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Case loss threatens investors

THE white knights of managed investment scheme investors, lawyers Wilson & Atkinson lost their clean slate-status last week after the Federal Court in Perth found in favour of the Australian Taxation Office.

Some Perth lawyers argue that the case has widespread implications for all investors, because the judgement is not limited to managed investment schemes.

Justice Malcolm Lee ruled against Perth meteorologist Noel Puzey and his investment in a Sandalwood Plantation project under section 177F of Part IVA of the Taxation Administration Act.

It is the first time that the anti-avoidance provisions in Part IVA have been successfully applied and appears at odds with a decision made just three days previously by the Full Federal Court in the case involving Julie Vincent where it was found that Part IVA did not apply.

While the court found that the scheme was not a sham and that Mr Puzey was carrying on a business that was promoted by Allrange Tree Farms Pty Ltd and financed by Sandalwood Finance Pty Ltd making it possible to seek tax deductions, it held that the anti-avoidance provision applied because the scheme’s dominant purpose was to receive tax benefits.

Robert O’Connor QC, who has been closely watching the case unfold, said in this instance the judge considered the dominant motivating factor of both the promoter and the taxpayer.

“The material distributed by the promoter to prospective investors

had stated that the amount to be paid for seedlings by investors would be met out of the tax savings to be made from tax deductions to be allowed to the investors,” he said.

Another aspect separating the Vincent and Puzey cases was the disparity in media attention they received.

While the Vincent case made headlines over the past week, the Puzey decision has gone largely unnoticed.

Shocked by the decision Wilson & Atkinson has battened down the hatches and is trying to make sense of the decision before deciding on its next move.

“We now have a mark on

our copy-book if you like,” Wilson & Atkinson partner Teague Czislowski told WA Business News.

“Until last Monday we had never lost a case against the Tax Office.”

“One never likes to broadcast losses.”

However, the ATO has been equally short on making any announcement.

Mr Cizslowski said he thought both parties could be waiting to see what the final orders would be before going public.

“The ATO has a very powerful PR machine and one has to wonder why they haven’t started beating their chest yet,” he said.

On Tuesday a crisis committee meeting of Australians for Tax Justice, including Clough Engineering manager Lawrence Henderson and public relations consultant Tony Dawe, met with lawyers to decide their next move.

But Mr Czislowski has already indicated that the decision was likely to be appealed.

“From a logical perspective it’s a very good case to appeal. Our QC has advised us that we have a very good case to appeal,” he said.

Mr Puzey sought deductions of $40,000 in both 1997 and 1998 for expenditure on seedlings, plantation establishment and other fees.

Mr O’Connor said Mr Puzey only paid $28,000 of the $80,000 over the two years, with the balance of $52,000 to be paid out of proceeds from the sale of harvested timber in 15 years time.

Mr Czislowski said if the case went to appeal and lost the impact would be diabolical.

“If we lost the appeal it would be extremely significant not only for managed investment schemes but in all investments. It has real implications and real concerns for all investors.”

Mr O’Connor said it was interesting to contrast the two approaches used in the Vincent and Puzey cases.

“In Vincent, the Full Court agreed with Justice French at first instance that the promoter’s purpose can be a relevant purpose, but indicated that in that case the promoter’s dominant purpose was not to obtain a tax benefit for the investors,” he said.

“However, in Puzey’s case, Justice Lee found that that was indeed the promoters dominant purpose.”

The decision leaves Mr Puzey out in the cold. The settlement offer period extended by the ATO has now passed, so he joins thousands of other investors who have also rejected the settlement offer.

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