an offence which shall be subject to an appropriate penalty.

   Finally, the ATO’s approach towards, and role in relation to, mass marketed tax effective
schemes which much of our discussions have revolved around today. Firstly, in relation to all
current schemes which were promoted with a prospectus lodged with the ASC, which were
supported with a chartered accountant’s report, that advised that tax deductions would be
accepted by the ATO, then the ATO be liable to allow investors to claim the deductions.
Secondly, in relation to all current schemes the ATO to withdraw any amended assessments and
return any tax paid, together with interest, in instances where the investor can provide written
evidence that they had obtained professional financial advice as to the taxation deductibility of
the scheme. Thirdly, in relation to future schemes, tax deductibility ruling status determined by
the ATO is to be provided before any scheme is advertised or promoted. If the ATO adopted this
approach, any investor or promoter adviser could confidently invest in a scheme with the full
knowledge that any deductions for taxation would be legally allowed by the ATO.

   Finally, I would just like to say that in relation to interest remitted by the taxation department,
they charge at the general interest rate of 13.5 per cent. In my case I have paid one reassessment
to the tune of $20,000 and, if the court case is successful, I will not get 13 per cent interest on
the money that they have had. I have had to pull that money out of my superannuation fund to
pay for it.

  CHAIR—I now call Dr Michael Jones.

   Dr Jones—Thank you for the opportunity to say something. I have actually got a PhD in
plant biochemistry. I have been in research all my life. Indeed, I have been responsible for
building up probably the major centre of biotechnology in Western Australia. From government
schemes like AusIndustry, the Australian Research Council and federal and state schemes, there
are all sorts of things I am bombarded with constantly—things such as adding value, R&D and,
in my area of agriculture, for agricultural businesses to add value to the Australian economy.

  It seemed natural to me, if I were looking for investment, to invest in something which
involved agribusiness and would promote business so I went to a financial planner. I am a
professional in my field but I work very hard at that and have no time for personal finances and
legal issues, and so on. If you want to know how to genetically engineer canola you can come to
me and I can do that. Similarly, if I want some advice on financial planning, I will go to
professional financial planners and assume that they know their business and I can take their
advice, and that is what I did. I invested in a tea-tree production. It seemed logical to add value
to that. I am constantly being urged to add value to Australian agriculture. We should not be
digging it up and shipping it out. It is time that we added value to things, and Budplan fitted

Tuesday, 20 March 2001                 SENATE—References                                    E 463

exactly that sort of scheme. I thought I was doing something useful for the rural economy and,
hopefully, in the longer term, I would get some investment benefits out of it.

   It is not very nice now to find that now I am a tax cheat and a criminal. I have $100,000 tax
bill arriving every month and probably another $50,000 to come on top of that. This whole
process to me is just like one of entrapment. For example, with tea-tree no. 4—when you think
there have been three before that—you know quite well that the ATO knew all about those
things so quite clearly it was like entrapment. If they did not approve of those schemes then it is
total incompetence by the ATO to let those schemes go ahead and not stop them. What is
needed now is to draw a line in the sand and say that before the date for rulings they will draw a
line and withdraw the amended assessments, the punishment and the accusations of tax
cheating, which certainly was not my intention nor that of any of the other investors.

   I have never had any dealings with the ATO. I got to the point where I was so fed up that I
applied under the Freedom of Information Act for information as to how they got to these
amended assessments. The statutory 28 days went by and nothing much happened. I got a letter
saying that there would be extra costs. Having heard some of the other things people had said
that anything up to $5,000 might be charged just to get information on my amended assessments
from the tax office, I went to see my MP Daryl Williams last week—and I would urge anybody
else to write for freedom of information—and he has stated that I should send to him
correspondence from the ATO relating to any additional charges above the $35 I have sent and
he will take that up with the Commissioner of Taxation. I just thought it would be worth adding
some of those comments. I am a professional in terms of the area of plant biotech but I am not,
obviously, in terms of taxation law. I feel that the whole process has been entrapment by the
ATO. I will leave it at that.

  CHAIR—With regard to the reassessed taxation—I think you said you got a taxation bill

  Dr Jones—I invested in Main Camp, firstly, in tea-tree, then in Budplan, then in an
additional project.

