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Mass marketed scheme cases
The below information extract from Ato

Six investment scheme cases have been considered by the Federal Court.

In five of the cases the Courts have now confirmed the Commissioner’s view that the deductions are not allowable.

The sixth case Cooke and Jamieson concerned an investment scheme which was not part of the Commissioner’s settlement offer. In this case the Court upheld the original decision that the deductions were allowable.

The following is a summary of each of the six decisions.
Sleight
On 4 May 2004, the Full Federal Court held that the taxpayer was not entitled to a deduction for his half share of the deductions claimed by a partnership of himself and his wife investing in the Northern Rivers Tea Tree Oil project in the 1995 income year.

The Court found that although the taxpayer was carrying on a business the dominant purpose for entering into the scheme was to obtain a tax benefit and therefore Part IVA of the income tax law operated to deny the deduction claimed. In overturning the original finding that the overall commercial objective of the scheme saved it from the application of Part IVA, the Court considered the objective rather than the subjective purpose of the taxpayer in entering into the scheme.

Puzey
On 26 August 2003, the Full Federal Court upheld an earlier decision of 19 September 2002. The court maintained that expenses claimed for the purchase of seedlings relating to the taxpayer’s investment in the Kununurra Tropical Forestry project were not allowable in the first year of the project. This was because the sole or dominant purpose of entering into the scheme was to obtain a tax benefit and therefore Part IVA of the income tax law operated to deny the deduction claimed.

The court found that the seedling purchase costs in the second year of the project were not allowable as expenses of a capital nature because the pooling arrangement that happened under the trust structure provided that the taxpayer became a passive investor in someone else's business.

The seedling purchase agreement was a scheme entered into by the taxpayer for the dominant purpose of obtaining the deduction of $40,000 in each year. The scheme was promoted with the tax consequences to the fore and with the taxpayer signing pre-prepared documents, while the success of the project was highly speculative. However, the tax consequences were certain. The amount paid for the seedlings was grossly excessive ($80,000 compared to a likely market price of $3,000), such that the tax refund from the deduction claimed was sufficient in each year to fund the cash outlays (repayments of the $80,000 borrowed) in each year of $14,000.

On 13 February 2004, the Full Federal Court handed down a supplementary decision that the $800 plantation management fees were deductible and that the $2,000 plantation establishment fees were of a capital nature and not deductible.

An application for special leave to appeal to the High Court was filed by the taxpayer on 23 September 2003 and is still current.

Krampel Newman Partners Pty Ltd (known as Mephisto’s Web)
On 28 February 2003, the Federal Court handed down its judgment in which it considered the deductibility of amounts purportedly paid for the copyright and other costs associated with the production of an animated feature film.

The Court held that these amounts were not allowable under the general income tax deduction provisions nor under the specific regime in Division 10B for capital expenditure on Australian films. The Court also found that the specific anti-avoidance provisions in section 82KL of the income tax law and the general anti-avoidance provisions in Part IVA operated to disallow the deductions. The Court concluded that penalty tax of 50% was payable as the investor’s position on the deductions they claimed in connection with the scheme was not ‘reasonably arguable’.

Vincent
On 16 September 2002, the Full Federal Court decided that the expenses claimed by the taxpayer were not deductible under the general deduction provisions because the expenses were of a capital nature. Despite this finding, the court allowed the appeal in the 1995 year as the amendment, relying only on Part IVA, was outside the four-year period allowed under the general amendment provisions. In the 1996 year the deduction was not allowed by the court.

No application for special leave to appeal was filed by the Commissioner or the taxpayer.

Howland Rose and Ors (known as Budplan)
On 18 March 2002, the Federal Court held that amounts paid to participate in the Budplan Personal Syndicate were not deductible under the general deduction provisions of the income tax law. The court also held that the general anti-avoidance provisions in Part IVA of the income tax law operated to deny deductions for the amounts subscribed because the investment made no commercial sense without the tax benefits.

No appeal was filed by the taxpayers.

Cooke and Jamieson
On 26 March 2004, the Full Federal Court upheld the original decision that expenses claimed by the taxpayers in relation to their investment in the Australian Horticultural Project (No 1) were deductible under the general deduction provisions of the income tax law. Further the court held that the anti-avoidance provisions did not apply to disallow the deductions.

No application for special leave to appeal was filed by the Commissioner.

19 May 2004