IN THE TAX COURT OF FIJI
AT SUVA

Tax Court Appeal No: HBT  9 of 2013

IN THE MATTER of the Income Tax Act 1974

AND

IN THE MATTER of section 82 of the Tax Administration Decree 2009 (Decree 50 of 2009)

BETWEEN	:	CHRISTOPHER JAMES DONLON

Applicant

AND                         :	CHIEF EXECUTIVE OFFICER, FIJI ISLANDS REVENUE AND CUSTOMS AUTHORITY

Respondent

Coram			        	:	The Hon. Mr Justice David Alfred

Appearance 			:	Mr B. Solanki for the Applicant
Ms F. Gavidi for the Respondent

Dates of Hearing		:	25 and 27 April, 25 and 30 August, and 19 September 2016

Date of Judgment		:	31 March 2017

JUDGMENT

1.	This is the Applicant’s Amended Application for Review (application) of the Respondent’s (Revenue) Objection Decision (decision) dated 23 September 2013 wholly disallowing the Applicant’s objection of the 9 July 2013 to the tax assessment (for 2010) issued on 24 June 2013 and demanding payment by the Applicant of the sum of $1, 678, 166.92 (disputed sum) as income tax and penalties.
 
2.	The grounds of the application are that the decision is wrong in law and in fact in not taking into account:
(a)	That the Applicant is not involved in buying or selling shares or stock and is not a stock broker.
(b)	That the restructure was not carried out with a profit seeking motive, i.e.  s 11(a) of the Income Tax Act 1974 (ITA).
(c)	That the transfer of assets were capital in nature and thus did not attract Income Tax.
(d)	The above mentioned assets did not belong to the Applicant himself, but to the companies concerned and the Revenue therefore erred in issuing tax assessments against the Applicant when he was not the legal owner of those assets. 

3.	The Statement of Agreed Facts and Issues include the following:
Agreed Facts

(1)	The Applicant is a principal shareholder and director in Sustainable Forest Industries Limited (SFI), Feint Investment Limited (Feint) and Donlon Investment Limited (DIL).
(2)	In 2009, a joint venture was set up, Sustainable Mahogany Industries Limited (SMI) was incorporated and the following were one third partners and shareholders in the Joint Venture (JV):
(a)	Aquaview Pty Limited or nominee – the Applicant’s Businesses.
(b)	WPI Fiji Limited or nominee – White’s businesses.
(c)	PWT Limited or nominee – Wagner’s businesses.
(3)	“The Applicant in order to meet his contribution to the Joint Venture arranged for the transfer of assets into the newly formed Sustainable Mahogany Industries Limited”.
(4)	“The dealings, values and payments were detailed and settled in an executed Agreement dated 18 November 2009”.

Agreed Issues

(1)	Was there a restructure and was it carried out with a profit seeking motive?
(2)	“Whether the Applicant personally benefitted or gained from restructuring and transferring of Companies assets?
(3)	Whether it is legally correct for the Respondent to issue the assessments on the Applicant and not the Companies?

4.	The hearing commenced with the Applicant’s first witness (PW1) giving evidence.  He was Peter Kevin White, the managing director of Wood Products International Ltd, which exports wood to the United States, and were an exporter of the Applicant’s products.  He said the Applicant approached his Company and wanted to be part of it.  They started a  joint venture (JV) version 1.  They invested as a trustee company to avoid double taxation.  The JV was only in the marketing aspect and never anything to do with the mill – the hard assets.  They provided the working capital.  The JV relationship soured and they and the Applicant suffered losses.  One, John Wagner met him and they started a business in February 2008.  Wagner would bring capital into the JV.  The Applicant had to bring assets into the JV.  On 18 November 2009, the parties signed a conditional contract – Exhibit P1.  The  gist of this agreement is:
(1)	It was conditional – they wanted to hear from the Government on the issues they raised face to face with the Attorney – General (AG).
(2)	It crystalised the physical contribution in the form of assets and skills.  The physical assets – Annexure 1 – belonged to the Applicant.  PW1’s company contributed USD ½ million (m) as working capital for the short term.  The Applicant had to put physical assets into the JV.  It was all conducted at arms length and F $6,054,850 was a fair price.  On 20 January 2010 the JV materialised. The issues that led to PW1 leaving the JV in January 2011 were:
(1)	He was looking for a return to his company of the $500,000 but Wagner had blocked it.
(2)	He is a committed Christian and his values were an offence to Wagner who suggested his company would buy PW1 out.
He was paid for his 1/3 share and received a full refund of his US $500,000.

5.	During cross –examination, PW1 said the initial JV in 2005 was between his company and the Applicant’s company.  They had a proper JV agreement.  He did not have the agreement in court as it was not relevant.  With regard to Exhibit P1, there had been no third party valuation of the assets.  The parties themselves valued the assets.  Each of them had 1/3 ownership.  WP1’s $500,000 loan was repaid.  The $800,000 was also paid to him to free Wagner of all PW1’s rights and allow this Agreement to be destroyed.  He said the Applicant is not a stock broker.