  CHAIR—Of the reassessed tax bill that you got for $100,000, I think you said, how much of
that money did you actually keep in the first instance? You may choose not to answer the
question but I assume that most of the money went into the schemes.

   Dr Jones—Yes. That bill is as a result of disallowed tax, punitive fees and then punitive
interest on top. So the actual amended assessment is coming out to much more than I have ever
received in benefits of reduced tax.

  CHAIR—I understand that. I am just trying to ascertain with regard to the claims for
deductions you made—and I now understand that you have a range of investments—how much
of the money that was claimed per project did you actually get or did it all go into the project?

  Dr Jones—It either went into the project or there was a reduction in my taxable income.

E 464                                    SENATE—References                 Tuesday, 20 March 2001

   Senator CHAPMAN—Senator Murphy is saying that as a result of your investment you
claimed a tax deduction. How much of that tax deduction went into the project and how much
actually came back to you as a tax refund in each case?

  Dr Jones—I do not have chapter and verse on that.

  CHAIR—Did you do yours through a 221D?

  Dr Jones—Yes. I even got sent 221Ds when I did not send them in.

 CHAIR—That is okay. I was just trying to ascertain that, essentially, a large part of the
money would have gone into the project. Thank you, Mr Jones. I now call Mr Rodney Watts.

   Mr Watts—I am a financial planner and have been in the financial planning industry for
some 16 years. I have not made a written submission to your committee but I would like to
make a few comments that I believe encapsulate some of the comments that have been made in
this last three-quarters of an hour or so. I have been a certified financial planner since 1995. It
was in that year that I joined a dealer and we were looking at various tax effective
investments—in fact, the dealer had been involved for a number of years in those. My previous
dealer had not. I had a fairly healthy scepticism about the real nature of what we know as tax
effective investments because I was aware of some investments in the late 1980s that had gone
belly up and the investors in one case did lose their tax deduction that they had originally

   Along with several of my colleagues, I visited four different agricultural projects. At that
stage they were all based in the eastern states. There were very few here in Western Australia
back in 1995. All of those projects had previous prospectuses and the funds raised via those
prospectuses had been invested. They included a vineyard—and it has been mentioned here—
Central Highlands. I visited Main Camp Tea Tree Oil Project, a macadamia project, and the
Tumut or Treetop orchard projects.

  When you go there you see some 50,000,000 tea-trees planted on this 5,000 acre ex-cow
paddock and you see acres and acres of vineyards just the other side of Orange, and looking at
the infrastructure that is put in place by these you certainly come away with the feeling that
these are very real investments, very real business, and you talk to the people involved and they
are very much there to make these investments work and to deliver a dollar to the investors,
which was the whole idea.

  As a result of that I then embraced the option of investors utilising these investments as one
of the tools that we, as financial planners, use. The obvious reason for doing this is that there is
a very real opportunity for the investors to make a dollar over time even though they, and we,
knew that there are a million assumptions involved in the projections, and you always had to
caution clients to take projections with a grain of salt because so many things can happen in
agricultural projects.

  Consequently, I have utilised these tools for the last five or six years. In the first few years, up
to 30 June 1998, these investments were recommended to appropriate clients without product
rulings because they simply did not exist. You could not get them. Since 1 July 1998 I, along

Tuesday, 20 March 2001                 SENATE—References                                    E 465

with, I am sure, every other person in the financial planning industry who operates under all the
huge amount of regulatory framework that we operate under, have recommended only products
that have had product rulings from the ATO because they were the rules that they set at the time.

   Going back to the 1995, 1996 and 1997 financial years, when you look there is a very real
business in place; when you do your due diligence—as everyone else here has said they do—
and they have looked at taxation opinion from accountants and from QCs, all of whom know
more than you or me about this issue, and they all say that it is all kosher; when you visit and
you see that it is a very real business, then why wouldn’t you suggest it to somebody such as
that gentleman over there who found himself nearing retirement with a not huge amount of
money to fund his own retirement? Here is a suggestion as to why he may be able to earn a bit
of extra income in retirement. Then, as part of a person’s financial plan, he embraces that and
utilise it along with superannuation and the other tools that we use every day. Then such a
person retires and finds that the tax office has gone back up to six years—as they have with
Main Camp. That is a project which—as you know and I am sure you have been told—has
private rulings for the first two prospectuses that were issued, and any reasonable person when
looking at the investment would say, ‘If Joe Bloggs over here, who is not terrifically different
from me, has a private ruling that says that it is okay, then it should be okay for me.’ These
people then find that their superannuation is being devastated because they have to pay these
bills, and there are all the other emotional aspects that have been borne out by previous speakers
that they have to pay these bills. Several of my clients have gone back to work to pay them, and
they had already retired and were looking forward to putting their feet up and enjoying their
years after work.

