05 Mar 1515 Loan transaction a sham - Morrison
The Administrative Appeals Tribunal has found that a purported loan transaction, by which the taxpayers, husband and wife, “borrowed” from a bank in order to purchase an apartment, was a sham. This had the result that an avoidance of tax because of fraud or evasion had occurred, and both taxpayers were liable to pay an administrative penalty for intentional disregard of the tax law. The Tribunal affirmed the Commissioner’s objection decisions except in one respect, relating to a transfer to the taxpayers’ superannuation fund by one of the taxpayers’ companies.
The taxpayers wished to purchase an apartment. The purchase price was $1.1 million. The purchase was financed in part by a loan of $600,000 from the St George Bank. There was no dispute about that. The taxpayers said that a further $600,000 came to them by way of loan from a bank, incorporated in Samoa in 1994 and known as Hua Wang Bank Berhad (“HWBB”). They relied principally on a document styled “Loan Facility Agreement” between them and HWBB, and dated 1 July 2000, but also on:
(a) a letter to them of the same date and in which HWBB offered to extend to them a loan facility of $750,000 for a period of five years, and
(b) a further letter dated 1 June 2005 in which HWBB indicated its preparedness to “roll-over” the existing loan for a further five years.
The loan transaction required the taxpayers to place an equivalent amount of $600,000 on deposit with HWBB, sourced from their superannuation fund.
The Commissioner said the arrangement between the taxpayers and HWBB was a sham, that the documents did not represent the true relationship or the true dealings between them. The Commissioner argued that the true arrangement was different from the arrangement as presented by the documents. He said that the documents disguised the truth of the matter, which was that the taxpayers accessed their superannuation funds to purchase the apartment.
On the evidence, the Tribunal concluded that in 2000 the taxpayers improperly accessed their superannuation funds to purchase the apartment. The documents that were created at the time were created for the purpose of providing a smokescreen to disguise the true position. The taxpayers did not truly place the $600,000 on deposit with HWBB and HWBB did not truly lend the $600,000 to the taxpayers. The money was transferred to Samoa to make it look as though it was being put on deposit, in the name of the superannuation fund, for the purpose of earning interest. The subsequent transfer of the identical amount to Australia was not an advance of loan funds but a return of the money sent over only three days before. The purported placing of funds on deposit with HWBB and the loan documentation were mere window dressing.
It followed from those findings that the taxpayers’ claims for interest deductions on the “loan” from HWBB could not be sustained. Disputes about the taxpayers’ failure to pay interest withholding tax and about Part IVA also fell away.
The Tribunal also found that the Commissioner’s amended assessments were not out of time because the taxpayers had failed to prove that the avoidance of tax was not due to evasion.
A further amount of $122,000 had been transferred to the taxpayers’ superannuation fund by one of the taxpayers’ companies. The Commissioner argued that the money was paid to the taxpayers as a dividend, assessable under s 44 of the Income Tax Assessment Act 1936, the amount having been paid at the direction of and for the benefit of the taxpayers when each of them held a 50% share in the company; alternatively, the amount was said to be assessable to the taxpayers under Division 7A of the ITAA 1936. The Tribunal found, however, on the evidence, that the money was a contribution by an employing company to the superannuation fund that it operated for its employees, and was more properly assessable to the fund.
Otherwise, the Tribunal affirmed the Commissioner’s imposition of administrative penalties.
Re Morrison and FCT  AATA 114 (S E Frost DP, 27 February 2015).