Castagna v R; Agius v R

THE COURT: The appellants, Anthony Castagna (Dr Castagna) and Robert Agius (Mr Agius) were charged on indictment presented on 19 February 2018 with 13 offences arising out of payments made from Macquarie Bank Ltd and its associated companies (Macquarie), pursuant to letter agreements, three of which were dated 9 April 1998, 23 August 1999 and 6 September 2001. In the broadest terms, it was alleged that the payments made formed part of the assessable income of Dr Castagna and that Dr Castagna and Mr Agius conspired together to defraud the Commonwealth by taking steps to conceal the fact that such payments formed part of the income of Dr Castagna, in particular by lodging income tax returns for the financial years ended 30 June 1999 to the year ending 30 June 2008, which failed to disclose such income.

It was alleged that the monies received from Macquarie were paid into an account that a company Billbury Limited (Billbury) held with a New Zealand branch of the Australian & New Zealand Banking Group Ltd (ANZ) and from then paid into various bank accounts held by International Finance Trust Company Ltd (IFTCO), a Vanuatuan company.

It was also alleged by the Crown that certain transactions between Mr Agius and companies associated with him on the one hand and Mr Castagna on the other hand, involved a repatriation of those funds including monies which should have been paid to the Commissioner of Taxation by way of income tax. The Crown alleged that this payment involved a conspiracy between Mr Agius and Dr Castagna to deal with money that was the proceeds of crime (the avoided tax) and which, at the time of dealing, had a value of $1 million or more.

The relevant provisions of the indictment, Counts 1, 2 and 13 were in the following terms:

Counts 1 and 2 were charged separately to take into account the change in the underlying legislation which occurred on 24 May 2001. It was not contended that a separate agreement was required to establish each conspiracy alleged. It was accepted, consistent with the decision of the High Court in Agius v The Queen (2013) 248 CLR 601; [2013] HCA 27, that it was sufficient that the alleged conspirators continued to adhere to or participated in an existing agreement.

Following a jury trial which commenced on 19 February 2018, the jury returned verdicts of guilty for Counts 1, 2 and 13 on the indictment on 18 April 2018. Each of Dr Castagna and Mr Agius have appealed their convictions, or to the extent necessary, have sought leave to appeal against them.

Dr Castagna relied upon the following grounds of appeal in respect of his conviction on Counts 1 and 2:

Mr Agius relied upon identical grounds of appeal.

In addition, prior to the return of the jury verdict, the appellants applied for the reservation of a question of law pursuant to s 72(1A)(a) of the Judiciary Act 1903 (Cth). The questions as ultimately agreed upon were in the following terms:

There was little dispute surrounding the background facts the subject of Counts 1 and 2.

Dr Castagna was a venture capitalist with expertise in investing in technology companies. Until late 1998, he lived and worked in the United States. However, from 1 January 1999, he was a resident of Australia for tax purposes.

Mr Daniel Phillips was an employee of Macquarie Technology Investments Banking, a division of Macquarie. The division focused on venture capital and worked with early stage technology companies. In 1997, Mr Phillips discussed with Dr Castagna the possibility of him taking on an advisory role with Macquarie.

Mr Phillips indicated to Dr Castagna that if the arrangement between Dr Castagna and Macquarie was to be a consulting arrangement, Macquarie’s policy was that it would only deal through companies and it would not enter into a consultancy agreement with individuals.

Billbury was a company incorporated in the United Kingdom on 29 June 1983. The directors and shareholders of Billbury were companies incorporated in Vanuatu. There was no issue in the proceedings that Billbury was in some way associated with Mr Agius. Billbury held bank accounts in New Zealand and the signatories to those accounts including Mr Agius, were directors and employees of the Vanuatuan accounting firm, Moore Stephens Vanuatu.

Mr Agius and Dr Castagna are cousins and had a close relationship. It was not in contest that Mr Agius suggested Billbury as a potential participant in the consultancy arrangement.

Between 1998 and 2008, Dr Castagna provided consultancy services to Macquarie pursuant to a series of consulting agreements. Two of these agreements were in evidence. The first of those was dated 23 August 1999 and the second, 6 September 2001.

Although not in evidence, it was clear that there was an earlier agreement dated 9 April 1998. This was because there was a letter of that date from Macquarie addressed to Billbury, care of Dr Castagna at an address in the United States, that referred to a “Consultancy Agreement dated 9 April 1998” and set out what was described as a “schedule for monthly payments to Billbury”.

The letter was signed on behalf of Macquarie by Mr Phillips and a Mr Charles Wheeler and was in the following terms:

The following page contained an authorisation signed by Dr Castagna which was in the following terms:

As will appear, the Crown placed some reliance on the fact that the acknowledgment signed by Dr Castagna referred to payments to be made “to me”.

The first agreement in evidence was dated 23 August 1999. It was addressed to Billbury care of Dr Castagna at an address in Gordon, NSW. Relevantly it provided as follows:

Schedule 1 of the agreement described the services to be provided. It was in the following terms:

At the same time a payment direction was given pursuant to schedule 3 of the agreement. Although the schedule is not in evidence, the payment direction dated 23 August 1999 was in the following terms:

The direction also contained an acknowledgment of the terms of payment signed by Mr Agius which was as follows:

The third agreement was dated 6 September 2001. It was expressed to be for a term commencing on 1 July 2001 and continuing until 30 June 2003. It was otherwise identical to the second agreement.

Notwithstanding the termination date of the third agreement, payments continued to be made by Macquarie to Billbury up to and including the financial year ended 30 June 2008. It was not suggested that the payments made after 30 June 2003 were made on different terms than those made during the term of the earlier agreements.

Macquarie paid the money due under the consultancy agreements to Billbury, the payments being made into either a United States dollar account or an Australian dollar account held by Billbury with ANZ in New Zealand. The Crown’s forensic account, Mr Rositano, identified approximately $6.3 million of payments made by Macquarie to Billbury over the period the subject of the charges.

The bulk of the monies paid to Billbury were transferred into bank accounts standing in the name of IFTCO. The accounts included an Australian and a New Zealand dollar account held by IFTCO with ANZ in New Zealand and similar accounts with the same bank in Vanuatu. They also included two other accounts which could not be identified but were likely to be Vanuatu accounts, and two in respect of which neither the account number nor the jurisdiction in which they were established could be identified.

Throughout the period the subject of the charges, approximately $8,800 per month was paid by Billbury to Australian bank accounts standing in the name of Dr Castagna. Billbury, however, did not retain funds out of the monies initially received from Macquarie to make these payments. Rather, funds were transferred to it by IFTCO out of which the payments were made.

The amounts totalling $999,647, paid in this fashion to Australian bank accounts standing the name of Dr Castagna, were declared as income by Dr Castagna. The amounts were described in his tax returns as “other business income”. Dr Castagna did not declare any of the other monies received by Billbury pursuant to the consultancy agreements.

Dr Castagna provided a voluntary disclosure statement to the Australian Taxation Office in 2008. Relevantly it contained the following statements:

The balance of the voluntary disclosure statement although it had some relevance to Count 13, is not relevant in relation to Counts 1 and 2.

The following provisions of the Income Tax Assessment Act 1997 (Cth) (ITAA 1997), are relevant to the determination of the appeal in respect of Grounds 1 and 2:

Having regard to the manner in which the argument developed, the provisions dealing with the taxation of trust income in Pt III, Div 6 of the Income Tax Assessment Act 1936 (Cth) (ITAA 1936) are also of relevance. The relevant provisions for present purposes are s 96, s 97(1)(a) and s 99(2). They are in the following terms:

There are four matters which should be noted at the outset. The first is that the Crown did not contend that the agreements between Macquarie, Dr Castagna and Billbury were shams. The Crown case was that notwithstanding that the agreements, on their face, required Macquarie to pay the consulting fees to Billbury, the income was in fact was derived by Dr Castagna.

The second matter is that no reliance was placed on the anti-avoidance provision in Pt IVA of ITAA 1936. The operation of those provisions are conditional on the Commissioner of Taxation making a determination under s 177F of that Act, which has not occurred in the present case.

The third matter is that no reliance was placed on the personal services income provisions in Pt 2-42 of ITAA 1997, which are designed to deal with arrangements concerning the alienation of personal services income of individuals.

The fourth matter is this. As will appear, the Crown as a fall-back position to its primary case that the receipts from Macquarie constituted income derived by Dr Castagna, sought to submit, at least on appeal, that if the income was derived by Billbury it was derived by that company as trustee of a trust in respect of which Dr Castagna was entitled to the income and which thus formed part of his assessable income. To understand the manner in which the case was put at trial and to consider the availability of the alternative position, it is necessary to consider the course of the trial in some detail.