   I just wanted to mention those few issues because I do not believe that the types of promoters
that Ashok spoke of are indicative of the level and quality of advisers that have been in the
financial planning industry for a number of years and who intend to be around for a lot longer.
In the meantime we have to try to assist our clients through this very difficult period.

   I might also mention that for every client who is in this situation, and that includes myself as
an investor, anything they may have been thinking of doing in a positive sense to try to increase
their benefits at retirement now has had to go on hold because they have this huge contingent
liability hanging over their heads. There is no way they are going to invest in further
superannuation, geared investments, or other investments of a similar nature, because they
simply do not have the money to do it. They have this liability hanging over their heads or they
have already paid it hoping that they will get some of it back.

   I would simply reiterate a lot of previous comments that the line in the sand that the ATO
drew on 1 July 1998 by issuing the product ruling system, be the definitive time and that all
deductions prior to that, that had been tacitly allowed by the ATO, stand. Forget settlement
offers. Settlement offers appear to be a very arbitrary thing that the ATO has come up with since
they decided to go down this campaign trail. But draw the line in the sand. They have set the
rules. We will all operate under them from 1 July 1998. Prior to that, yes, there have been a few
things possibly not done the way they should have been but we cannot go back. It was very
heartening to hear Senator Cook’s comments earlier that there appears to be bipartisan
agreement that retrospectivity is not a part of the way that we should operate in Australia.
Thank you very much.

E 466                                   SENATE—References                 Tuesday, 20 March 2001

  CHAIR—Thank you, Mr Watts. That, in essence, brings us to the end of this day’s hearing. I
say to all of you, thank you for attending. It has been rather a long day, and before I adjourn this
hearing I want to make a few comments in regard to the committee’s inquiry. The committee—I
am sure Senator Chapman would join me—views very seriously the circumstances that many
taxpayers have found themselves in as a result of a number of circumstances. There are, of
course, a range of issues for us to consider and we will do our best to deal with some of the
matters that are more urgent sooner rather than later. I do not think that anyone in this room—
and, indeed, anyone who has been involved with this process—would support the types of
actions that have been outlined to this committee with respect to some investment processes
where very significant amounts of money have been raised from investors and very little of that
money has actually gone into particular projects. That is a very serious issue particularly from
my point of view.

   I think that managed investment schemes can make a good contribution to the economy of
this country particularly in the rural and regional areas of the country but they must be better
managed than they currently are. We must ensure that investors are not only protected from a
taxation point of view but that they are also protected from an investment point of view, and we
must endeavour to at least maximise the opportunity of those investments realising the potential
that is outlined in a prospectus. All of the issues that we have to deal with will take a little time
but we are very cognisant of the fact that there are some that are critically important and we will
endeavour to deal with those as quickly as we can—and I believe that we have a Mr Stewart
who would like to have three minutes.

  Mr Stewart—Thank you for your indulgence. I did not appreciate that questions would be
taken from the floor only from a list of names.

  CHAIR—You may not have been here at the time that I announced that. You can proceed

   Mr Stewart—I first became aware of the problem I had with my investments in May 1998
when I received a letter from the tax department, part of which said that there was a reasonable
degree of uncertainty that a deduction would be allowable for expenditure claimed to have been
incurred. It was fairly straightforward—18 words, product, warning, there could be poison in
the medicine bottle, take care. I guess that the fact that I had applied for a 221D ruling for an
investment I made in 1997—and I wrote, I think, in September of 1997—took some time to get
through but there was a very clear warning. My problem is that I invested in the first scheme in
1992. I subsequently invested in other schemes in 1995 and again in 1996. In the 1995 scheme I
approached via a 221D deduction. There was no product ruling at all. I could make reference to
the idea of equity, duty of care and, as someone mentioned, entrapment through—I wrote
incompetence but crossed it out—poor communication. But if those simple words which are
totally inoffensive—a reasonable degree of uncertainty that a deduction will be allowable for
expenditure claimed to have been incurred—had been put in place either in the public record in
terms of newspapers or on people’s forms when they applied for 221D deductions or to the
whole industry, this mess would not have been here, I suspect, to the degree or the magnitude
that it is.

