Sleight v Commissioner of Taxation [2005] HCATrans 14 (4 February 2005)

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Sleight v Commissioner of Taxation [2005] HCATrans 14 (4 February 2005)

Last Updated: 17 February 2005

[2005] HCATrans 014

IN THE HIGH COURT OF AUSTRALIA

Office of the Registry
Perth No P50 of 2004

B e t w e e n -

KEVIN SLEIGHT

Applicant

and

THE COMMISSIONER OF TAXATION OF THE COMMONWEALTH OF AUSTRALIA

Respondent

Application for special leave to appeal

GLEESON CJ
HAYNE J

TRANSCRIPT OF PROCEEDINGS

FROM PERTH BY VIDEO LINK TO CANBERRA

ON FRIDAY, 4 FEBRUARY 2005, AT 2.07 PM

Copyright in the High Court of Australia

MR M.J. McCUSKER, QC: May it please the Court, I appear with my learned friend, MR F.C. WILSON, for the applicant. (instructed by Wilson & Atkinson)

MR G.T.PAGONE, QC: If the Court pleases, I appear with my learned friends, MS M.H. SYMON, SC and MS L.B. PRICE, for the respondent. (instructed by the Australian Government Solicitor)

GLEESON CJ: Yes, Mr McCusker.

MR McCUSKER: Your Honours, there are two special leave points sought to be raised by this application. They may appear at page 129 of the appeal book. The first is the assertion of the Full Court as to whether certain facts can support a conclusion of dominant tax purpose, and allied with that, 1.B:

Was the decision of the Full Court of the Federal Court in Cooke (2004) FCAFC correct, and if so, how it is reconcilable –

Essentially, what we say in relation to those matters is that - and you need to understand the background, of course, of this. After the hearing before the Full Federal Court, another full Federal Court delivered its decision in Cooke, which involved very similar circumstances so far as the taxpayer was concerned. Because of that decision, the parties were invited to make submissions, which they did. The Full Court in Sleight distinguished, we say, an indistinguishable case in principle, that is Cooke, from the case of Sleight, and concluded, unlike the Full Federal Court in Cooke, that the dominant purpose of the taxpayer in this case was to obtain a tax benefit.

Ground 2, or special leave point 2, which is sought to be raised, is the short question of whether it is correct, as the Full Federal Court said, that a taxpayer cannot demonstrate that a Part IVA assessment is excessive by showing some error in the making of a determination under section 177F. Now, that is a matter which has been the subject of some debate. We say that the Full Federal Court in this case was wrong in that the decision of this Court in Commissioner of Taxation v Richard Walter clearly establishes that it is open to a taxpayer to challenge the fundamental question of whether the discretion was properly exercised. That is, if one properly has regard to the requirements, the various criteria specified by the Part IVA, before making the determination, one must consider the circumstances peculiar to the individual taxpayer.

In this case what occurred was that the Taxation Office apparently looked at the Northern Rivers Tea-tree Project, in which Mr Sleight was one of a number of participants, and, having looked at the project as a whole, then simply made determinations under Part IVA against every participant in that project. It was put to the delegated officer, Mr D’Cunha in this case, in the course of cross-examination that the particular circumstances relating to Mr Sleight were not considered by him before he made the section 177F determination. And his answer was, “No, I would not have”. So it was simply a broad brush approach taken by the Taxation Office without regard to the individual circumstances of the relevant taxpayers.

HAYNE J: What were the relevant individual circumstances of Mr Sleight that were not taken into account, do you say?

MR McCUSKER: They are summarised, your Honour, in material which the respondent has recently filed with the Court, namely the particulars of the applicant’s claim, that is the applicant’s further and better particulars, and they are numerous. They appear at paragraph 2, page 2 of the applicant’s particulars, all of which were borne out by evidence that was given in the proceedings at first instance before Justice Nicholson who, as your Honours appreciate, concluded that the dominant purpose of the taxpayer was not a tax benefit, was a commercial purpose. And those particulars show there is a considerable amount of material or information, that is peculiar to or relevant to the taxpayer’s circumstances, and indeed relevant to the making of a determination under section 177F, but Mr D’Cunha did not consider those matters.

Furthermore, as was conceded in the case itself and found by Justice Nicholson, Mr D’Cunha, in making his determination, incorrectly doubled the tax benefit that he attributed to Mr Sleight. He made a determination that there had been a tax benefit, I think it was $25,000, and it was incorrect on any view of the matter. Justice Nicholson - and this appears at application book page 44 at paragraph 148 - accepted that the tax benefit which was taken into account by Mr D’Cunha was incorrect, that in fact he had doubled the tax benefit. That in itself is an error. We do not say that that standing alone would necessary show that the discretion was not properly exercised but that, coupled with the failure of the relevant officer - and we do not challenge his authority, by the way, as a delegated authority, although we did at the trial, but we abandon that proposition. We simply say that Mr D’Cunha, who was a person who made the determination, did not properly exercise his discretion. He, as it were, arbitrarily made the decision without considering, as he must for the purposes of 177F, the circumstances relevant to the various criteria.