The Crown opened its case over the course of three days. In relation to counts 1 and 2, the Crown stated the following early in its opening address:

After reviewing the remaining counts, the Crown then gave an overview of its case in relation to each of the counts as a whole. While somewhat lengthy, this overview is important in understanding the way in which the Crown put its case. In relation to the facts which are relevant to counts 1 and 2, the Crown stated the following:

In this part of the address, it is apparent that the Crown was placing some emphasis on the fact that, while Billbury was a party to the consultancy agreements and received payments from Macquarie Bank, it was Dr Castagna who had “earned” those payments by providing his services to Macquarie Bank. Further, while it was not explicitly stated, it is also apparent that the Crown was suggesting that Dr Castagna should have declared the payments to Billbury in his income tax returns over the relevant period.

The Crown then proceeded to outline the evidence in some detail. The Crown first identified and described some of the corporate entities which were relevant to its case. When discussing Billbury, the Crown noted that the payments made to Billbury were not recorded by Billbury as its income in its United Kingdom financial statements. The Crown did not suggest any explanation for this omission.

In dealing with the relationship between Mr Agius and the accounting firm Moore Stephens in Vanuatu, the Crown emphasised that its case was that Dr Castagna earned income by working with Macquarie. The following remark is of relevance:

The Crown then turned to the consultancy agreements between Macquarie Bank, Billbury and Dr Castagna. Whilst reviewing their terms and the payments which they required to be made, the Crown made the following statements to the jury about, first, the rationale for the consultancy agreements and, second, what they expected to be one of the principal issues during the course of the trial:

The Crown clarified this position a little later while giving an overview of the evidence of the payments which were actually made to Billbury by Macquarie Bank. The Crown said the following in relation to bonuses which were payable under the consultancy agreements:

It is here that there is the first reference to the payments made by Macquarie Bank to Billbury being “ordinary income”. Although the Crown did not highlight to the jury that this term had a particular legal meaning at this point, this was done at the conclusion of the address, where it was described as including “a gain that is a reward for services rendered”. There was no reference to the payments being any form of statutory income, either explicitly or implicitly at any point in the Crown’s opening address.

In concluding its overview of the payments which were actually made to Billbury, the Crown made a statement upon which it placed considerable reliance at the hearing of the appeal. The statement was the following:

This statement was called in aid by the Crown to support a submission that, “even though ‘bare trustee’ … terminology [was] not used in substance … what was being put to the jury, was the way that the money … was treated in such a transitory fashion by Billbury and really immediately sent on to IFTCO and then from IFTCO, the living expenses to Dr Castagna, the rest to the on call deposit, reflects in substance a bare trustee relationship”. Whether this statement was correct as a characterisation of the opening address or the Crown case at trial as a whole will be considered later.

During its opening address, the Crown also spent considerable time reviewing the evidence relating to the income tax returns filed by Dr Castagna. It is not necessary to go through these parts of the address in detail. It is sufficient to note the allegation which the Crown ultimately made about this evidence:

In this part of the address, it is apparent that the Crown was placing significant emphasis on the fact that the payments made to Billbury were “directly attributable to [Dr Castagna’s] personal exertion as a consultant at Macquarie Bank”. This is consistent with the Crown’s earlier statement to which we have referred at [44] above that one of the principal issues in the case would be “whether or not [these payments] was generated through [Dr Castagna’s] personal exertion, through his personal qualifications and attributes”.

The Crown then turned to consider Count 13.

The Crown returned to counts 1 and 2 at the conclusion of its opening address, but did not say anything relevant to those issues, apart from reiterating that the agreement between Dr Castagna and Mr Agius which the Crown relied upon was one to conceal Dr Castagna’s “true and complete assessable income”. It was also emphasised that on the Crown case, the funds received from Macquarie were not Billbury’s income. This was made clear in the following passages of the opening :

We have dealt with the Crown opening in some detail because it was suggested during the course of the appeal that the manner in which the case was put was wide enough to encompass the allegation that the relationship between Billbury and Dr Castagna in respect of the monies received from Macquarie was that of trustee and beneficiary and, in particular, that Billbury held the funds received from Macquarie as bare trustee for Dr Castagna. However, it is difficult to see any indication in the Crown’s opening address that the case was being put on the basis that the relationship between Dr Castagna and Billbury was a “bare trustee” relationship. It was correctly conceded that there was no express reference to the concept. It seems quite clear that the principal basis upon which the Crown opened its case was that Dr Castagna should have included the payments made by Macquarie Bank to Billbury as part of his assessable income in his income tax returns because those payments were “directly attributable to his personal exertion as a consultant at Macquarie Bank”.

The statements which we have extracted at [47] above and which were relied upon by the Crown on the appeal do not lead to a different conclusion. At its highest, it could be said that the statements that “Billbury really had no role whatsoever in this arrangement” and that Billbury was a “corporate vehicle” are consistent with a case that there was a “bare trustee” relationship. However, when read in the context of the opening address as a whole, it is not possible to read them as conveying that meaning. Instead, they simply serve to emphasise the idea which was at the heart of the Crown case: that Billbury was not doing any independent work for Macquarie Bank which might have entitled it to the payments which were instead “directly attributable to [Dr Castagna’s] personal exertion as a consultant at Macquarie Bank”.

At the conclusion of the evidence, an application for a verdict by direction was made to the trial judge on behalf of both accused. Counsel for Dr Castagna commenced his address by stating that “if the Crown accepts, as it does, that the agreement between Billbury and Macquarie Bank is genuine then this fact permits only one conclusion, namely the income paid pursuant to that agreement was derived by Billbury not Dr Castagna”. In response to a comment by the trial judge, he then explained this submission in more detail:

Counsel for Mr Agius adopted the submissions made on behalf of Dr Castagna.

The Crown responded to the submissions made on behalf of the appellants in the following manner:

The Crown placed considerable reliance on the decision of the Federal Court both at first instance and on appeal in Baker v Federal Commissioner of Taxation (1989) 20 ATR 798 (Baker); on appeal Baker v Federal Commissioner of Taxation (1989) 20 ATR 1706 (Baker FFC):

The Crown explained the point of difference with the submissions made on behalf of the appellants in the following manner:

The Crown then referred to its written submissions on the application, which listed a wide range of circumstances which it said would be included within the “factual matrix” in the present case. It should be noted that the circumstances listed in these submissions were identical to those identified by the Crown in its closing address to the jury on this issue.

At this point, it is apparent that there was a slight divergence between the language used by the Crown and the appellants in the application for a verdict by direction to describe the Crown case. The submissions made on behalf of the appellants viewed the Crown case as to whether Dr Castagna could be taken to have “derived” income as depending upon the fact that “the valuable thing which Macquarie received in consideration for the fees was the provision of services to be performed by Dr Castagna”. This understanding accords with the emphasis placed by the Crown on the fact that the payments made to Billbury were “directly attributable to [Dr Castagna’s] personal exertion as a consultant at Macquarie Bank” in its opening address.

However, the submissions made by the Crown on the application for a verdict by direction used slightly broader language to describe the circumstances in which Dr Castagna would be taken to have “derived” income. In an exchange with the trial judge about the effect of one of the relevant authorities, the Crown stated that “the income was not in this case derived in any legal meaningful sense by Billbury because it was passed through and immediately to the benefit of Dr Castagna and acknowledged by him at the outset that that was always the arrangement”. The Crown expanded upon this submission by stating the following:

This submission focused on the “benefit” which Dr Castagna received from the payments in order to determine whether he had “derived” income, rather than the fact of his “personal exertion”.

Despite this divergence, it seems clear that there was still a common understanding that the Crown had put its case on the basis that the question of whether Dr Castagna had “derived” income by reason of the payments made by Macquarie Bank to Billbury was ultimately a question of fact to be determined by the jury from the circumstances of the case as a whole, or the “factual matrix”. While the Crown had started referring to whether Dr Castagna had received a “benefit” as relevant to the factual question of whether he had “derived” income, it could not be said that this amounted to an allegation that the relationship between Billbury and Dr Castagna was a “bare trustee” relationship. The focus remained on an assessment of all the circumstances as a matter of fact, not a legal analysis of the relationship.

The trial judge noted the submission made by senior counsel for Dr Castagna that “in circumstances where the Crown did not suggest that any of the Consulting Agreements were shams, no regard could be had to anything outside the four corners of these agreements”. She noted in this regard that reliance was placed on the decision of the Full Court of the Federal Court in Tupicoff v Federal Commissioner of Taxation (1984) 4 FCR 505 (Tupicoff).

