Commissioner of Taxation v Futuris Corporation Limited [2007] HCATrans 686 (16 November 2007)

Last Updated: 19 November 2007

[2007] HCATrans 686

IN THE HIGH COURT OF AUSTRALIA

Office of the Registry
Adelaide No A31 of 2007

B e t w e e n -

COMMISSIONER OF TAXATION

Applicant

and

FUTURIS CORPORATION LIMITED

Respondent

Application for special leave to appeal

GLEESON CJ
GUMMOW J

TRANSCRIPT OF PROCEEDINGS

FROM CANBERRA BY VIDEO LINK TO ADELAIDE

ON FRIDAY, 16 NOVEMBER 2007, AT 9.34 AM

Copyright in the High Court of Australia

MR N.J. WILLIAMS, SC: May it please the Court, I appear with MS L.B. PRICE for the applicant. (instructed by Australian Government Solicitor)

MR D.F. JACKSON, QC: If the Court pleases, I appear with my learned friends, MR B.J. SULLIVAN, SC and MR T.M. THAWLEY, for the respondent. (instructed by Cosoff Cudmore Knox)

GLEESON CJ: Yes, Mr Williams.

MR WILLIAMS: The defining feature of the assessment scheme of the Income Tax Assessment Act is that an honest attempt to exercise the assessment power that results in a quantified ascertainment of an amount of tax due and payable communicated to the taxpayer as such will bring into existence a liability and, simultaneously, an entitlement to comprehensive merits and judicial review.

The rationale for that legislative scheme is easily identified. The scheme imposing taxation is complex, as are the infinite range of factual scenarios to which it is to be applied. The system requires a trigger that will be effective to create liability where the facts and the provisions to be applied are uncertain and even where the assessment decision contains gross errors. Uncertainties and errors are left for clarification or correction by the mechanisms of full merit and judicial review in Part IVC.

This application concerns the operation of the basic elements of the assessment scheme and the architecture of the provisions by which the anti-avoidance provisions in Part IVA are to be given effect in an assessment. The Commissioner in the first amended assessment in November 2002 added an amount of $19.95 million to the taxable income as returned by the taxpayer to reflect an increase in capital gains on the disposal of certain shares. The taxpayer objected then appealed to the Federal Court against the disallowance of the objection.

When the second amended assessment based on Part IVA came into existence in November 2004 one of the key elements of it, the assessable income to which the Part IVA amount was to be added, was the subject of pending proceedings before the Federal Court. The proper approach to the second amended assessment in that circumstance was the subject of debate within the Australian Taxation Office. To proceed on the basis of the first amended assessment that the Commissioner was defending in the Federal Court might, it was recognised, result in a possible error, might result in the need for adjustment depending on the outcome of the Part IVC proceedings. Such an adjustment, it was assumed, could be made if necessary.

GLEESON CJ: There seems to have been a suggestion at some stage against you that the course that was taken was to overcome a difficulty relating to lapse of time.

MR WILLIAMS: Your Honour, the position is that if the assessment had not been made when it was, time would soon thereafter have expired but there had been a process of consideration going on over a period of at least a number of months close to a year prior to that.

GLEESON CJ: The finding that appears on page 35, paragraph 10, and 50, paragraph 53, is said to be a finding of fact and it is a finding that the Commissioner knew that the second amended assessment was wrong. Now, there may be a question about whether that is a finding of fact or a mixed question of fact and law, but that resulted in the conclusion of the Full Court that this was not a bona fide exercise of the power to assess. That is the point of departure, is it not, between the decision of the Full Court and the decision of Justice Finn?

MR WILLIAMS: Each of those is a point of departure; both the finding, if it be a finding of fact, and the conclusion that followed. The finding or, rather, the view that the Full Court expressed in paragraph 10 that your Honour the Chief Justice has called attention to on paragraph 35, derives, in our submission, from an error of fundamental principle in the approach to the question of knowledge and when it can be found or imputed, and that error is apparent from the top of page 36 of the book. On page 36 of the book the Full Court at about line 10 observes that:

contrary to the position taken in the Commissioner’s discovered documents – that “... depending on the outcome of the Division 19A issue, a compensating adjustment can be made at a later stage if necessary” – a compensating adjustment would have to be made in any event.

What the Full Court is there doing is applying its hindsight with the benefit of the primary judge’s reasons and argument in the Full Court to contradict the view expressed at the relevant time within the Australian Taxation Office, in effect, to impute a different view to that the contemporaneous documents reflect. That is also clear from the following paragraph on page 36 at about line 20 where the Full Court finds reinforcement for its view from an admission in the pleadings in the matter.