The matter of importance is that there are many other taxpayers in the same position as Mr Sleight, and if the Commissioner is at liberty to simply make arbitrary assessments instead of properly exercising a discretion, as the Full Federal Court has in effect said, then it would never be possible to challenge the exercise of the discretion, and furthermore, the discretion may continually miscarry. This Court in Commissioner of Taxation v Richard Walter has said, in our submission quite clearly, that it is open, contrary to the Full Court’s reasoning, to a taxpayer to demonstrate that a Part IVA assessment is excessive because it is not supported by a valid exercise of the discretion conferred by section 177F.

That is quite a different proposition from a challenge to the making of the assessment or some other reason, just seeking to set it aside, for example, by proceedings to do so. The assessment is made, but the question is whether, when it is being challenged, it can be challenged on the ground of an invalid exercise of discretion. So that is, we say, a very important issue of principle which has widespread ramifications not only in connection with Part IVA but also in connection with other areas of the Income Tax Assessment Act where the Commissioner is required to make a discretionary determination. It raises the point fairly and squarely in this case, and therefore we submit it is an appropriate vehicle for the determination of this important issue.

HAYNE J: What is wrong with the reasoning in the Full Court of the Federal Court at page 90, paragraph 110?

MR McCUSKER: It really goes back, your Honour, to what their Honours say at the previous page, where they say at paragraph 107:

it is not open –

in other words, dealing with Richard Walter –

to a taxpayer to challenge an assessment under Part IVA by showing some error in the making of that determination –

The starting point for the determination and the assessment is a consideration of the factors that the statute requires to be taken into account, and that cannot be done, so that it simply is an improper exercise of discretion. What the court says at paragraph 110 appears to be simply that you cannot attack the determination as such. All that is open to the taxpayer is to argue the question of whether the determination was right or wrong. We say that is looking at the evidence that is given before the court. We say there is one step back from that. First of all, there must be a proper determination based on a proper exercise of discretion, and that is why we say paragraph 110 reasoning is incorrect.

Ground 1, as I have said, raises a very important question because there is a conflict, we say, for the reasons we have set out in our summary of argument, between the reasoning and the conclusions in Cooke by one Federal Court and the reasoning and conclusions by the Full Federal Court in Sleight, and - - -

GLEESON CJ: Was there an application for special leave to appeal in Cooke?

MR McCUSKER: No, I do not think there was, your Honour. The Commissioner did not seek leave, I am instructed, so there was no application for special leave there. The similarities, we say, between Cooke and Sleight are numerous, but can I try to pinpoint some of the important matters. In Sleight, this case, the Full Federal Court or some members of it considered that the pooling arrangements suggested a tax-dominant purpose. Yet in Cooke, the pooling arrangements were accepted as a sound commercial approach and were not indicative of a tax-dominant purpose.

Furthermore, in Sleight the Full Federal Court, while saying that was indicative of a tax-dominant purpose, also referred to it as a sound commercial arrangement. Where you have a large number of taxpayers who wish to participate in something such as a tea tree oil project and who individually have not the wherewithal to buy a farm for themselves, they participate by the pooling I have referred to.

Then the question of appointing a manager because the individuals themselves cannot manage their own farms, their own allocated portions of farms, again was something which occurred in Cooke but was said in this case again to be indicative of a tax-dominant purpose. The management fee was paid in advance, that is true, so was it in Cooke, and yet in Cooke’s Case it was not said to be a tax-dominant purpose. Furthermore, in Cooke’s Case the borrowing that was made for the purpose of paying for some of these fees was a borrowing which was in excess in percentage terms of the borrowing that the taxpayer engaged in in this case. He borrowed funds used to make expenditure. The question is: in broad terms can that be said?

I appreciate one cannot just take item by item, there has to be a global look at this, but the four points that I have mentioned, which are referred to at page 129 of the application book, are the main ones:

(a) The taxpayer has borrowed the funds –

that is what occurred in Cooke –

(b) the “tax benefit” resulting from the expenditure would exceed the likely income from the business –

In this case the business ultimately failed through bad management, but that of course is not indicative of a tax-dominant purpose. The expenditure
which was made by the taxpayer, on the evidence which was accepted and undenied by Justice Nicholson and was not challenged on appeal, was made after he had carefully examined the project and satisfied himself of the likely commercial outcome. Of course, all commercial outcomes forecasts are subject to the same problem, that there are risks. They said that the substantial part of the expenditure was paid in advance, but so it was in Cooke, and the investment was pooled, and it was the same in Cooke.

If the Full Court decision is permitted to stand, there are two problems. One, we say, is that there are many such ventures where perfectly ordinary citizens, taxpayers, wish to engage in projects such as tree tea oil production or, indeed, in tree plantation – a multitude of so-called schemes - because they see some future commercial benefit, albeit, as in most businesses, they also look to obtain a taxation advantage. That is not confined to schemes of pooling for the purpose of tree tea, et cetera.

The second problem is that, as it stands, we say we have identified all of the relevant similar features between this case and Cooke. As it stands, this case is in sharp contrast to the outcome in Cooke, albeit essentially the same basic attributes appeared in Cooke as they did in Sleight. May it please the Court, that is all we can really help your Honours with.

GLEESON CJ: Thank you, Mr McCusker. We do not need to hear you, Mr Pagone.

The case turned upon the application to particular facts and circumstances of legislation and established principles and does not, in our view, raise an issue suitable for a grant of special leave to appeal. The application is dismissed with costs.

AT 2.24 PM THE MATTER WAS CONCLUDED