Her Honour noted that in opposing the application, the Crown relied on the decision of Pincus J in Baker and the Full Federal Court in Baker FFC in submitting that the question of who derived the relevant income was “a question of fact which was to be determined having regard to all relevant circumstances”. The trial judge also referred to the wide range of circumstances referred to by the Crown in its written submissions. She summarised these as follows:

The trial judge referred to Tupicoff, and to the fact that it had been followed by the Full Court of the Federal Court in Federal Commissioner of Taxation v Mochkin (2003) 127 FCR 185 (Mochkin). She also referred to Baker stating that Pincus J said that it was “a question of fact which was to be determined in light of all the circumstances” whether the monies paid to the companies controlled by the applicant were in fact the income of the applicant or that of his companies. She noted that Pincus J found that there were no contracts between the clients to whom services were provided and the companies who received the fees. She noted that “[t]his was regarded as significant … but not determinative”.

Her Honour also noted that the Full Court in Baker FFC concluded that Pincus J was correct in stating that “the case turned on what were, essentially, questions of fact” and that the conclusions reached by Pincus J were correct.

The trial judge noted that the agreements in the present case were “tripartite agreements”. She noted that unlike Tupicoff, there was no evidence of any enforceable legal documentation between Billbury and Dr Castagna. She stated that she did “not accept the submission that … [Dr] Castagna would not have had a right to sue for monies owing to him by Macquarie if Billbury did not”.

Her Honour also stated that “Billbury contributed nothing of value” to the consulting agreements and that “it had no assets” to meet the various obligations imposed upon it under the agreements. She stated that on one view, Billbury was “merely the conduit through which money passed at … [Dr] Castagna’s direction”.

The trial judge stated that she regarded Tupicoff as “factually distinguishable”. She stated that what was of significance in that case was the documentation which established the legal relationship between the insurance company (which was liable to pay the commissions), the trust company (which was named as the entity entitled to receive the commissions), Mr Tupicoff as an employee of the trust company and the structure of the trust company, which held assets and sold insurance. She stated that although the present case is “not similar to Baker, where there were found to be no agreements in place in to provide a legal justification for the payments by clients to [the taxpayer’s] companies”, the statements of principle in Baker and Baker FFC were applicable. She said that it followed that the question of whether the income was that of Dr Castagna or the company was “a question of fact for the jury as the tribunal of fact”.

The trial judge gave the following directions to the jury relevant to the issues the subject of Grounds 1 and 2:

Subsequently direction 12 was amended to read as follows:

The Crown commenced its closing address by reminding the jury of the broad nature of the Crown case in relation to counts 1 and 2:

The Crown then turned to discuss the evidence which had been adduced during the trial in detail. For present purposes, the Crown started to touch on matters relevant to the present case in discussing the evidence of Mr Phillips. The Crown began by stating the following:

Following this introduction, the Crown summarised what it said Mr Phillips’ evidence showed about the nature of the relationship between Macquarie Bank, Billbury and Dr Castagna:

The Crown then explained the nature of the task facing the jury in assessing whether the income was “derived” by Dr Castagna:

In this passage, the Crown emphasised that no single fact was determinative of the issue of whether Dr Castagna had “derived” the relevant income, and that it was necessary to look at the factual circumstances as a whole. This closely aligns with the approach of the Crown in its submissions on the application for a verdict by direction. Indeed, as pointed out at [58] above, the circumstances which the Crown had listed in those submissions as relevant were identical to those which the Crown discussed in its closing address. It is convenient to highlight these circumstances:

It is fair to say that the remaining additional circumstances relied upon by the Crown elaborate and amplify upon what is perhaps already implicit in the first five circumstances. When understood in this light, it is very difficult to accept that the several references by the Crown throughout its closing address to Billbury being a “nominee company” or “corporate vehicle” and to Dr Castagna being “beneficially entitled” to the payments made to Billbury were intended to put to the jury that there was a “bare trust” relationship between Billbury and Dr Castagna without any express reference to that concept. Rather, it is far more likely that those references were simply convenient short-hand descriptions of the general nature of the relationship between Billbury and Dr Castagna for the benefit of the jury, without being intended to refer to the technical legal concept which happens to use the same language.

This conclusion is reinforced by examining the other language used in the closing address to refer to Billbury and its relationship to Dr Castagna. One example is that the Crown repeatedly stated that the funds were only ever intended to “pass through” Billbury, and described Billbury as a “pass through entity”, “pass through vehicle”, or more colourfully, as a “Trojan horse”. The use of this type of language in the address to the jury to explain the relationship between Billbury and Dr Castagna strongly suggests that it was not intended to be put to the jury that there was a “bare trust” relationship between Billbury and Dr Castagna, since there is no necessary or even usual connection between the existence of a “bare trust” and the fact that funds “pass through” an entity. However, the relevance of this language is clear once it is recognised that it was being put forward simply as a means of characterising the relationship between Billbury and Dr Castagna as a matter of fact.

This same theme also readily appears from the way in which the Crown concluded its closing address when discussing the elements of each of the offences. In relation to count 1, the Crown commenced by stating the following:

The Crown then took the jury through the relevant paragraphs of the tax law directions contained in MFI 36. The Crown first highlighted the explanation of “assessable income” contained in paragraph 13:

This passage is significant for understanding how the Crown put its case to the jury. The Crown placed heavy emphasis on the fact that the income is “dealt with on the person’s behalf or as the person directs” as a matter of fact, and made no further reference to the fact that the taxpayer was “entitled” to the income, despite this also being referred to in paragraph 13. This strongly tells against the Crown relying on any kind of “bare trust” relationship before the jury, since such a relationship would have clearly entailed that Dr Castagna was “entitled” to the income, and as a consequence the income would have been required to be dealt with at his direction. It is clear that the Crown was not putting any such case to the jury, and was instead relying on the jury to draw an inference that Dr Castagna had “derived” the income from the circumstances of the case as a whole.

The Crown then turned to focus on the concept of “ordinary income”. It was stated that “ordinary income” was relevant to determining the “assessable income” which had just been discussed, but the connection was not further explained to the jury. The Crown stated the following:

The Crown then discussed the criteria for determining whether an amount is “ordinary income” in paragraphs 18 and 19 by reference to the circumstances of the case as a whole. These differed from the circumstances which were emphasised when the evidence was being reviewed, as we have set out at [75] above. Nevertheless, it is clear from this analysis that the Crown was treating the question of whether the payments to Billbury were income “derived” by Dr Castagna as one to be determined as a question of fact taking into account all the relevant circumstances, and that the Crown case did not seek to rely upon the existence of a “bare trust” relationship between Billbury and Dr Castagna. The way in which the Crown concluded its address on this element of count 1 is clear:

However, after the conclusion of the Crown’s closing address on count 1, counsel for Dr Castagna made an objection to the terms of paragraph 12, which had been referred to, although not emphasised, by the Crown in its address. Some discussion and debate followed before the revised paragraph 12 was agreed upon between the parties.

The Crown was given an opportunity to readdress the jury on the terms of the revised paragraph 12, and did so in the following terms:

The Crown then discussed several circumstances of the case which it suggested showed that the payments to Billbury were dealt with at Dr Castagna’s direction and for his benefit. The Crown concluded by saying the following:

The language used in this portion of the closing address is perhaps the closest that the Crown case came to emphasising only those matters which might have been relevant to determining whether a “bare trust” relationship existed between Billbury and Dr Castagna. However, it must be remembered that this was in the context of addressing only the “one factor” which had been identified by the revised paragraph 12 that the jury might take into account. It cannot be interpreted in isolation from the remainder of the Crown closing address. When that wider context is taken into account, it cannot be said that it was put to the jury at any stage that there existed a “bare trust” relationship between Billbury and Dr Castagna. The Crown case at trial relied upon the jury finding that income was “derived” by Dr Castagna as a matter of fact taking into account all of the relevant circumstances of the case.

Further, it is difficult to see how the Crown could have run a case relying upon the jury being satisfied that there was a “bare trustee” relationship between Billbury and Dr Castagna without also seeking a legal direction for the jury on what elements needed to be established before such a relationship could be found to exist. It is telling that the trial judge was not asked to give and did not give any direction to the jury which referred to a “bare trust”, or what was necessary to establish a “bare trust”.

It must be emphasised that the primary position of the Crown on the appeal was to support the approach taken in the Court below. Reliance on a trust relationship between Billbury and Dr Castagna was only a fall-back position. In that context, it is convenient to turn to the submissions of the parties.

At the outset of his submissions, senior counsel for Dr Castagna submitted that the Crown case at trial was not put on the basis that Billbury was a bare trustee or nominee, or on the basis of principal and agent. He submitted that the Crown’s position at trial was that whilst accepting the agreements with Macquarie were not shams, the Crown ignored the agreements completely. He submitted that “[t]he jury were directed in clear terms that they had to acquit if the money coming from Macquarie to Billbury at that moment was not income of Dr Castagna”.

