In Sunraysia Harvesting Contractors Pty Ltd (Trustee) v Commissioner of Taxation [2017] FCA 694 the Federal Court dismissed the taxpayer’s appeal from the decision of the Tribunal that arrangements entered into between the taxpayer and other entities were a “sham”, with the effect that the taxpayer was not entitled to claim input tax credits on taxable supplies said to have been made by those entities.

The Federal Court agreed with the Tribunal that where the Commissioner contends that particular business structures and transactions were shams, the onus remains on the taxpayer to prove the assessments to be excessive. The Federal Court found that the positions as stated by Lockhart J in Richard Walter Pty Ltd v Commissioner of Taxation (1996) 67 FCR 243 at 245-246:

Use of the word “sham”, in some cases, and this is indeed one of them, obscures the fundamental issue between the parties. Essentially, it is for the taxpayer to prove that an assessment is excessive: …. The onus of proving that the assessment is excessive lies upon the taxpayer; although the evidentiary onus in a particular case may shift from time to time. In this case, the appellant has the burden of establishing that the alleged loans to it by Morlea are not income. It is common ground that if this burden is discharged and it is established that the payments here are in fact loans, then the appellant will succeed, provided it survives the possible application of s 260.
I mention this because it is a misconception in my view to assert that the Commissioner has the burden of establishing that a transaction is a sham. The Commissioner may, as he did in this case, submit that the relevant transactions were a sham and of no force or effect. In some cases the evidentiary onus may shift to the Commissioner to establish what the real transaction is for which the sham transaction is a cloak (assuming there is a real transaction); but at most this is an evidentiary onus which may shift back and forth depending upon the facts of the case and inferences which it is proper for the Court to draw. It remains that the burden of proving that an assessment is excessive lies upon the taxpayer.
[Footnote references omitted]

The facts and the decision by the Tribunal 

An individual had for a number of years operated a business of supplying casual labour to meet the seasonal demands of orchardists and vignerons. Until 2011 he operated through a company which contracted with growers to provide casual labour. The company was paid by the growers and it paid wages to the employees, deducted PAYG and paid payroll tax. In June 2011, the method changed and the applicant was incorporated to act as a trustee of a discretionary trust. Under the new arrangement, the applicant provided casual labour to growers, but it was said to be done through a succession of contracts with other companies, with those companies being obliged to account for PAYG deductions and payroll tax of the workers if necessary.

After an audit, the Commissioner concluded that the arrangements with the other companies were a sham and disallowed input tax credits claimed by the applicant on supplies said to be made to it by the other companies. The Commissioner also disallowed income tax deductions claimed by the applicant.

At the hearing, the applicant contended that where the Commissioner alleges a sham, the onus falls on him to prove the charge. The Tribunal did not agree. Rather, as the Commissioner alleged that the arrangements between the applicant and the other companies were not as they appeared to be, it was for the applicant to show that the assessments were excessive and that the arrangements were genuine and real.

The Tribunal considered that the applicant had failed to discharge that onus, largely because the applicant failed to adduce evidence from the persons said to be centrally involved in the new arrangements.

The Appeal

The Federal Court observed that the Tribunal was correct to take as his touchstone for the concept of sham transactions the following statement of Mustill LJ in Hadijiloucas v Crean [298] 1 WLR 1006 at 1019 which, subject to one qualification, was referred with approval by Gleeson CJ, Gummow and Crennan J in Raftland Pty Ltd v Commissioner of Taxation [2008] HCA 21 at [35]:

… it is necessary to distinguish between three situations in which, aside from any question of rectification, the court may take an agreement otherwise than at its face value. The first exists where the surrounding circumstances show that the arrangement between the parties was never intended to create any legally enforceable obligation. The second is the case of the “sham,” in the sense in which that word has been used in numerous cases, including Snook v London and West Riding Investments Ltd. Correctly employed, this term denotes an agreement or series of agreements which are deliberately framed with the object of deceiving third parties as to the true nature and effect of the legal relations between the parties. The third situation is one in which the document does precisely reflect the true agreement between the parties, but where the language of the document (and in particular its title or description) superficially indicates that it falls into one legal category, whereas when properly analysed in the light of the surrounding circumstances it can be seen to fall into another.
[Footnote reference omitted]

The qualification made in Raftland was that any absence of intention to create legal relations need not necessarily entail fraud.

The Tribunal found that the present matter fell into the first of these categories. The Federal Court found that there were, to say the least, logical and legally permissible bases for the Tribunal’s conclusion. The Federal Court found that the the Tribunal’s reasons were thorough, methodical, relentlessly logical, well grounded in legal principle both as to the operation of the onus of proof and the doctrine of sham and amply explain why the objection decisions were confirmed. The Federal Court concluded that, in design, the structure looked to be but a crude, interposed company of no worth, run by a straw man (a feature reminiscent of the “bottom of the harbour” behaviour of a generation ago) with “phoenix” successors. The taxpayer also failed to show that the key legal elements of the structure were ever intended to take effect.