Once again, an admission not of knowledge because it was at all times denied by the Commissioner in the pleadings, and the denial was maintained that he or his officers knew that an adjustment would be required and that it was excessive, but rather an admission reflected on page 36 as to certain elements. What the Full Court has done is to take those figures, those elements, and to say, well, when you apply the correct approach, which the court then goes on to on the following page, that is necessarily wrong. There had to have been an adjustment in any event and, moreover, following the correct approach, it should not have been made in this way at all. To take that approach in substitution for the finding that the primary judge made at page 22, from about line 10, that he was:

not satisfied that the Commissioner deliberately engaged in what the applicant calls double counting . . . Rather, in view of the facts as he then understood them to be, he chose to include the totality of the benefit in the knowledge that there was some likelihood of the need later to make a compensating adjustment.

His Honour then goes on to make an observation as to his entitlement to proceed in that way. Now, that, with respect, is a correct finding. The Full Court, with respect, erred in principle in the approach that it took to the facts in the matter. This was a finding that was entitled to wait in any event on appeal, but leaving that aspect aside - - -

GUMMOW J: Sorry, say that again, Mr Williams?

MR WILLIAMS: The primary judge’s finding was entitled to wait on appeal in any event, notwithstanding that there were not witnesses, but leaving that aspect aside, it derives from the error of principle that we identify in the Full Court in approaching the matter with hindsight rather than looking for the state of mind, as it were, of the decision-maker and finding a lack of bona fides, a matter that would only be found on clear evidence, which was absent here.

All of the cases that are relied on against us are cases where there were either admissions, as in Darrell Lea; in Darrell Lea there was a concession by the Commissioner that he knew at the relevant time that the facts were not as he had proceeded and that the assessments could not be correct. In Briggs there was an admission in similar terms. In Stokes it was self-evident that three assessments issued in different amounts on the same day to the same taxpayer gave rise to a question of tentativeness and uncertainty, and the observation in Stokes as to bona fides is one that flows entirely from the finding that the purported assessment was tentative rather than from any question of application of Hickman principles.

GUMMOW J: Does it come down to this? The question is whether there was or was not a bona fide attempt to exercise the power assessment in accordance with those cases.

MR WILLIAMS: Yes, your Honour. We say that the Full Court’s approach manifests an error of principle but one which is likely to have
ramifications beyond the particular case because in the area of collateral attack on assessments there is a large incentive to exploit every departure from principle.

The Full Court’s conclusion in paragraph 54 in effect, we say, converts what was in truth a conclusion as to – this is page 50, paragraph 54 – the proper approach to the task of further amending an assessment in those particular circumstances to a fact which the Commissioner knew to be untrue. There is no possibility that the amount could be assessable income in both. If that is reflective of a general approach, then the scope for collateral attack is much wider than has been thought to date.

GLEESON CJ: Thank you.

MR WILLIAMS: Your Honour, we do raise other points in respect of 177F(1) and F(3). Does the Court wish to hear me in respect of those?

GLEESON CJ: No, we have read those. Yes, Mr Jackson.

MR JACKSON: Your Honours, may I just say one thing before going on to the substance of the matter, one thing about it factually. What this case involves is a first amended assessment which adds – I will use 20 million as the figure to make it simple – which adds 20 million. The second amended assessment adds about 86 million which includes and is known to include the same 20 million. It seems rather absurd.

One then has a situation, your Honours, where the judges in the Full Court were perfectly entitled to have regard to the contemporaneous, not hindsight, view which you will see expressed at page 9 of the application book between lines 20 and 30. The contemporaneous observation be there quoted:

Obviously, we will not pursue recovery for both amounts of tax, penalty and 170AA interest/general interest charge involved with the two $19,950,088 adjustments.

So it was recognised at the time that there was a double counting and that double counting was one which – your Honours, if one looks at it for a moment it just seems such a curious and rather absurd, with respect, thing to do.

GLEESON CJ: Was not part of the background to it that there was a challenge to the first assessment?

MR JACKSON: Yes, there was, but your Honour so be it. What was done by the second assessment was to add the whole of the amount not to the original amount of assessment, but to the amount of the first amended assessment which itself already included the same 20 million. The result of it was that there was payable and in respect of it an additional nearly $8 million tax.

May I say just these things, your Honours. It is established, in our submission, that a notice of assessment of income tax fixes, subject to objection at appeal, the taxpayer’s liability to tax. It creates a debt which may be sued for and which may found bankruptcy or liquidation. Your Honours, I say “found” in two senses of the term, both as a matter of law and as a matter of fact. We are, fortunately, a company of sufficient substance and will to challenge the imposition of an entirely inappropriate addition of almost $8 million to our taxation liabilities; many individuals and companies would have to roll over if that happened to them.