In that context, senior counsel for Dr Castagna referred to the following passage of the summing-up by the trial judge:

In submitting that the monies received from Macquarie was not income derived by Dr Castagna, senior counsel for Dr Castagna referred to the evidence of Mr Phillips that Macquarie would only enter into a consultancy agreement with a company, rather than an individual directly and would only pay the consulting fees to a company. Mr Phillips gave evidence stating that this requirement was non-negotiable. Earlier in his evidence he had set out the reasons for Macquarie adopting this position in the following terms:

Senior counsel for Dr Castagna referred to the direction given to Macquarie in response to the letter of 17 April 1998 (see [18]-[19] above). He submitted that notwithstanding the use of the personal pronoun in the direction signed by Dr Castagna, it was signed by him on behalf of Billbury, pointing out that the subsequent directions in the same terms were signed by Mr Agius. He also submitted that if the income was in fact derived by Billbury, s 6-5(4) of ITAA 1997 did not operate to have the effect of including the funds as part of the ordinary income of Dr Castagna once the direction was made.

Senior counsel for Dr Castagna pointed out that the consulting agreements required Billbury to provide the services, although he accepted that they had to be provided by Dr Castagna as representative.

In his written submissions Dr Castagna referred to a number of cases which he submitted supported the proposition that money received from Macquarie was income derived by Billbury: Tupicoff at 519; Mochkin at [130]-[131]; Bayly v Federal Commissioner of Taxation (1977) 15 SASR 446 (Bayly); Fowler v Federal Commissioner of Taxation (2008) 167 FCR 425; [2008] FCA 528 at [15] (Fowler).

Senior counsel for Dr Castagna in dealing with the judgment given on the verdict by direction described the decision in Baker and Baker FFC as a “very thin weed to build an entire case around”. He referred to her Honour’s reliance on the circumstances surrounding the transaction, but submitted that whilst consideration of such issues was appropriate in a case such as Baker where there were no written agreements, it was not appropriate in the present case. He submitted that in those circumstances Baker and Baker FFC provided no support for the approach taken by the trial judge in her conclusion on the application for a verdict by direction.

In addition to the cases to which we have referred above, senior counsel for Dr Castagna also submitted that the approach which he submitted should be adopted was consistent with what was said by the Full Court of the Federal Court in Federal Coke Co Pty Ltd v Federal Commissioner of Taxation (1977) 15 ALR 449 at 459 (Federal Coke) and in Business & Research Management Pty Ltd (In liquidation) v Federal Commissioner of Taxation (2008) 173 FCR 204; [2008] FCA 1652 at [105]-[106].

Senior counsel for Dr Castagna submitted that it was not put by the Crown that there was a separate arrangement between Billbury and Dr Castagna that when Billbury received the funds it would be held by it as trustee. He submitted that had the case been put in that way, there would have been a different set of directions.

Senior counsel for Dr Castagna further submitted that “the Crown determinatively decided" not to contend that Billbury held the funds as bare trustee for Dr Castagna, having regard to the decision of this Court in Osborne v R; R v Osborne [2017] NSWCCA 11 (Osborne). He also submitted that no reference was made to the provisions of Div 6 of ITAA 1936 which deals with the taxation of trust income, the case having been conducted throughout on the basis that the monies received from Macquarie was the ordinary income of Dr Castagna. He also submitted that the Crown “specifically disavowed” a case that Dr Castagna derived the income the moment the funds left Billbury.

In reply, senior counsel for Dr Castagna referred to the document handed up by the Crown in her submissions (see [121] below) indicating how the Crown “wish[ed] to put its case on the basis that [the income] was statutory income, not ordinary income”. He submitted that the Crown case was not put in that fashion and if it was, the jury would have to be directed to find beyond reasonable doubt that there was a trust and that Dr Castagna had a present entitlement to the income in question. He submitted that in the event his submissions were successful, the Crown should not be given the opportunity of “re-construing a tax fraud”.

Senior counsel for Dr Castagna also noted that the events in question took place over 10 years ago, identifying that there was a tax audit in 2008, Dr Castagna was discharged by a magistrate in October 2015 on the basis that no jury would convict, and an ex-officio indictment was laid in May 2016. He submitted that in those circumstances if Grounds 2 and 3 were made out, a verdict of acquittal should be entered.

In his written submissions Mr Agius adopted Dr Castagna’s submissions on Grounds 2 and 3 of the grounds of appeal.

Senior counsel for Mr Agius supported the submission that the Crown should not be permitted to proceed on a basis different from the approach taken in the Court below. She noted that the only directions given in relation to trust were given in relation to the retirement fund said to have been set up for Dr Castagna. She emphasised that these directions did not relate in any way to the tax directions.

Senior counsel for Mr Agius also submitted that the note concerning the trust submission which she assumed reflected the way the new case would be put, demonstrated that the way the Crown proposed to put its case on any retrial would be “fundamentally different” to the manner in which the case was in fact put.

The Crown described the appellants’ submission as requiring the trier of fact to only look at the consulting agreements, and the construction of those agreements would determine who derived the income resulting from the Macquarie payments.

The Crown submitted that this was an incorrect approach. It submitted that what was required was to determine whether the assessable income belonged to Billbury or to Dr Castagna. This was consistent with the manner the Crown put its case at trial.

In her written submissions the Crown submitted that in determining whether the amounts in question were the assessable income of Dr Castagna or Billbury, it was necessary to “look at all the facts and circumstances” for each of Billbury and the appellant, and look at them in each relevant income year. However, the Crown did not seem to contend that there was any particular distinction in any of the years in which it said the conspiracy was on foot.

In her written submissions the Crown referred to the well-known statement of Jordan CJ in Scott v Commissioner of Taxation (1935) 35 SR (NSW) 215 at 219 to the following effect:

The Crown submitted that this approach to the identification of income demonstrated that all the facts and circumstances had to be taken into account. It submitted that this approach was supported by what was said by the High Court in Federal Commissioner of Taxation v Montgomery v (1999) 198 CLR 639; [1999] HCA 34 at [65] and [117] (Montgomery); Hayes v Federal Commissioner of Taxation (1956) 96 CLR 47 at 55 (Hayes) and Windeyer J in Scott v Federal Commissioner of Taxation (1966) 117 CLR 514 at 526. It submitted that it was also supported by a number of decisions of the Federal Court of Australia: Alexander v Commissioner of Taxation (2014) 99 ATR 773; [2014] FCA 1161 at [5] (Alexander); Reuter v Commissioner of Taxation (1993) 111 ALR 716 at 731, on appeal Reuter v Commissioner of Taxation (1993) 93 ATC 5030; Rotherwood v Commissioner of Taxation (1996) 64 FCR 313 at 323 (Rotherwood); Zobory v Federal Commissioner of Taxation (1995) 95 ATC 4251; MacFarlane v Commissioner of Taxation (1986) 13 FCR 356 (MacFarlane); and indirectly by the decision of the High Court in Richardson v Federal Commissioner of Taxation (1932) 48 CLR 192 (Richardson). It must be remembered that in considering those cases the question in the present case was whether the payments from Macquarie was income derived by Billbury or Dr Castagna, not whether the payments were income or capital in the recipient’s hands. At the hearing, the Crown accepted that a number of the cases relied upon in the written submissions dealt with the latter issue.

In her written submissions, the Crown sought to distinguish the authorities relied upon by the appellants. So far as Tupicoff was concerned, she pointed to the fact that there was a separate agreement between the insurer (National Mutual) and the service company which separately nominated Mr Tupicoff as an “accredited representative”. She noted that unlike the present case, the representative, Mr Tupicoff, was not a party to the contract pursuant to which the payments were made.

The Crown also noted that in Tupicoff the service company was a registered group employer and lodged an income tax return disclosing a profit, including the commission income received from National Mutual. She also noted that the service company had acquired the assets of Mr Tupicoff used in carrying on the business, noting the comment of Beamont J in that case that “the parties were fastidious to ensure the scheme was put into effect in the manner outlined by National Mutual”. She submitted that in contrast to the present case, the business was actively carried out by the service company.

The Crown submitted that Mochkin could be similarly distinguished on the facts. She submitted that Bayly was “not a case involving a separate corporate entity but rather a case where there was found to be a general transfer of the legal and equitable [interests in a] pharmaceutical business from a husband to his wife”, whilst Fowler was a case involving the personal service provisions in Pt 2-42 of ITAA 1997.

As in the Court below, the Crown in her written submissions placed particular reliance on Baker and Baker FFC. She said that Baker, upheld by the Full Federal Court in Baker FFC reflected the following principles:

In her written submissions dealing with the factual circumstances surrounding the transaction, the Crown referred to the direction to Macquarie to which we have referred at [19], the fact that the subsequent direction was not signed by directors of Billbury (two Vanuatuan companies), although it should be noted in this context that it was also part of the Commissioner’s case that Mr Agius controlled Billbury. She also referred to the fact that the consulting agreements were sent to Dr Castagna’s home address and the fact that no one from Macquarie Bank, including Mr Phillips, had any contact with any representative of Billbury other the appellant. The Crown also referred to the circumstances raised by it in its submissions on the application for the verdict by direction, which were summarised by the trial judge in the manner we have set out in [63] above.

