Rowntree v Commissioner of Taxation, [2018] FCA 182

The taxpayer, an experienced lawyer, received over $4 million in numerous dealings with companies that he controlled and, for most of them, was the sole director. He appealed assessments including these amounts in his income on the basis that they were loans to him. The Administrative Appeals Tribunal found that two of the receipts (for $1,000,000 and $80,000) were received as loans, but that loans did not exist at the time of his other receipts.

In dismissing the taxpayer’s appeal, Rares J stated (at paras 53, 54, and 55):

In Crowe-Maxwell v Frost (2016) 91 NSWLR 414 at 430-431 [81]-[84] Beazley P… referred to what Barrett J had said in Fisher v Divine Homes Pty Ltd (2011) 85 ACSR 512 at 5221 [50]-[51] including (at [50]):

If a company is to enter into a service contract with its director, it must do so in some clearly observable manner. … Corporate decisions and acts can only be achieved in explicit ways… . Coincidence of the identity of the sole director, the sole shareholder and the person by whom services are provided does not mean that the corporate decision to enter into a service contract and the actual formation of the contract can take place wholly within the individual’s head and be revealed, if at all, only when it suits him or her to reveal it. (emphasis added)

Beazley P went on to say (91 NSWLR at 430-431 [84]):

Whilst Barrett J’s opinion that entry into a contract must be apparent in some concrete way may be accepted, there can be no question that, as McHugh JA (Hope and Mahoney JJA agreeing) held in Integrated Computer Services Pty Ltd v Digital Equipment Corp (Aust) Pty Ltd (1988) 5 BPR [97326] at 11,117:

“… a contract may be inferred from the acts and conduct of parties as well as or in the absence of their words. The question in this class of case is whether the conduct of the parties viewed in the light of the surrounding circumstances shows a tacit understanding or agreement. The conduct of the parties, however, must be capable of proving all the essential elements of an express contract.” (citations omitted) (emphasis added)

The significance of the emphasised passage from McHugh JA’s reasons is that the task for the fact finder … where there is no document recording an alleged contract, is to examine the acts and conduct relied on in the context in which they occurred to ascertain whether objectively they evince a contract. …

If a shareholder is the sole director of his company, does it follow that an advance made to him by his company was a loan if that was his intent? Rares J demurred (at paras. 53-54), quoting previous judicial statements that:

Corporate decisions and acts can only be achieved in explicit ways… . Coincidence of the identity of the sole director, the sole shareholder and the person by whom services are provided does not mean that the corporate decision to enter into a service contract and the actual formation of the contract can take place wholly within the individual’s head and be revealed, if at all, only when it suits him or her to reveal it.

and that:

The question … is whether the conduct of the parties viewed in the light of the surrounding circumstances shows a tacit understanding or agreement. The conduct of the parties, however, must be capable of proving all the essential elements of an express contract.