Your Honours, not only does the assessment create a debt, it also sets a ticking the clock for interest and penalties for non-payment. Your Honours, could we in that regard refer your Honours to the cases to which the Full Court adverted when it was dealing with the tentative or provisional strand of the argument, at page 44 of the application book, paragraphs 32 to 35, but may I summarise them in effect by selecting what is said in paragraph 35 by Justices Mason and Wilson in Bloemen:

a definitive ascertainment of the taxpayer’s taxable income and of the tax payable thereon –

Your Honours, one sees here an elision of two concepts by our learned friend’s argument. A bona fide attempt involves more than the application of honesty. Honesty is essential, of course, but the honest attempt is to be directed to the function which is to be performed, namely, to - - -

GLEESON CJ: What was attempted here, some kind of alternative assessment?

MR JACKSON: Well, your Honour, it is difficult to find a word that actually describes it. It could not have been alternative, your Honour, because it had the same amount in twice.

GLEESON CJ: What is going through my mind at the moment, Mr Jackson, is this. Leave entirely to one side the circumstances which, as I understand it, involve in part a question of the relationship between two anti-avoidance provisions of the present case, a similar problem would arise, would it not, in relation to decisions as to the relevant period?

In other words, problems often arise as to whether income was derived in a particular year or an expense that was an allowable deduction was incurred during a particular year and that produces flow-on consequences for assessments in subsequent years. Can the Commissioner when issuing assessments in respect of a number of years issue an assessment in respect of year two which in effect proceeds upon the basis of saying to the taxpayer, “I say you are wrong about year one but if you are right about year one this is the consequence in year two”?

MR JACKSON: Well, your Honour, I have to say there may be some qualification, but the answer is generally speaking, no, because what your Honour will bear in mind is that the assessment in respect of the first year will stand unless it is set aside on appeal. If it is set aside on appeal, the consequences may be that in respect of other years then there is room for an amended assessment in respect of those other years.

Of course, there are time limits, and this is a case where there is almost two years between the first amended assessment and the second amended assessment, which came only three weeks before the end of the possible period. So, your Honour, what would happen would be that it may be that the result of a challenge to the first assessment, or to an assessment in the series your Honour is speaking about, would give rise to an ability and would give rise to circumstances where it would be appropriate to amend other assessments, but the first assessment stands. It is an assessment; there it is unless set aside.

Now, your Honours, it does not leave with it the possibility if the taxation for that year has been calculated on the basis that the money, the income, falls into that year, it does not leave the possibility that there is another year. Your Honour, that is the short answer. Your Honours, what I was coming to, your Honours, was the point that whilst honesty of course is essential, it has to be an honest attempt directed to the function to be performed and that is to ascertain the taxable income and the tax payable thereon. Your Honour, if I could go to our submissions at page 74 in paragraph 16, in particular the last four lines of that paragraph, your Honour will see:

In each case in which an assessment has been held not to be an assessment within the meaning of the relevant legislation, the decision-maker apparently believed he had the power to act in the way he did.

Your Honours will see the references to some cases there. May I mention about two of them, Darrell Lea and Stokes. The Court refused special leave in those cases. May I go briefly to Darrell Lea. It is in the volume of materials, your Honours, the joint book of authorities, behind tab 20. You will see the first paragraph of the headnote which set out the position in respect of the goods:

four notices of assessment of sales tax, each purporting to give notice of an assessment under an Assessment Act different from that named in the other notices. At the time it was made, each assessment was wrong, as the Commissioner knew.

Now, your Honours, could I refer to some observations made by the Full Court of the Federal Court in that case. Page 186, between letters E to F, it was said, if I could pick it up in effect in mid-sentence:

and in respect of the same goods under multiple and inconsistent Sales Tax Acts, no one of which could in fact apply to all of the goods, necessarily involved the conclusion that each one of the assessments at the time it was made had to be wrong –

Now, “had to be wrong”, your Honours will see that, your Honours will remember the passage to which I referred in this case earlier –

and had to be known to the Commissioner to be wrong.

Your Honours will see at the bottom of the same page:

What the Act does not contemplate is that the Commissioner will seek to apply the provisions of the Act to facts which he knows to be untrue. That could never amount to an assessment in the relevant sense for it could not amount to a bona fide process –

et cetera. If I could go then, your Honours, further down page 187, the paragraph commencing between C and D:

Conversely it may be said that once the Commissioner forms the view that there is no substantial possibility that the item of income is assessable income of a person, it could not be a bona fide exercise of the assessing power to assess that person to tax in respect of that income. Likewise here where it is conceded that there is no possibility at all that the assessments made were correct, there can be no assessment.

Could I finally, your Honours, refer to the passage quoted from R v Deputy Commissioner of Taxation (WA); Ex parte Briggs on the same page, and the quoted passage commencing between F and G. I will not read it out, your Honours, it is the last paragraph on that page and it goes over to the first five lines on page 188.

GUMMOW J: What is obscure in these cases is the attempt or lack of attempt to apply to 177 and the power conferred by section 177 ordinary principles, if I might put it that way, which attract judicial review?