At the hearing, the Crown emphasised the financial position of Billbury as disclosed in its financial statements. She pointed out that the financial statements from Billbury for the year ended 31 October 1997, disclosed a turnover of $US265 and a loss of $US365; in 1998 a turnover of $US640 and a loss of $US75; in 1999 a turnover of $US468 and a loss of $US262, in 2000 a turnover of $US842 and an operating loss of $US872; in 2001 a loss of $US365 and that in subsequent years the company appeared to be dormant. She said that, coupled with the absence of any of the Macquarie payments being recorded in the Billbury accounts, showed that Billbury was merely a conduit. The Crown also relied on the voluntary disclosure statement.

The Crown submitted that one of the reasons that it was necessary to look at the whole of the circumstances was to see whether “there was a trust in place. She submitted that this could lead to a different conclusion than that which would be reached if the agreement was looked at in isolation.

The Crown submitted that Dr Castagna had the legal right to receive the income from Macquarie. She submitted that looking at all the circumstances, the person who was “really generating the assessable income” was Dr Castagna. The Crown submitted that whilst the jury could take into account the consultancy agreements as part of the factual matrix, it was not the only matter. The Crown stated that “one really has to look at the requirements under s 6-5 [ITAA 1997] … [to see] whose assessable income was it actually and … to answer that look at all the facts and circumstances and here it’s quite clear it was Dr Castagna’s assessable income”.

However, at the commencement of the second day the Crown seemed to accept that Dr Castagna had no legal entitlement to the payments. The Crown first expressly noted that Dr Castagna was a party to the consultancy agreements and had provided consideration, but then submitted that clause 2 of the consultancy agreement dated 23 August 1999 “would seem to imply that Dr Castagna has some at least entitlement to the payment referred to in paragraph 3”. Clause 2 in fact deals with director’s fees payable to Dr Castagna “in addition to any payments referred to in paragraph 3 below”, referring to the consultancy fees payable in clause 3.

The Crown on the second day of the hearing put what might be described as an alternative case. She made the following submissions:

The Crown accepted that whilst the analysis was not expressly put in the Court below, there was reference throughout the Crown address to Billbury being a nominee company and to whether Dr Castagna was beneficially entitled to the payments. She accepted that what was involved in putting the case in this fashion was that the consultancy agreements regulated the arrangements between Billbury, Dr Castagna and Macquarie to pay the consulting fees to Billbury, and that there was a separate arrangement to the consulting agreements between Billbury and Dr Castagna by which it was agreed that Billbury would be the corporate vehicle entering into the consulting agreements, would derive no benefit and bear no liability and that any money received from Macquarie would be payable to Dr Castagna or at his direction. She submitted that the case was consistent with the manner that the case was put below, referring to references that “Billbury was not beneficially receiving the Macquarie payments or was a nominee”.

The Crown submitted that in the circumstances surrounding the payments made to IFTCO and the $8,800 going back to Dr Castagna with the remainder to an “on call deposit fund”, it was implicit that the funds only came to Billbury as a nominee. She submitted that this was consistent with the payments to Billbury not being recorded in its accounts. She submitted, referring to Union Fidelity Trustee Co of Australia Ltd & Mayfield v Federal Commissioner of Taxation (1969) 119 CLR 177 at 182, that where monies were paid to beneficiaries during the course of an income year, the income is treated as ordinary income rather than statutory income assessable under Div 6 of ITAA 1936.

At the request of the Court a note was provided setting out the case sought to be put. It was in the following terms:

The Crown submitted that if the Court came to the view that the Crown’s primary case that the income received from Macquarie was derived by Dr Castagna not Billbury could not be made out, there should not be a verdict of acquittal, but rather there should be a new trial where the Crown should be permitted to put its ‘trust case’. She submitted, referring again to the references to “nominee” and “beneficial entitlement” in the Court below, that the case proposed was not significantly different to that put at trial and it should be a matter for the Commonwealth Director of Public Prosecutions to determine whether or not there should be a new trial.

As we have pointed out the primary fashion in which the Crown put its case was that the income received from Macquarie was derived by Dr Castagna. It was not suggested that this resulted from the application of the personal services provisions in Pt 2-42 of ITAA 1997 or the application of Pt IVA of ITAA 1936, but rather depended on the proposition that a consideration of the circumstances surrounding the payments showed that the income was derived by Dr Castagna rather than by Billbury. This was the question essentially posed by the Crown to the jury in both his opening address and his closing address (see [41], [50] and [76] above).

The expression “ordinary income” in s 6-5 of the ITAA 1997 is not defined (although there was previously a definition of income from personal exertion in ITAA 1936). However, the nature of income for the purpose of the taxing statutes is well established. In Montgomery, the majority, after citing the passage from the judgment of Jordan CJ in Scott v Commissioner of Taxation (1935) 35 SR (NSW) 215 to which we have referred above, made the following remarks (at [64]):

However, it is important to remember that in the present case the question is not whether the money paid by Macquarie was properly characterised as income rather than capital, but rather whether the income which was derived was that of Dr Castagna or Billbury.

In Federal Coke, agreement was reached between a coal producer and a purchaser that the purchaser would compensate the producer for a variation of the contract by paying a total sum of $1 million in two equal annual instalments of $500,000 less certain adjustments. It was agreed between the parties that the payments would be made to the taxpayer appellant, an associated company of the producer, which had no business relationship with the purchaser. It was held by Bowen CJ and Nimmo J that “[t]he payments in the taxpayer’s hands were sums received without consideration and were not the product of any business or income producing activities” and so did not constitute income of the taxpayer. Bowen CJ and Nimmo J held that “[a]lthough the payments were made to [the] taxpayer … with the motive of avoiding tax, it was not legitimate to disregard the separateness of different corporate entities and decide liability to tax on the basis of the substantial economic or business character of what was done”.

Although the facts in this case were significantly different to those of the present case, the following remarks of Bowen CJ at 459 are of relevance:

In the present case the arrangements between Macquarie, Billbury and Dr Castagna were regulated by the consulting agreements which were acknowledged not to be shams. As was pointed out in Equuscorp Pty Ltd v Glengallen Investments Pty Ltd (2004) 218 CLR 471; [2004] HCA 55 at [46], “‘[s]ham’ is an expression which has a well-understood legal meaning” referring to “steps which take the form of a legally effective transaction but which the parties intend should not have the apparent, or any, legal consequences”.

It follows from the concession that the agreements were not shams, that the agreements must be given effect according to their terms. The consulting agreements obliged Billbury, albeit through its representative, to provide the services (cl 2). It obliged Macquarie to pay the consulting fees to Billbury (cl 3). The payments made to Billbury from Macquarie thus discharged Macquarie from its obligations.

The agreements expressly imposed on Billbury the responsibility for holding and maintaining any necessary insurance and obliged Billbury to indemnify Macquarie if it was held that Dr Castagna was an employee of Macquarie, as well as obliging Billbury to comply with all laws and regulations of government authorities.

The trial judge in dealing with the application for a verdict by direction, expressed the view that Dr Castagna could sue on the agreements if payment was not made to Billbury. It may well be that Dr Castagna and Billbury were joint promisees such that Dr Castagna could sue Macquarie for outstanding fees, joining Billbury as a defendant, if Billbury declined to sue or be joined as plaintiff. However, any judgment in such a suit would be in favour of Billbury (Coulls v Bagot’s Executor and Trustee Co Ltd (1967) 119 CLR 460 at 478-479; McEvoy v The Belfast Banking Co Ltd [1935] AC 24 at 43; Olsson v Dyson (1970) 120 CLR 365 at 389-390).

In any event, the money was paid to Billbury. It was not suggested that the payments did not discharge Macquarie’s obligations under the consulting agreements. The fact that Dr Castagna may have been able to sue as joint promisee is not a matter of particular significance in these circumstances.

The trial judge, both in her judgment on the application for a verdict by direction and in her summing-up, stated that in considering whether or not Dr Castagna derived the income it was necessary to look at the circumstances surrounding the entry into the agreements and the payments (see [64] above).

It is certainly relevant to look at the surrounding circumstances in construing the agreements to determine whether it actually reflects the legal relationship between the parties to it and whether there was some other agreement external to the consulting agreements which would lead to the conclusion that the payments made by Macquarie to Billbury or an equivalent amount, was income derived by Cr Castagna.