6.	When re-examined PW1 said he did not feel any need to get an independent valuation.

7.	The next witness (PW2) was the Applicant.  He said he invested in Fiji in forest products and was involved in the timber industry.  There was no dispute regarding the JV agreement.  Some of his assets were to be put into the JV.  Each company was to account for their own tax liability.  His contribution was the milling assets.  They all 3 agreed on the value of the assets, though they could have had an independent valuer.  Wagner asked him to place assets in the new vehicle but these were not his personal assets.  The JV agreement was conditional.  Following the A.G’s letter – Exhibit P3 – they considered the JV agreement was unconditional and a letter – Exhibit P7 – was exchanged between the 3 parties confirming this.  The Revenue issued an assessment for him, which was an assessment for the transfer to Sustainable Mahogany Industries (SMI).  Those assets were not personally owned by him.  He was never a stockbroker in or out of Fiji.  The Revenue never provided any evidence that he was a stockbroker.  The Revenue was correct there was a restructure of the capital assets of the company at a gain.  He was not involved in the buying and selling of equipment.  Under the deed he undertook to transfer the company’s assets.

8.	When cross – examined PW2 said he was involved in the buying and selling of companies.  He owns a controlling interest in all of those companies.  The shares went up from $1 to $10.  He denied that $3m was paid into his personal account as shown in the email.  He denied he benefitted from these transactions.

9.	The final witness (PW3) was Arthur James Groom, the head of operations ANZ Bank.  He said all payments evidenced by the credit advice notes were credited into Feint’s account.

10.	Under cross –examination PW3 said he was not able to validate who is the signatory for Feint.  The account is a business checking account and not a personal account.

11.	Before closing the Applicant’s case his Counsel informed the Court that he was deleting (a) from s. 11 (a) in the application.

12.	The Revenue opened its case by calling its sole witness, Ms. Tulia Takala (DW1). She is the principal auditor, large and international audit with the taxation division.

13.	In December 2012, they were asked to look into the account of SMI.  In the course of their auditing, they discovered the Applicant was a director and shareholder of the company; that SMI had a lot of related transactions with other companies; that the Applicant is a principal shareholder.  The Applicant has a controlling interest in all these companies Payments were made for transactions.  The gain was personal in nature to the Applicant and this is why the assessment was made in the name of the Applicant as the gains fell into the hands of the Applicant.  Returns from SFI were lodged but did not declare any of these transactions.  The independent auditor’s report was qualified.  Her findings were that the financials lodged by the Applicant as the authorised officer of SF1 and Feint were not of the true status.  The Assessment was therefore raised.  Exhibit P12 is the notice of amended assessment raised and $1.6m was payable.

14.	When cross – examined DW1 said a company is a separate entity from an individual.  The Applicant did not lodge tax returns.  She could not confirm if the Applicant was a stockbroker.  He personally gained from the sale of the company assets and that is the source of the assessment.  The funds were for the Applicant’s personal accounts.

15.	The Revenue has issues with the sale price which was determined by Wagner, White and the Applicant.  The Revenue thought the sale price was unreasonable.  She said the assessments are correct, the gain is income and they have the right taxpayer.  The restructure was carried out with a profit motive and the penalties are not excessive.

16.	In re – examination DW1 said the Applicant is the only shareholder running Feint.  There was never any capital expansion to show that money came back into Feint to expand or diversify its activities.  The Applicant used his authority to sell the assets of SF1 and other entities and when the sales were realised, they went into the hands of the Applicant.

17.	With that the Respondent closed its case and Counsel made their oral submissions.

18.	The Applicant’s Counsel said the Capital Gains Tax came into force in 2011 and the tax assessments here were for 2010.  The Applicant is not a broker in Fiji, or abroad.  The Respondent’s witness was not able to show the Applicant was trading in shares.  The capital assets were of the companies.  The Applicant as the majority shareholder agreed to transfer the assets of the company.  Because they acted at arms length the parties were independent.

19.	There was a gain on the transfer but it was a capital gain and not an income gain.  S. 11 of the ITA did not tax a capital gain.  The money received was still money due to the company and not the Applicant.  He cannot be personally liable to pay the company’s tax.  The tax penalty should be on the company and not the Applicant.  The Court could reduce the penalty to below the statutorily imposed 20%.

20.	Counsel for the Respondent then submitted.  She said the 2 companies contributed assets to the JV.  There was a transfer of assets of the 2 Fiji companies and in return the Applicant gained shares in SMI.  Exhibit P21, the memo of agreement for the shares is considered by the Revenue as not simply a sale of assets but is income and not capital.  Exhibits P15 and P16 - the emails – show the Applicant received the money.  There is no evidence that the money actually went to SFI and Feint and that is why the accounts are qualified.  Why did the accounts not state the money went into Feint’s account.

21.	The Revenue’s case is that the monies went into the pocket of the Applicant and not into the companies’ accounts.  Although SFI and Feint contributed assets into the JV, they did not acquire shareholding rights in SMI.  There was no benefit to SFI and Feint from all these transactions and therefore the Applicant should be personally liable for the gain.  Both sides were only relying on S. 11 ITA.  She concluded by stating 20% is the minimum the Revenue can impose under the law.