MR JACKSON: Not really, your Honour. That is not so, if I may say so, with respect, because the cases in this Court to which reference is made by the Full - - -

GUMMOW J: They are section 75(v) cases, some of them, are they not?

MR JACKSON: Yes, your Honour, this was a section 39B case of the Judiciary Act.

GUMMOW J: So we are really talking about lack of jurisdiction on the part of the Commissioner?

MR JACKSON: Well, your Honour, it is talking about one of the – perhaps I might start one stage before. What has been held has been in effect that satisfaction of the Hickman approach is necessary to attract the privative provisions of section 175 and so on in relation to production of notices of assessment. These cases turn on whether those aspects of that were satisfied. That appears to be an established principle. The question is, really, whether they were satisfied on the particular case, and the particular aspect of it in this case was whether - - -

GUMMOW J: There is an anterior question. You do not get to Hickman unless there is something to have the privative clause against.

MR JACKSON: Your Honour, one can put it in two ways. One is that you do not get to the relevant provisions of that unless there is something that satisfies the concept of there being a notice of assessment. Notice of assessment involving there being, amongst other things, an exercise of the power, meaning a bona fide exercise of the power, and that depends on what the nature of the power is, and the question is, if a person purporting to exercise the power is doing something which it is known will not result or will not result in the appropriate result contemplated by the statute, that invalidates it.

That means there has not been an exercise of power and validation puts it too briefly and perhaps inaccurately. But, your Honours, one comes to a case like this where the evidence was that it was absolutely clear as a matter of fact that it was known that the 20 million was added twice. I have taken your Honours to page 9, for example. What one then sees at page 35, in the passage to which your Honour the Chief Justice earlier referred, in paragraph 10, is the Full Court simply taking a view of the facts rather less benign to the Commissioner than the primary judge had taken, but one which was perfectly open on the facts.

It was an application, your Honours, of established principle to rather particular and indeed quite unusual facts and the notion that the Full Court’s approach was incorrect is, in our submission, itself not correct. So too, may we say with respect, is the shibboleth, if I could use that expression, that this will mean a great deal less to the revenue.

Could I refer in that regard to the contention that is made in reply at page 79 of the application book, and it is in paragraph 3 and a large number of cases are referred to in footnote 4. Your Honours, there are many occasions, I suppose if one adds them all up, quite a few cases really in quite a few number of years, in which issues of this kind have been raised but, your Honours, if I could adapt an expression from another context, many may be called but, as we have set out in our written submissions at page 68, paragraph 2(a), few are chosen and there appear to have been only I think four cases, perhaps five, four including this, in which there has been a successful application. Your Honours, our submission is the principles are pretty clear and in the ordinary course of events it is for the Federal Court to apply them.

Could we say, your Honours, that as to the section 177F(3) point, our learned friend’s reply at page 80, paragraph 6 – your Honour, I will explain what I mean by the 177F(3) point in a moment – our learned friend’s reply there suggests that the concern said to merit the grant of special leave is based on “the second sentence of the Full Court’s reasons” at page 38, second sentence of paragraph 16 of the Full Court’s reasons.

What is contended on behalf of the Commissioner is that section 177F(3) gives a wide ranging power to make appropriate adjustments, appropriate adjustments in this context being said to be to do after the event what is appropriate to get rid of the $20 million from the assessment. If one looks at the terms of section 177F(3), which is set out at the bottom of page 37, the top of page 38 of the application book, it is not dealing with that topic at all. It is not saying, you can deduct from the assessable income you have assessed pursuant to these provisions something that you put in there by mistake.

What it is saying is that because you have assessed on a particular basis, it may be that there are items which have to be taken out because they were included on a different basis. Your Honour, I am putting it very shortly, but it does not refer to dealing with errors of this kind, and what the Full Court said in paragraph 16 appears, with respect, not to be in any way attended by doubt.

May I say two things finally, your Honours. We have set out at page 68 in our written submissions commencing at paragraph 2 and following the reasons why special leave to appeal should be refused. We submit they are germane in this case and should be applied. The second feature we would want to draw attention to, with respect, are the matters set out in our submissions at page 74, paragraphs 17 to 21.

To put it shortly, your Honours, what we say there is that we failed in the Full Court on the question whether this was an assessment which was purely of a tentative kind. We would wish to raise that issue by way of a contention if the special leave were granted. We would submit in the light of the material the conclusion that the assessment was not of a tentative nature does, with respect, seem a little surprising and so we draw attention to the matter simply because if the Commissioner were successful on the issues on which it seeks to agitate, it does not follow that this appeal would be allowed.

GLEESON CJ: Thank you, Mr Jackson. In this matter there will be a grant of special leave to appeal.

AT 10.05 AM THE MATTER WAS CONCLUDED