Thus, it would be relevant to look at the surrounding circumstances to determine whether there was an arrangement between Billbury and Dr Castagna, that the monies received by Billbury would be held on trust for Dr Castagna, to pay the money to him or at his direction, or whether Billbury was the trustee for Dr Castagna of the promise made to it by Macquarie to pay the consulting fees (see Trident General Insurance Co Ltd v McNiece Bros Pty Ltd (1988) 165 CLR 107 at 120-121, 147-149; in Re Schebsman [1944] Ch 83 at 104; Vandepitte v Preferred Accident Insurance Corporation of New York [1933] AC 70 at 79; Wilson v Darling Island Stevedoring and Lighterage Company Ltd (1956) 95 CLR 43 at 67), or whether irrespective of any trust relationship, the money paid by Billbury to Dr Castagna or into the retirement fund (to the extent it existed) was paid to him as consideration for providing the consulting services on behalf of Billbury or in recognition of the fact that he provided those services. In the latter case, the assessable income derived by Dr Castagna would be the money received from Billbury, not the money received by Billbury from Macquarie. Billbury would have derived income from Macquarie but have made an allowable deduction in an equivalent amount in respect of the payment to Dr Castagna.

However, leaving aside the question of trust, the case was not put on any of these bases. Rather, it was simply stated that the payment made by Macquarie to Billbury formed part of the assessable income of Dr Castagna notwithstanding the express terms of the consulting agreements. It seems to us that absent reliance on any of the alternatives to which we have referred, having regard to the terms of the agreements the monies paid by Macquarie was income derived by Billbury, not Dr Castagna.

The conclusion which we have reached is consistent with authority. Tupicoff, a case upon which considerable reliance was placed by the appellants in the Court below, involved a taxpayer resigning his appointment as a commission agent with an insurance company, procuring the appointment instead of a company in the capacity of a newly formed discretionary trust of which he and his family were beneficiaries and on whose behalf he then carried out the insurance selling activities. The Court determined that the purpose of the arrangement was splitting the taxpayer’s income between members of his family and was therefore void against the Commissioner of Taxation, pursuant to s 260 of ITAA 1936. However, the Commissioner’s primary contention that the agreements were a sham was rejected. Beaumont J, with whom Fisher and Jenkinson JJ agreed, in rejecting the proposition made the following remarks at 518-519:

The trial judge on the application for a verdict by direction referred to these remarks as distinguishing the factual circumstances in Tupicoff from those of the present case. However, it is important to bear in mind that the remarks were directed to the question of whether the arrangements entered into were a sham, something that was not in issue in respect of the consulting agreements.

Tupicoff makes clear that an agreement that is not a sham will have legal effect even if the purpose of entering into it is to evade or avoid any tax liability subject always to the provisions of Pt IVA of ITAA 1936 or its predecessor s 260 of ITAA 1936. The case demonstrates that it is not appropriate to ignore the legal arrangements of a contract in favour of the Court’s view of the substance of the matter (see Federal Coke at 469), even if it is plain that the purpose of the arrangement was to avoid taxation. As it was put succinctly by Menzies J in Peate v Federal Commissioner of Taxation (Cth) (1964) 111 CLR 443 at 445, “in the absence of a special law a genuine transaction does not lose its legal effect because it was carried out to avoid, limit or postpone tax”.

Mochkin provides further support for the appellants’ case. The proceedings involved a challenge under Pt IVA of ITAA 1936 to arrangements whereby a taxpayer stockbroker caused trustees of a discretionary trust to enter into commission arrangements with other stockbrokers. The beneficiaries of the trust were the taxpayer, his family and charity. The Court held that the particular arrangements in question which had a self-evident commercial purpose was not one which a reasonable person would conclude was “entered into or carried out … for the dominant purpose of obtaining a tax benefit”. However, in the course of dealing with the matter Sackville J with whom Merkel and Kenny JJ agreed, rejected the proposition that the income received from the trading activities carried out by the trustee company was income derived by the appellant. Sackville J with whom Merkel and Kenny JJ agreed applied what was said in Tupicoff in dealing with this issue (127 FCR 185 at [131]).

Sackville J also rejected the submission that s 19 of ITAA 1936 (repealed), the equivalent to s 6-5(4) of ITAA of 1997, had the effect that the income was deemed to be derived by the taxpayer whenever it was dealt with as the taxpayer directed. He made the following remarks (at [132]):

A similar conclusion to that reached in Tupicoff and Mochkin was reached by Bray CJ in Bayly at 454-455. In Fowler, the appellant was the sole director, shareholder and employee of a company, the core business of which was to supply the appellant’s consultancy services to third parties. The appellant was assessed to tax under the alienation of personal services income provisions contained in Pt 2-42. Lindgren J in applying the test in s 84-5(1) of ITAA 1997 noted (at [41]) that it could not be disputed that the amounts were ordinary income of the company.

The Crown placed particular reliance on Baker and Baker FFC.

In Baker, the taxpayer carried on the business of an accountant in partnership. Separately, he earned income from certain tax avoidance arrangements made by him on behalf of his clients. He claimed that the income derived from that activity was not derived by him but was earned by companies he controlled which were the trustees of various discretionary trusts.

The taxpayer’s clients gave evidence that they were told that the commissions paid were for “the appellant’s trouble and expense in arranging and advising” on the arrangements. There were no contracts between the clients and the companies.

In these circumstances, Pincus J in Baker rejected the proposition that the income was derived from the company. He made the following remarks ((1989) 20 ATR 798 at 800):

Pincus J expressly rejected the taxpayer’s evidence (20 ATR 798 at 801-802):

The result was hardly surprising. There were no contractual arrangements between the companies and the clients which obliged the companies to provide any services or entitled them to any fees. Having rejected the appellant’s evidence, the conclusion that the income was derived by him was inevitable.

The decision was upheld on appeal, Baker FFC. The Court (at 1709) noted that Pincus J stated that the “basic point, namely, [was] that the appellant did not establish ‘that the income, which was undoubtedly earned by his own work, was in truth that of any corporate entity’”. The Court’s conclusion was expressed in the following terms (at 1710-1711):

In that case, once it was concluded that there were no contractual or other arrangements between the company and the clients and the evidence of the taxpayer was rejected, it followed that the taxpayer was providing the services rather than the companies through the taxpayer as its agent. By contrast in the present case, there was a contractual arrangement between the client (Macquarie) and the company (Billbury) by which Billbury agreed to provide the services to the client through its representative Dr Castagna. Unless it could be said that the agreement was a sham or any of the alternatives to which we have referred at [135] were established, it follows that the income was derived by Billbury. It was not contended that the agreement was a sham and none of the alternatives to which we referred were relied upon.

The Crown relied on a number of other authorities to support its contention. It was submitted that these cases established that it was necessary to look at the facts surrounding the entry into the agreements and the conduct of the parties, as well as the agreements itself to identify who in fact derived the income. However, as is demonstrated below, these cases in the main involved the question of whether receipts undoubtedly received by the taxpayer had the character of income in his or her hands, a different question to whether the taxpayer or another entity derived what was admittedly income.

In that context, the Crown relied on four decisions of the High Court: Hayes; Montgomery; Scott v Federal Commissioner of Taxation (1966) 117 CLR 514 and Richardson. Hayes concerned the question of whether a transfer of shares to the taxpayer was a gift or whether it constituted income. Fullagar J in the passage relied upon by the Crown (96 CLR 47 at 55) stated “[t]he question in each particular case is as to the character of the receipt in the hands of the recipient” and “[t]he test to be applied is an objective, not a subjective test”. His Honour’s remarks were directed to the characterisation of a payment to a particular taxpayer, not to the question of who derived the income.

Montgomery concerned the question of whether certain payments made as an inducement to enter into a lease formed part of the taxable income of the taxpayer. The case was argued on the basis that the ultimate issue was whether the amounts received were income or whether they were capital (198 CLR 639 at [32]). The remarks made by the majority (at [62]-[64]) to which we have referred above, were made in the context of dealing with that question.

Scott v Commissioner of Taxation involved the question of whether a payment of £10,000 to a solicitor by a longstanding client was derived as income or a gift. In her written submissions the Crown relied on a passage from the judgment of Windeyer J. However, a consideration of the whole of that passage makes it clear that it was directed to the question of whether the monies in question were income or a gift. Thus Windeyer J stated (at 526):

The fourth of the High Court cases relied upon, Richardson, bears some superficial resemblance to the present case. In that case, part of the profits derived by the applicant from carrying on a hotel business were falsely returned in the name of a nominee. The Commissioner, on discovering this fact, issued amended assessments to the taxpayer. However, the Commissioner refused to make any allowances for the tax paid by the nominee. Both Starke J and the Full Court of the High Court held that the allowance should be made. Importantly, it was not in dispute that the income returned by the nominee formed part of the income of the taxpayer. The case in those circumstances provides no assistance to the Crown.