  What can be done? In terms of equity I think the private rulings certainly should spread
throughout those sorts of projects. In terms of duty of care 221D to my mind certainly has an

Tuesday, 20 March 2001                  SENATE—References                                    E 467

overriding duty of care and is not a piece of paper to be processed lightly. It is something that
means something to the investor and it is no good to hide behind the fine point of the law as,
sadly, we are going to be working towards to resolve the issue. I feel that entrapment through
poor communication is part and parcel of the problem. If those words of warning had been put
out earlier my position would have changed radically.

   I have invested, after that word of warning, with products that have had product rulings. The
tax department, I understand, said that they implemented the product rulings. The world is full
of rumours and innuendos at this stage, but I understand the product rulings—as someone has
stated—really came about by some financial planners trying to get some stability into the world.

   The comment was made on several occasions at today’s hearing about the viability of the
projects. Senator Cook, I think, is a student of economics and in his day, as in my day, there
would have been a thing called the ‘hog cycle’, and the hog cycle expressed that when prices
are high everyone will go into the venture and then there will be a supply and demand situation
arising where there is hopelessly inadequate demand for a huge supply and the price crashes.

   The viability of the project such as Main Camp, I think, cannot be pinned on poor projections
at the time so much as an arm of the hog cycle. It will probably take three years to work
through. I suspect that the blue gums type projects and plantations will be faced with the same
proposition. I suspect that grapes, be they red or white, are going to be faced with the same
proposition. But we do not live in a managed economy. No-one dictates that we will plant X
acres of grapevine to look after our needs. We are all seeking—as other speakers have said—the
best for Australia in terms of growing the country. It is a shame that we are growing it under a
set of rules which, to my mind—and I think to all investors—look as though they have gone
retrospective. What was the difference between the 1998 review of my 221D versus a 1995 one,
and I suppose the ones that were before that: carelessness on the part of the tax department,
carelessness that is causing all the anguish that you have heard about tonight.

   I did phone the tax department in 1992 and the advice was that, no, they could not offer any
firm comments on my first investment. I should submit my proposition, my tax return, and if it
was accepted that was good and it would be acknowledged by the tax department that they
accepted deductions. In 1992 I submitted my return. I waited and back came the deductions and
that pleased me. I was very nervous during that process in terms of them not being rejected. In
1993 I did not make any further deductions because I wanted to see what happened. Not one
negative word did I hear of any of these schemes, and I know from talking to three or four
different groups of financial advisers that the schemes were rampant from 1992 through until
perhaps today and beyond. The wolf was seen to be in sheep’s clothing until about 1998, and I
think the idea of drawing a line in the sand or understanding that there is a process that needs to
be involved whereby all the mistakes of the past have to be put to one side based on all the
information that is available is a good one, and I trust that you gentlemen will look at it with the
due care that it requires.

  CHAIR—I can assure you, Mr Stewart, that we will. And in response to the point you made
about the success or otherwise of ventures, it is also incumbent upon us to ensure that where
taxpayers’ dollars are used—and that is all of the taxpayers in this country—that sufficient of
those funds from the revenue raised goes into the projects to make sure, or at least to maximise
the certainty, that those projects will succeed. I do not think that anyone would accept that in

E 468                                  SENATE—References               Tuesday, 20 March 2001

projects where in some instances several hundred million dollars have been raised that only a
very small amount of money is put into the project and the only people that have made any
money out of the project are, indeed, the developers and designers and promoters. I do not think
that is an acceptable outcome in this country, and there are many examples I could give you. I
am not going to enter into a debate about it but there are certainly some that I do not think are
acceptable projects. As I said, we want to get an outcome for the people that have been caught
up in this very difficult situation, and Senator Chapman and I, as the two members of the
committee here, will be working very hard to ensure the best outcome possible. We are from the
two different major political parties and I am sure we will be talking to our colleagues with
regard to what might or might not be able to be done. With that, I declare this hearing of the
committee adjourned. Thank you very much.

                              Committee adjourned at 8.28 p.m.


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