22.	The Applicant’s Counsel in his reply said the shares were not sold.  The assessment is on assets.  It is farfetched to say an assets sale is a shares sale.  The bank statement shows these funds were received by Feint.  It is up to the Applicant to decide who is the shareholder in SMI.  It is not necessary to get independent valuations.  There was no false statement by the Applicant so there should be no penalty imposed.

23.	At the conclusion of the arguments I said I would take time to consider my decision.  Having done so, I now deliver my judgment.

24.	The facts of this application are contained within a small compass, viz whether the sale of the assets of SFI and Feint resulted in a personal gain to the Applicant, thus entitling the Revenue to assess him personally for income tax thereon rather than levying the tax on the 2 companies concerned.  This necessitates a close study of the 2 relevant agreements.  The first is the SMI JV Deed and Agreement dated as of 18 November 2009 (Exhibit P1).  It states the parties are PWT Investments, LLC and WP1 Fiji Limited and Aquaview Pty Limited (APL).  It is stated that APL acts as a trustee for the Donlon Family Trust and APL holds controlling interest in Matasau Holdings Ltd and Sustainable Forest Industries Ltd (hereinafter called SFI Group).  It is significant that SFI is stated to be of the third part.

25.	In Annexure 1 of this Agreement, at A. APL it is stated all of the milling assets listed in Annexure 4 are valued as US 3m and shall be vended into SMIL.

26.	Annexure 4 is titled “SFIL Asset Listing” and sets out the Land and Building, Plant and Machinery etc.  The JV value in USD is the total sum of $3,027,425.

27.	Clause 7 states that SFIL agrees that PWT and / or WPI has the right to purchase SFIL’s interest in the SMI assets for the total price of $3m up through 31 December 2012, and thereafter the purchase price shall increase based on the valuation of the underlying land.

28.	The next agreement to be considered is the SMIL Memorandum of Agreement dated 20 October 2011 (Exhibit P21).  It is stated that the parties to this agreement are Wagner, Donlon, PWT, APL and DIL being the shareholders and directors of SMIL.  It is also provided that PWT / Wagner will acquire 300,000 shares from APL / DIL for $3m.  Finally it provides that this is a full settlement of all claims payable to APL, DIL and Donlon.

29.	In the opinion of the Court this is not a JV where all the parties are discrete corporate entities.  At least one of the participants / partners is the Applicant in his personal capacity as an individual.

30.	The Court is aware that Salomon v. Salomon & Co. Ltd [1897] A.C 22 established that a registered company is a legal person separate and distinct from its members. 

31.	But the court is also aware that the so – called veil of incorporation is not an impenetrable iron curtain. It can be lifted or pierced in certain specified circumstances.  One of these is where there is some evidence of impropriety.  In: Re H: [1996] 2 B.C. L. C. 500, the English Court of Appeal held it was an appropriate case to lift the veil where the evidence provides a prima facie case that the defendants control these companies.

32.	In the instant case, the Court notes that the independent auditor’s report (attached to Exhibit P8) contains a qualification that they “were unable to verify and validate, neither could we obtain sufficient documentary evidence for the following balance sheet items:  
1)	Other Receivables - $6,054,850.

33.	This is part of the Company Income Tax Return for SFIL for the year ended 31 December 2010 where the statement by Directors bears the solitary signature of the Applicant.

34.	If I may say so, surely the Applicant would have been the best person in the best position to show and satisfy the auditor that the above sum had actually been received into the coffers of SFIL.  His failure to do so can only raise the reasonable inference that the money did not end up in the company’s but in the Applicant’s pocket.  If this was the conclusion reached by the Revenue. I am satisfied on the totality of the evidence led and documents provided to the Court, that on a balance of probabilities they were entitled to arrive at that conclusion.  

35.	The scheme / JV and the sale thereafter clearly fell within the net cast by s. 11 of the ITA and the opinion of Lord Justice Clerk in: Californian Copper Syndicate v Harris [1904] STC 159.  

36.	The Applicant was using company assets for the JV, a JV from which no apparent gain was to be made by any company.  This is shown with blinding clarity by the Agreed Facts that the Applicant in order to meet his contribution to the JV arranged for the transfer of assets into SMIL.

37.	 I am therefore of opinion that the Revenue were correct to assess the income tax on the Applicant and not on the company.  They were correct to consider that the Applicant had personally benefitted from the scheme.  They were correct as to the amount of tax imposed, regarding which I note there is no complaint from the Applicant.  They were correct to impose the penalty on the Applicant personally as he knew better than anyone else that the income received should have been properly declared.  And finally the Revenue was correct in imposing the penalty at 20% because that is the minimum imposed by law.

38.	In the result, I uphold the Objection Decision and dismiss the Amended Application for Review with costs which I summarily assess at $1,000 to be paid by the Applicant to the Respondent. 

Delivered at Suva this 31st day of March, 2017.

………………………….
David Alfred
JUDGE of the High Court of Fiji.