Nor do we think that the cases in the Federal Court relied upon by the Crown support the proposition for which she contends. In Alexander, Edmonds J refused to order certain separate questions, stating that they involved “questions of mixed fact and law”. He stated that would always be the case “where the question is whether a receipt has the character of income”. (emphasis added) (see 99 ATR 773 at [3]). In that context, he referred to what was said by Dixon and Evatt JJ in Western Gold Mines NL v Commissioner of Taxation (WA) (1938) 59 CLR 729 at 740, stating that the question involved “a wide survey and an exact scrutiny of the taxpayer’s activities”. Those remarks (59 CLR 729 at 740) were stated by Dixon and Evatt JJ to be necessary in determining whether a profit was of an income or capital nature. It does not provide assistance in the present case.

In Alexander, Edmonds J made reference to the decision of Hill J in Reuter v Federal Commissioner of Taxation (1993) 111 ALR 716 and on appeal, 93 ATC 5030, another decision relied upon by the Crown. The facts were complicated but the taxpayer was approached by Rothwells Limited to provide services in connection with a proposed takeover by Tryart Pty Ltd of John Fairfax Limited. It was agreed that the fee payable would be 45% of the $100 million fee payable on the successful completion of the takeover.

The takeover was successful but Rothwells Limited had fallen into financial difficulties. As a consequence it was agreed that another company, Bond Media Limited, would provide the fee. Following subsequent negotiations Rothwells (or its managing director, Mr Laurie Connell) agreed to pay the applicant $8 million for his services.

However, it was realised that if Rothwells made the payment it may constitute a preference. As a consequence, a Deed of Covenant was entered into, pursuant to which Bond Media acknowledged that it had paid $8 million to the applicant, and the applicant, in consideration of the payment of $8 million, covenanted not to sue anyone for the fee without the consent of Bond Media Limited.

The applicant sought to characterise the payment solely by reference to the Deed of Covenant as a payment for temporarily giving up the right to sue Rothwells.

Hill J rejected this contention stating (111 ALR 716 at 729-730) that he was “entitled to take into account all relevant circumstances [surrounding the deed] in determining the character of the receipt of the $8 million in Mr Reuter’s hands”. In that context, he concluded that “[t]he payment was so closely associated with the services provided” by the taxpayer to Rothwells, that “as a matter of fact … the payment was a product of his services” and thus a matter of income. The Full Court reached a similar conclusion ((1993) ATC 5030 at 5036).

In that case, the Crown emphasised that the agreement between Bond Media and Reuter was not a sham but nonetheless, the Commissioner and the Court were entitled to look outside the agreement to determine the true characterisation of the payment. However, when, as in the present case, the question is who derived the income in circumstances where the agreements were not a sham, it does not seem to us that its effect can be disregarded in determining the question of who derived the income notwithstanding the fact that the work was done by Dr Castagna, that Billbury had no other capacity to meet its obligations and that Billbury only retained the funds for an extremely limited period of time. These matters may be highly relevant in determining whether the payments made by Billbury to Dr Castagna formed part of his assessable income but that is not the manner in which the case was put by the Crown.

Similarly, Rotherwood involved the question of whether the payment was income or capital. The Court emphasised in that case that the question is objective and whilst the description in the contract was relevant, it was only part of the matrix of fact from which the character of the payment may be derived (64 FCR 313 at 323). However once again, this case involved the question of whether the payment admittedly made to the taxpayer was income or capital in his hands.

The Crown submitted, relying on the decision of MacFarlane, that it was sufficient if it could be established that the income was derived beneficially by Dr Castagna and that it was enough if Billbury was merely the “nominee” of Dr Castagna.

In MacFarlane the taxpayer successfully argued that his wife was beneficially entitled to half of the income of their joint venture and was not required to be included in his assessable income. Beaumont J with whom Fisher and Burchett JJ agreed on this issue, explained the position as follows at 367:

His Honour’s remarks, with respect, are undoubtedly correct. However, to establish a case based on beneficial entitlement to the income, the Crown would need to show that Dr Castagna was beneficially entitled to the monies from Macquarie, either as a result of an express trust or perhaps because of a resulting or constructive trust. As we point out below, the difficulty is that such a case was not sought to be raised.

So far as the contention that Billbury was the mere nominee of Dr Castagna, that again ignores the fact that the consulting agreements provided for Billbury to perform the services through its representative and receive the payments. There is nothing in the agreements to suggest that Billbury was a mere nominee in the sense of simply being the recipient of the payments and having no positive obligations under the agreements.

Apart from the trust contention, there were two further issues raised. First, whether s 6-5(4) provides any assistance to the Crown and secondly, whether the directions given by Dr Castagna and subsequently by Mr Agius that the funds were to be paid to Billbury provides support for the Crown case.

Section 6-5(4) of ITAA 1997 is relevantly in the same terms as the former s 19 of ITAA 1936. As Hill J pointed out in Liedig v Federal Commissioner of Taxation (1994) 50 FCR 461 at 470 (Liedig), the section only operates when the amount in question is “‘income’ of the person which, if paid to him or her, would clearly have been derived by him or her”. See also Mochkin at [132].

Further, we do not think that the directions and authorisations to Macquarie to which we have referred at [18] - [19]; [21]; [23] - [24] above, alter the position. The directions were made pursuant to the consulting agreements and directed payment to Billbury. They do not affect the contractual relationship which existed between the parties under the consulting agreements.

Fundamentally, the Crown case amounted to the proposition that because the services were performed by Dr Castagna, Billbury had no capacity to proffer the services other than through Dr Castagna and only held the monies for a very short period of time, meant that notwithstanding the terms of the agreements, the income was derived by Dr Castagna as the service provider. A somewhat similar proposition was argued by the Commissioner in Liedig. In that case, where the taxpayer performed certain services as trustee of a trust, it was argued by the Commissioner that as the income was earned by the trustee through his personal exertion, it was taxable in his hands. Hill J rejected the submission and after referring to Tupicoff and Bayly, made the following remarks which are apposite to the present case at 474-475:

Similarly to that case, the income in the present case was derived from the contract with Macquarie, albeit dependent on the personal services of Dr Castagna.

It follows that subject to the proposition that Billbury was trustee for Dr Castagna, such that he was beneficially entitled to the income received from Macquarie, Grounds 2 and 3 of the grounds of appeal have been made out.

In the circumstances, it is not necessary to deal with the reserved questions.

We have pointed out at [121] the manner in which the Crown ultimately sought to put its case based on the existence of a trust. Because of the importance of the issue both as to the fate of the grounds of appeal themselves and the orders which should be made were the appeal to be allowed, we have set out in considerable detail the manner in which the case was put at trial (see [39]-[86] above). It is unnecessary to repeat what we have set out but it demonstrates with abundant clarity that a contention of the nature of that suggested at [121] was not put. However, there are a number of matters which may be added.

Although it is correct as pointed out in the note to which we have referred at [121] that where monies are paid to beneficiaries during an income year, income derived by them is treated as ordinary income for taxation purposes, it would still be necessary for the Crown to demonstrate that the whole of the distributable income was held on trust for Dr Castagna (Federal Commissioner of Taxation v Bamford (2010) 240 CLR 481 at [45]).

The Crown relied on an express trust. It would thus have been necessary for it to prove beyond reasonable doubt that the person creating the trust intended to do so. The intention must be clear and it must also be clear what property is the subject of the trust and the identity of the beneficiaries be reasonably certain. Intention is to be inferred objectively from the words used and the surrounding circumstances (Byrnes v Kendle (2011) 243 CLR 253 at [14]-[16]; [57]-[65]; [114]; Associated Alloys Pty Ltd v ACN 001 452 106 Pty Ltd (in liq) (2000) 202 CLR 588; [2000] HCA 25 at [29], noting at [34] that “[a]n express obligation … to keep the ‘proceeds’ separate would have pointed to the existence of a trust”, although the absence of that requirement does not of itself deny the trust; see also Korda v Australian Executor Trustees (SA) Ltd (2015) 255 CLR 62; [2015] HCA 6 at [3] - [10]; [109] - [111]; [204]).

Finally on this issue it is important to bear in mind the fact that mere control over a company’s funds does not render the company a trustee for the controller. The position was summarised by Leeming JA in Osborne in the following terms:

The jury was not directed or invited to draw a conclusion on any of these issues as the Crown did not conduct the case on this basis. It is not for this Court to speculate what the result would be had the Crown done so. The possibility that the Crown may have done so does not alter the fact that Grounds 2 and 3 have been made out.

The grounds of appeal in respect of Count 13 were in the following terms:

It was accepted that if the appeal against the convictions on Counts 1 and 2 are made out, the appeal against the conviction on Count 13 must also be allowed there being no proceeds of crime to constitute the offence.

Count 13 essentially involved a conspiracy to repatriate part of the funds transferred overseas by Billbury to Dr Castagna by what were described by the Crown as “sham loan[s]”. The case was essentially based on two matters. First, the monies paid overseas by Billbury, or at least a part which represented unpaid tax, were the proceeds of crime and second, that Mr Agius and Dr Castagna conspired to have the money returned to Dr Castagna by way of “sham loans”.

It did not seem to be disputed that a portion of the funds paid by Billbury to IFTCO represented proceeds of crime if the Crown was successful on Counts 1 and 2. That was accepted, notwithstanding the fact that there would be no liability to pay tax out of the particular funds in question had the income been declared and an assessment issued. The tax assessed would constitute a debt to the Crown for which Dr Castagna was liable but not a charge over any particular funds.

The issue which was argued on the appeal related to the repatriation of these funds. The Crown essentially contended that the repatriation funds were directly or indirectly derived from the proceeds of the offence the subject of Counts 1 and 2, whilst the appellants contended that the repatriation funds were genuine loans and could not be traced to such proceeds of crime.

The issues raised by the grounds of appeal on Count 13 thus raised difficult questions of whether the money in question was wholly or partly derived or realised directly or indirectly from the conspiracy the subject of Counts 1 and 2 (c/f Commissioner of Australian Federal Police v Hart (2019) 262 CLR 76; [2018] HCA 1 at [16]; [91]-[93]; [98]). Because, as appears below, we are of the view that a verdict of acquittal should be entered, it is both unnecessary and inappropriate to deal with what is now a hypothetical issue.

In the circumstances it is unnecessary to deal with these grounds.

The appellants contended that if they were successful on these grounds a verdict of acquittal should be entered. The Crown by contrast submitted that a new trial should be ordered and it be left to the prosecuting authorities to determine whether or not a new trial should be had. In that context, the Crown submitted that it would not be relying on any fresh factual material, but merely be seeking to place a different characterisation on the transactions.

In King v The Queen (1986) 161 CLR 423, the appellant was charged along with another man with the murder of the appellant’s wife. The case put was that the husband was an accessory before the fact having procured the other man to do the killing. The trial judge initially directed the jury that it was not possible to enter different verdicts against the two men. However, following objection by the prosecution, the jury was told that they could convict the husband if they were satisfied that he arranged for someone to kill his wife, even if it was not the other man charged. The husband was convicted and the other accused acquitted.

The Court of Criminal Appeal set aside the conviction and ordered a new trial on the basis that the trial judge had erred in allowing the alternative way the case was put to go to the jury.

A majority of the High Court held that the Court of Criminal Appeal was correct in ordering a new trial. It was accepted by Dawson J, with whom the other members of the majority agreed, that a new trial should not be ordered “when the evidence in the Court below was not sufficiently cogent to justify a conviction, or to allow the Crown to supplement a case which had proved to be defective and in particular the Crown should not be given an opportunity to make a new case which was not made at the first trial (161 CLR 423 at 433). However, as the alternative case was raised belatedly at the trial and the case was a strong one, a new trial was ordered.

In Jiminez v The Queen (1992) 173 CLR 572; [1992] HCA 14, a case involving a misdirection on a charge of dangerous driving causing death, the plurality ordered an acquittal rather than a retrial stating that it was “more than three and a half years since the accident occurred”, the applicant had “already been subjected to the expense, strain and inconvenience of a trial”, “the case against him was not a compelling one” and the sentence was “one of periodic detention which, if it had been served, would … have expired”.

In Parker v The Queen (1997) 186 CLR 494; [1997] HCA 15, the applicant was convicted of stealing, the Crown asserting that the applicant used monies provided by donors to his parliamentary election campaign which was deposited in a bank account for purposes other than to support his parliamentary election, contrary to a direction by the donors that it be only used for the purpose of the election campaign. The Western Australian Court of Criminal Appeal held that there had been a misdirection on the relevant provisions of the legislation (s 373 of the Criminal Code (WA)) but held that a retrial was appropriate on the basis that s 373 deemed the money to be held on trust, and that equitable principles could be applied to determine who owned the money when it was withdrawn from the account.

The majority in the High Court held that s 373 did not have that deeming effect. However, the Crown indicated that on a retrial, it “would contend that the campaign account represented a common fund but that donors were owners of different parts of the fund”. The Crown said it “would rely upon principles of tracing so as to identify a relationship between money paid into the account and money paid out”.

The majority, in ordering an acquittal, stated that it was “apparent that on a retrial the appellant would be called upon to meet a quite different case to that presented against him at trial” which would have been “unfair, particularly having regard to the sentence already served” (186 CLR 494 at 519).

In The Queen v Taufahema (2007) 228 CLR 232; [2007] HCA 11, an accused was charged with the murder of a police officer on the basis of secondary liability. By the conclusion of the trial, the joint criminal enterprise was described in a different way: the judge directed the jury that the Crown alleged a joint enterprise to avoid apprehension, involving the shooting of a police officer as a foreseen possibility. The Court of Criminal Appeal quashed the conviction on the ground that evasion of apprehension was not an offence known to law and entered a verdict of acquittal. On an application for special leave to appeal to the High Court, the Crown for the first time characterised the joint enterprise as the commission of an armed robbery in which a fatal shooting which was foreseen as a possible occurrence occurred.

The majority of the Court concluded that a new trial should be ordered. The majority pointed out that one of the key circumstances referred to in s 8(1) of the Criminal Appeal Act 1912 (NSW) is “the public interest in the due prosecution and conviction of offenders” and that “[a]n order for acquittal conflicts with ‘the desirability, if possible, of having the guilt or innocence of the [accused] finally determined by a jury’” (228 CLR 232 at [49] - [51]). They pointed out at [51] that “the trial which took place was a flawed one” due in part to the influence of the trial judge. They also pointed out at [55] that “only a relatively small part of a very long sentence … had been served” and that a delay between the offence and the new trial was not such as to prejudice the accused. Having reviewed the authorities to which we have referred, the majority stated at [67] that “the difference between the case relied on in the first trial and the case to be relied on in a second trial must be substantial if the difference is to stand as a bar to an order for a second trial”.

Gleeson CJ and Callinan J who with Kirby J dissented, referred at [35] to the statements made by Dawson J in King to which we have referred above. They stated that “[i]n the context of a new trial for the same offence, the reference to a ‘new case’ must be to the particulars of the charge, and to the nature of the evidence”. They emphasised at [37] “[t]he general rule that litigants are bound by the conduct of their counsel, a rule essential to the adversarial system, applies with at least as much force to the prosecution as to the defence”.

It may be assumed that the case which will be put on any retrial would be based on the propositions in the note to which I have referred at [121]. However, it would at least be necessary to amend the particulars of the conspiracy to provide for an agreement, presumably between Mr Agius and Dr Castagna, that the monies received from Macquarie be held by Billbury on trust for Dr Castagna, be dealt with at his direction for the purpose of defrauding the Commonwealth and dishonestly causing a loss to the Commonwealth.

The case can thus be seen to be significantly different to that propounded in the original trial. It would involve proving a different conspiracy, as well as establishing whether the elements necessary to constitute the trust existed. In this context, the importance of proper particulars in a conspiracy case must be emphasised (see Gerakiteys v The Queen (1984) 153 CLR 317 at 333).

It is difficult to form an assessment of the strength of the suggested case, but even if it is assumed to be strong, and taking into account the desirability of the guilt or innocence of the accused to be determined by a jury, the countervailing factors lead us to the conclusion that the appropriate order is the entry of an acquittal. First, and importantly, the conclusion which we have reached means that the appellants were in fact entitled to a verdict by direction. It would be unjust in these circumstances to order a new trial to enable a new case to be agitated. Second, as we have pointed out, it is undoubtedly a new case in the sense referred to by Dawson J in King. Third, the events in question took place between 10 and 20 years ago. Fourth, the appellants have already been exposed to a trial of approximately 8 weeks and a new trial which could not take place until 2020 would take at least the same time having regard to the contemplated issues. Fifth, in the case of Dr Castagna he has already served 1 year of a 4 year non-parole period. Sixth, at the time of the trial Mr Agius was 69 and Dr Castagna was 71. Thus, they would both be in their seventies at the time of a new trial.

Section 8(1) of the Criminal Appeal Act empowers the Court to order a new trial whenever a miscarriage of justice can be more adequately remedied by a new trial than by any other orders. Having regard to the matters to which we have referred, we do not think a new trial, as distinct from the entry of a verdict of acquittal, is the appropriate remedy.

We would therefore quash the convictions and enter a verdict of acquittal.

In the result, we would make the following orders: