Allan J Heasman Pty Ltd v Commissioner of Taxation

Federal Court of Australia (Full Court)|2015-08-28|Before: Allan J, Mr J, Wigney JJ

Counsel for the Appellant: Mr J H Page with Mr B Symons

Solicitor for the Respondent: Australian Government Solicitor

IN THE FEDERAL COURT OF AUSTRALIA NEW SOUTH WALES DISTRICT REGISTRY GENERAL DIVISION NSD 1279 of 2014

The appeal be dismissed.
The appellant pay the respondent's costs of the appeal. Note: Entry of orders is dealt with in Rule 39.32 of the Federal Court Rules 2011.

IN THE FEDERAL COURT OF AUSTRALIA NEW SOUTH WALES DISTRICT REGISTRY GENERAL DIVISION NSD 1279 of 2014

JUDGEs: SIOPIS, DAVIES AND WIGNEY JJ DATE: 28 August 2015 PLACE: SYDNEY

THE COURT 1 The appellant ("the taxpayer") has appealed the decision of the Court below dismissing the taxpayer's appeal from a decision of the Administrative Appeals Tribunal ("the Tribunal") affirming the decision of the respondent ("the Commissioner") to disallow the taxpayer's objection against assessments of tax and penalties for the income years ended 30 June 1998 ("the 1998 income year") and 30 June 1999 ("the 1999 income year"). The Tribunal rejected the taxpayer's claim that the assessments were issued out of time and the taxpayer's challenge to: (1) the disallowance of amounts which the taxpayer had claimed were deductible business expenses in those income years; and (2) the imposition of additional tax for intentional disregard of the law. The taxpayer has also appealed the decision of the Court below to dismiss the taxpayer's related application under s 39B of the Judiciary Act 1903 (Cth) ("the Judiciary Act") for a declaration that the assessments were invalid. 2 For the following reasons, both the appeal should be dismissed with costs.

factual background 3 This factual background is taken from the decision of the Tribunal. 4 The taxpayer is a member of the Heasman Group of companies, which also includes Allan J Heasman (Sales) Pty Ltd ("Sales Co"). Allan Heasman ("Allan") and Douglas Heasman ("Douglas") are directors and shareholders of each company in the group. In the relevant income years, Douglas "looked after" the taxpayer's car repair business and Allan "looked after" the financial and tax affairs of the group.

Relevant events in the 1998 income year 5 In June 1998, the Group's external accountant, Vanda Gould ("Mr Gould"), recommended the establishment of an offshore employee welfare fund promoted to Mr Gould by the tax advisors for a New Zealand company, Asiaciti Trust (New Zealand) Ltd ("Asiaciti"). The fund had been promoted as offering substantial tax benefits, which were claimed to be supported by opinions from eminent senior counsel and favourable tax rulings from the Australian Taxation Office. Allan acted on the recommendation and instructed Mr Gould to attend to it. 6 On 24 June 1998, a discretionary trust called the "[Sales Co] Employee Welfare Fund" ("the Fund") was set up, with Asiaciti appointed as the trustee of the fund. The stated purpose of the trust was to provide welfare benefits to beneficiaries (as defined) who were employees of an employer (as defined) and had been admitted as members of the Fund. The definition of "employer" was incomplete in the copy of the deed put before the Tribunal, but referred to a Schedule of Employers attached to the deed which named the companies in the Heasman Group, including the taxpayer. 7 Minutes of meeting record that on 25 June 1998 (the day after the Fund was established) the taxpayer's directors unanimously resolved to arrange for the establishment of the Fund and to make contributions to the Fund for the purpose of the trustee "providing welfare benefits as it thinks fit by way of distributions to the Fund's beneficiaries". The minutes also record that the beneficiaries of the Fund would be limited to selected employees who would be invited by the taxpayer to become members of the Fund. 8 Minutes of a second meeting on 25 June 1998 record that the taxpayer's directors unanimously resolved to invite themselves (and also Douglas's wife) to become members of the Fund. Allan, Douglas and his wife were invited the same day to become members of the Fund and each completed an application to become a member of the Fund. 9 On 29 June 1998, the taxpayer deposited $400,145 into Asiaciti's New Zealand bank account. The taxpayer claimed this amount as a deduction for the 1998 income year.

Relevant events in the 1999 income year 10 On 1 July 1998, Asiaciti, at the direction of Mr Gould, placed $399,946.13 on deposit with the Group's banker, Hua Wang Bank Berhad ("HWBB") in Samoa. On 27 August 1998, HWBB deposited $544,977.86 back into the taxpayer's account. 11 In December 1998, Sales Co opened a local bank account in the name of the Sales Co Employee Welfare Fund. On 17 December 1998 the taxpayer deposited $10,000 into that account. Sales Co used that money to make monthly premium payments in respect of two health insurance policies, one in the name of Douglas and his wife, and the other in the name of Allan. 12 On 29 June 1999, the taxpayer deposited $25,000 into Asiaciti's New Zealand bank account and paid a $25 fee. 13 In its accounts for the year ending 30 June 1999, the taxpayer recorded expenditure of $35,025 against the item "employee welfare fund". The Tribunal found that this amount represented the sum of the $10,000 deposit on 17 December 1998, the $25,000 deposit on 29 June 1998 plus the $25.00 fee. In its tax return for the 1999 income year, the taxpayer claimed the amount of $35,025 as a deduction. 14 On 27 August 1999, Asiaciti transferred $22,780 to Sales Co's Employee Welfare Fund account. Sales Co used that money to pay the premiums on Douglas and Allan's health insurance policies and a further insurance policy for one of the "key employees" of the Heasman Group who had been invited to become a member of the Fund on 25 July 2000.

The assessments 15 In both income years, the taxpayer returned $0 taxable income and for both income years, the Australian Taxation Office generated a document headed "Company/Fund Assessment for ATO use only" showing taxable income of $0 for the income year. 16 In 2012, as the result of an audit, the Commissioner disallowed each of the claimed deductions and issued notices of "amended assessment" for the 1998 and 1999 income years ("the 2012 assessments"). The Commissioner also assessed the taxpayer to additional tax, by way of penalty tax, under s 226J of the Income Tax Assessment Act 1936 (Cth) ("the 1936 Act") (as it was then in force) equal to 75% of the amount of taxpayer's tax shortfall for intentional disregard of the law. In respect of the 1999 income year, the Commissioner additionally assessed the taxpayer under s 226X of the 1936 Act (as it was then in force) to further additional tax equal to 20% of the amount of the additional tax by reason that the taxpayer had been assessed to additional tax under s 226J for a prior year of income. 17 The taxpayer exercised its statutory right under Part IVC of the Taxation Administration Act 1953 (Cth) ("TAA") to object to the 2012 assessments and to have the disallowance of the objection reviewed by the Tribunal.

the tribunal decision 18 In issue in the Tribunal was: (a) whether the Commissioner had the power to make the 2012 assessments ("the first issue"); (b) whether the taxpayer was entitled to deduct the amounts claimed as deductions in the 1998 and 1999 income years ("the second issue"); and (c) whether the additional tax imposed on the taxpayer under ss 226J and 226X of the 1936 Act was correctly imposed or should be remitted ("the third issue"). 19 On the first issue, the taxpayer argued that the Commissioner did not have the power to make the 2012 assessments because the assessments were amended assessments and were made outside of the time prescribed in s 170 of the 1936 Act for amendment (as that section was then in force). The Tribunal rejected that contention, holding that the assessments, though labelled "amended assessments", were original assessments because no amount of tax had been assessed as due and payable on the tax returns as lodged by the taxpayer for the 1998 and 1999 income years: see Federal Commissioner of Taxation v Ryan (2000) 201 CLR 109 ("FCT v Ryan"). The Tribunal held that the Commissioner was within the time prescribed by s 171A of the 1936 Act to make original assessments for those income years. 20 On the second issue, the taxpayer argued that the amounts were deductible under s 8-1 of the Income Tax Assessment Act 1997 ("the 1997 Act") because: (i) the payments had a nexus with the taxpayer's business of providing personnel to other entities in the Heasman group, and the provision of remuneration and emoluments to these employees through the Fund was an expenditure that was incidental to this business; and (ii) the payments were on revenue account because they were intended to relieve the taxpayer from the necessity of providing such emoluments. As such, the character of the advantage sought had a revenue character. 21 The Tribunal identified as a "significant problem" for the taxpayer that the case as put, ie that the taxpayer conducted a "business of providing personnel to other entities in the [Heasman] group", was not supported by the evidence. The Tribunal stated at [62] to [64]: It case was put on the basis that [the taxpayer] conducts a "business of providing personnel to other entities in the [Heasman] group". However, that proposition is not supported by the evidence. [Mr Heasman] said in his first witness statement at [8]: In the period 1993-2005 [Sales Co] employed [Douglas] and me and paid our salaries. The other companies would pay management fees to [Sales Co] which it would return as income, and this money helped fund my salary and [Douglas's] salary during those years. In other words, [Sales Co] was the employing entity, and the other companies paid fees to the employing entity as a contribution towards the salaries paid by it. That bears no resemblance to an assertion that [the taxpayer] conducts a business of "providing personnel to other entities in the [Heasman] group". And in any event, the suggestion that the taxpayer (and the other companies in the [Heasman] group) were partly funding the salaries of the [Heasman] brothers by paying "management fees" to [Sales Co] is not consistent with the oral evidence that [Allan] gave in response to questioning from the Commissioner's counsel, Mr McGovern SC, about the way the fees were reflected in the financial statements of the taxpayer. Those responses indicated that (a) "management fees" was a convenient label applied by [Mr Heasman] to any inter-company transfer of funds; (b) funds could be transferred in either direction - both into and out of [the taxpayer]; (c) as a result, and despite [Mr Heasman's] suggestion that the external accountants would "generally come up with […] the net final figure", in some years the expression "management fees" represented both an income item and an expenditure item in [the taxpayer's] financial statements. Accordingly I reject the suggestion that "management fees" in the accounts of any of the companies in the group can properly be regarded as representing a contribution by one of the companies towards the salaries paid by another. 22 The Tribunal also identified that "a significant problem for the taxpayer [was] the way in which the Employee Welfare Fund was set up and then operated". Nine reasons were given. They included: (a) the origination of the Fund in a suggestion of the taxpayer's accountant, Mr Gould, and not in any business need of the taxpayer; (b) various unsatisfactory and opaque aspects of the establishment, constitution and operation of the Fund; (c) the absence of any relationship between the quantum of contributions to the Fund and the business needs of the taxpayer; (d) the fact that the taxpayer's contributions to the Fund were very substantially repatriated back to the taxpayer soon after it made them and, to the extent they were expended, were used, not for any business purpose of the taxpayer, but to pay private health insurance premiums of the Heasmans and another employee of Sales Co; (e) the absence of any evidence of applications for benefits by members of the Fund and only minor payments by the Fund over 15 years, the circumstances of which, when they did occur, were unclear; and (f) doubt as to the identity of the trustee of the Fund and the failure of the taxpayer to take any action when, in 2005, the purported trustee was deregistered in New Zealand. 23 These matters led the Tribunal to conclude that the payments were not made for the purpose of gaining or producing the taxpayer's assessable income but for the purpose of generating tax deductions. 24 Accordingly, the Tribunal held that the payments were not deductible under s 8-1 of the 1997 Act. 25 On the third issue, the Tribunal concluded that the taxpayer had not discharged its burden under s 14ZZK of the TAA of proving that the additional tax assessed was excessive. The Tribunal found at [115]: The consideration of that question is not assisted by the fact that Mr Gould, the driver of the arrangement and the creator of many of the implementation documents, did not give evidence in these proceedings. In that circumstance there is no basis on which I could be satisfied that the shortfall did not result from intentional disregard of the law by him. The lack of any evidence from him also severely restricts the taxpayer's chances of satisfying me that there should be any remission of the additional tax.

the federal court decision 26 The taxpayer appealed to the Federal Court under s 44 of the Administrative Appeals Tribunal Act 1975 (Cth) ("the AAT Act"). The taxpayer contended that three questions of law arose as follows: (i) whether the Commissioner had power to make amended assessments for 1998 and 1999 in the absence of original assessments for those years ("Question 1"); (ii) whether the Tribunal failed to properly apply s 8-1 of the 1997 Act in respect of the payments to the Fund made by the taxpayer ("Question 2"); and (iii) whether the Tribunal erred in respect of the application for review of penalties by either: (i) failing to exercise its jurisdiction to review the penalty assessments; or (ii) failing to draw inferences from the evidentiary record on the balance of probabilities; or (iii) failing to apply the principle in Jones v Dunkel (1959) 101 CLR 298 in respect of the omission of Mr Gould, the taxpayer's external accountant, to give evidence? ("Question 3") 27 The taxpayer also made application for relief under s 39B of the Judiciary Act for declarations that the assessments were invalid if they were original assessments. 28 On Question 1, the Court below rejected the taxpayer's argument that the Tribunal had erred in concluding that the 2012 assessments were original assessments, not amended assessments. The Court therefore held that Question 1 did not arise. The Court also held that the s 39B application must be dismissed by reason that s 175 of the 1936 Act preserved the validity of the assessments. Section 175 provides as follows: Validity of Assessment The validity of any assessment shall not be affected by reason that any of the provisions of this Act have not been complied with. 29 The Court held that Questions 2 and 3 did not raise questions of law founding the jurisdiction of the Court under s 44 of the AAT Act and "at best" Question 2 was a question of mixed fact and law. The Court nonetheless determined both questions and concluded that both questions must be answered "no". 30 As to Question 2, the Court reasoned that: The problem for the [taxpayer] is that it is apparent from the Tribunal's reasons that it dealt with the case precisely as it was put by the [taxpayer]. The [taxpayer] contended to the Tribunal that the payments were deductible in accordance with s 8-1 because the "payments had nexus with the [taxpayer's] business of providing personnel to other entities in the [Heasman] group, and the provision of remuneration and emoluments to these employees through the Welfare Fund was an expenditure that was incidental to this business" (see the Tribunal's reasons at [51], [62] and [65]). No other basis for the required nexus was proposed. The [taxpayer] cannot now complain that the Tribunal, on the merits, rejected the case the [taxpayer] put forward. 31 The Court also held as incorrect the taxpayer's contention that unless the Tribunal made a finding that the Fund and the payments to it were a sham, the Tribunal was bound to find that the payments were deductible. The Court held that the Tribunal had correctly applied the relevant principles for deductibility under s 8-1 of the 1997 Act. 32 Additionally, the Court rejected the taxpayer's contention that the Tribunal should have engaged in some exercise of apportionment, reasoning at [80] that: The [taxpayer] did not suggest to the Tribunal that such an exercise should be undertaken. The [taxpayer] ran its case below on an all or nothing basis and cannot now invite this Court to find facts different from those found by the Tribunal to support a case for apportionment never put to the Tribunal. 33 On Question 3, the Court said at [86] and [87]: Given the terms of s 226J it cannot be concluded that the Tribunal erred in so concluding. None of the cases on which the [taxpayer] relied are engaged in the present circumstances other than to the extent that, perhaps, the Tribunal's conclusion reflects a proper understanding of the principle in Jones v Dunkel. If not, the Tribunal's conclusion nevertheless reflects the common sense position that where the onus was on the [taxpayer] to prove that the shortfall in tax did not result from intentional disregard of the law by it or Mr Gould, and Mr Gould had not given evidence, it would not be possible in the circumstances of this case for the onus to be discharged. This was because the Tribunal had found that Mr Gould put the proposal for the Employee Welfare Fund forward to the [taxpayer] (at [68]) and was the "driver of the arrangement and creator of many of the implementation documents" (at [115]). The "entirety of the evidentiary record" on which the [taxpayer] relied supports the Tribunal's characterisation of Mr Gould's pivotal role. Without Mr Gould giving evidence, the Tribunal was entitled to treat that evidence as doing nothing more than exposing the role of Mr Gould. It was not bound to draw inferences favourable to the [taxpayer] or to Mr Gould from the face of the documents. It was open to the Tribunal to reason that given Mr Gould's role the onus could not be discharged without him giving evidence. How else, it might be asked, was the Tribunal to satisfy itself that Mr Gould had not intentionally disregarded the law? Why, without Mr Gould giving evidence, should the Tribunal draw any inference favourable to Mr Gould or to the [taxpayer] about what he might have said had he given evidence? The [taxpayer's] submissions attempt to convert a conclusion that was reasonably open on the available material into some error of principle by references to cases which (other than Jones v Dunkel itself) are not analogous to the present case. Accordingly, while the Tribunal's reasons about the penalties are short, they are cogent and disclose no error of principle. To the contrary, they disclose a conclusion dependent on the particular facts of the present case.

the appeal 34 Five grounds of appeal were raised: 1. The Court erred in finding [that] the [Tribunal] was reviewing an objection to original assessments rather than an objection to amended assessments. The decisions in George v Federal Commissioner of Taxation (1952) CLR 21 at [12] and Revlon Manufacturing Ltd v Commissioner of Taxation (1995) 63 FCR 535 (per Wilcox J at [3]-[4] and Tamberlin J at [1]) indicate the Court should have found that the administrative decision under review in the [Tribunal] was an objection to amended assessments, because the [taxpayer] had been served with notices of amended assessment. 2. In the alternative to Ground 1 - if the Court was correct in finding that the administrative decision under review was an objection to original assessments rather than to amended assessments, the Court erred by failing to make a declaration that the notices were ineffective. The Court should have held that a notice of amended assessment cannot function as an effective notice of an original assessment. 3. The Court erred by dismissing the appeal in respect of s 8-1 of the 1936 Act. In particular: (i) The proper application of s 8-1 to the [Tribunal's] factual findings that the [taxpayer] was in the business of automotive repair and spare parts, and the [taxpayer] had paid to set up a welfare fund for employees of related companies, was a question of law: Hope v Bathurst City Council (1980) 144 CLR 1; (ii) The [Tribunal] was obliged to apply s 8-1 to its existing factual findings; and (iii) The [Tribunal] fell into error at [67]-[83] of its reasons by applying a purposive test in order to determine the question of nexus arising under s 8-1. 4. The Court erred by dismissing the appeal in respect of penalties. In particular: (i) The Court should have allowed the ground of appeal that the [Tribunal] failed to deal with documentary evidence disproving intentional disregard of the law by the [taxpayer] and tax agent. This included legal advice from [two senior counsel] about the effectiveness of employee welfare fund arrangements, and a written evaluation of that advice authored by the [taxpayer's] tax agent; (ii) The Court reasoned at [86] that the [Tribunal] was not bound to draw favourable inferences from the documentary evidence, and that the [Tribunal's] conclusion on penalties was open. This was not determinative of the ground of appeal, which was that the [Tribunal] reached its conclusion without dealing with the evidence in question. 5. The appeal to the Court below should have been allowed because the [Tribunal] breached its obligation to provide adequate reasons under s 43(2) and s 43(2B) of the AAT Act in respect of the correctness of penalties and remission of penalties.

Grounds 1 and 2 35 The taxpayer argued that the Tribunal and the Court below took the same wrong approach to the question of the validity of the 2012 assessments by "commen[cing] with the well-established principle that a nil assessment is not an assessment, and the proposition that because there had only been nil assessments for 1998 and 1999 there was nothing to amend". It was submitted that "this entailed reasoning backwards to the conclusion that because the decision maker could not have validly made amended assessments the decision maker must therefore have made original assessments". The taxpayer contended that this reasoning imputed to the decision maker the exercise of a statutory power that the decision maker should have exercised or could have exercised, not the power that was in fact exercised by the decision maker in making the assessments. On the taxpayer's argument, the correct approach was to determine the statutory power that was exercised "as a matter of historical fact" and then to proceed to consider whether that exercise of power was valid. It was submitted that the exercise of power under s 170 of the 1936 Act was not valid because, so the argument went, there was no authority to make the amended assessment in the absence of original assessments for those income years. In our opinion, these submissions are wholly misplaced, and are to be rejected for the following reasons. 36 First, the Commissioner's power to make an amended assessment is separate and distinct from his power to make an original assessment. The power to make amended assessments and the preconditions for the exercise of that power are contained in s 170 of the 1936 Act. Where a prior assessment has been made for that income year, an assessment which operates to alter the prior assessment is an amended assessment: s 170. Where there has been no prior assessment for an income year, an assessment will be an original assessment for that year. The relevant question therefore is the nature of the 2012 assessments. That question is not answered by the form of the notices but what the Act requires as constituting an amended assessment, namely the alteration or addition to an assessment: see 170(1). In the present case, s 170(1) was only engaged as an exercise of power by the Commissioner if the 2012 assessments effected the amendment of any assessment. This is supported by Lever Bros Pty Ltd v Federal Commissioner of Taxation (1948) 77 CLR 78 which, contrary to the appellant's submission, is direct authority on this point. In that case, Williams J held that the time limits in s 170 of the 1936 Act for making amended assessments did not apply to assessments which were referred to in the notices as "amended assessments" because those assessments, though called amended assessments, were, in law, original assessments. The case is also authority that the misdescription of a notice of assessment as an amended assessment is an irregularity covered by s 175 of the 1936 Act. The primary judge correctly held that the Tribunal had to characterise the subject matter of the objection decisions in order to determine whether the Commissioner had made original or amended assessments and that the Tribunal carried out that task consistently with authority, and correctly. 37 Secondly, the primary judge correctly rejected the appellant's argument that the notices issued were "definitive of the administrative decision" the Commissioner made. The Tribunal correctly reasoned on the authority of FCT v Ryan that s 170(1) was not engaged. Under the law as it stood in relation to the 1998 and 1999 income years, an assessment within the meaning of the 1936 Act was not made until the Commissioner had served notice on the taxpayer of a positive amount of tax that was due and payable: Batagol v Federal Commissioner of Taxation (1963) 109 CLR 243 at 253; FCT v Ryan. As the taxpayer had returned $0 taxable income for both the 1998 and 1999 income years, no tax had become due and payable in respect of those income years. Accordingly, there had been no prior assessment of the taxpayer in respect of those income years. The only question for the Tribunal then was whether s 171A precluded the making of those assessments. 38 Thirdly, the primary judge correctly held that Danmark v Federal Commissioner of Taxation (1944) 7 ATD 333 and Federal Commissioner of Taxation v Wade (1951) 84 CLR 105 on which the taxpayer relied do not assist its case. The taxpayer argued that those cases were authority that an assessment made under one assessment provision of the 1936 Act cannot be supported under a different assessment provision and, so the argument went, the assessments could not be supported on "the new basis" as exercises of the power to make original assessments. Contrary to the taxpayer's submissions, those cases do not stand for the proposition advanced. As the Court below correctly pointed out, both cases were dealing with a different issue: namely, whether the Commissioner, in appeal and review proceedings, should be allowed to support the correctness of an assessment of a taxpayer's tax liability on a basis that was not relied on by the Commissioner in making the assessment where, in the statutory regime then applying to the appeal and review process, a taxpayer was confined to the grounds stated in that taxpayer's objection and had no opportunity to object on the new basis on which the Commissioner sought to rely to support the assessment. 39 Fourthly, s 177(1) of the 1936 Act also does not assist the taxpayer. Section 177(1) provided that the production of a notice of assessment or of a copy: … shall be conclusive evidence of the due making of the assessment and, except in proceedings under Part IVC of the Taxation Administration Act 1953 on a review or appeal relating to the assessment, that the amount and all the particulars of the assessment are correct. 40 The taxpayer argued that s 177(1) gave conclusiveness to the due making of the notices of amended assessments as assessments made by the exercise of power under s 170 and therefore, it was argued, the Tribunal was bound to find that the assessments were amended assessments. The Court below also correctly rejected this argument. It is well established law that the conclusive evidence provision in s 177(1) does not apply in Part IVC proceedings: Federal Commissioner of Taxation v Futuris Corporation Ltd (2008) 237 CLR 146 ("FCT v Futuris") at [64]. In such proceedings, the issue is whether the amount assessed is excessive: Federal Commissioner of Taxation v Dalco (1990) 168 CLR 164. In reviewing or determining an appeal against an objection decision, the Tribunal or the Federal Court (as the case may be) applies the provisions of the Act governing the ascertainment of the taxpayer's taxable income and tax liability and, in the application of those provisions, the "conclusive evidence" provision in s 177(1) has no operation: Deputy Commissioner of Taxation v Richard Walter Pty Ltd (1995) 183 CLR 168; McAndrew v Federal Commissioner of Taxation (1956) 98 CLR 263 at 282 to 283. In the present case, the nature of the assessments as original or amended assessments was not protected from challenge by s 177(1). 41 The taxpayer's appeal against the dismissal of the s 39B application must also fail. The contention that the assessments, if original assessments, were not legally effective because it was beyond the power of the Commissioner to make those assessments under s 170 is answered by s 175 of the 1936 Act. As the High Court explained in FCT v Futuris at [64] to [70], the effect of s 175 and s 177 is that the validity of an assessment is only capable of being impugned in proceedings under s 39B of the Judiciary Act where the assessment is tentative or provisional (for example Federal Commissioner of Taxation v Hoffnung & Co Ltd (1928) 42 CLR 39) or where it is the product of conscious maladministration: that is, deliberate failure to administer the law according to its terms. No such jurisdictional ground was alleged or relied upon by the taxpayer in the present case. 42 Federal Commissioner of Taxation v Bayly (1952) 86 CLR 506 and Federal Commissioner of Taxation v Prestige Motors (1994) 181 CLR 1 on which the taxpayer relied in support of its relief under s 39B do not require any analysis. They were not cases brought under s 39B. Moreover, by reason of s 175, the validity of an assessment is not affected by failure to comply with any provision of the 1936 Act. Errors in the process of assessment do not go to jurisdiction and so do not attract the remedy of a constitutional writ under s 39B of the Judiciary Act: FCT v Futuris.

Ground 3 43 The taxpayer argued that the Court below wrongly concluded that there was no error of law made by the Tribunal in concluding that the amounts claimed as deductions for the 1998 and 1999 income years were not deductible under s 8-1 of the 1997 Act. The substance of the taxpayer's submission was that the Tribunal did not consider the nexus between the payments and the business that the taxpayer did carry on, namely the car repair business which the Tribunal found as a fact. It was submitted that on the facts as found there was a connection between expenditure and the taxpayer's income earning activity by reason that the Tribunal made findings that: The taxpayer had a business of repairing cars and providing spare parts. The taxpayer's business gave rise to assessable income in the two income years in question. A related company (Sales Co) employed the personnel who staffed the taxpayer's business. The taxpayer made payments to an employee welfare fund which was required to apply those funds for the benefit and welfare of employees and did pay some benefits to those employees. 44 It is trite law that to come within s 8-1, the expenditure must be incidental and relevant to the operations or activities of the taxpayer that are directed at the derivation of income. In determining deductibility it is necessary to look at the scope of the operations or activities of the taxpayer to determine whether the expenditure has the relevant connection with the taxpayer's income producing activities: Ronpibon Tin NL v Federal Commissioner of Taxation (1949) 78 CLR 47. In that case the High Court stated at 57 that: … to come within the initial part of [s 8-1] it is both sufficient and necessary that the occasion of the loss or outgoing should be found in whatever is productive of the assessable income or, if none be produced, would be expected to produce assessable income. In Federal Commissioner of Taxation v Payne (2001) 202 CLR 93, the High Court said at [11]: The question is whether the outgoing was incurred in the course of gaining or producing actual or expected income. That is, is the occasion of the outgoing found in whatever is productive of actual or expected income? The connection is not satisfied by showing that the expenditure had the broader connection with the operations or activities carried on by some other taxpayer. 45 The Tribunal applied these principles in determining the taxpayer was not entitled to a deduction for the amounts claimed and the Court below was correct to hold that the Tribunal did not make an error of law in reaching that conclusion. The finding that the taxpayer was not in the business of providing personnel to other entities, and was not the employing entity, was fatal to the taxpayer's case. That finding was not contested. It follows thereby that the payments to the Fund for the purpose of providing welfare benefits to persons who were beneficiaries of that Fund did not have the necessary connection with the derivation of income by the taxpayer. The finding that the taxpayer was not the employing entity of the persons admitted as members of the Fund was a complete answer to the taxpayer's claim. The fact that the payments were sourced from the taxpayer's funds was not sufficient of itself to give the payments the character of expenditure that was relevant and incidental to the taxpayer's income earning activities. Any connection between the occasion of the expenditure and the taxpayer's income earning activities was too indirect to qualify the payments as deductions under s 8-1. 46 In addition, it was wrongly asserted on behalf of the taxpayer that the Tribunal did not consider the nexus between the taxpayer's car repair business and the payments to the Fund. The Tribunal went onto consider whether there was some nexus by reason of the claim made by Allan that other companies in the Group paid management fees to Sales Co which helped fund his and Douglas's salaries. The Tribunal did not accept that evidence and rejected the claim that the management fees could properly be regarded as a contribution towards the salaries paid by Sales Co. That finding was not contested. That finding was also fatal to the taxpayer's claim. 47 It follows that the Court below was correct also to hold that the facts as found by the Tribunal did not support any apportionment of the payments. 48 As this ground must fail because no error is shown in the finding of the Tribunal that there was not the necessary connection with the taxpayer's business, it is unnecessary to consider whether the Tribunal fell into error in the process of characterising the payments as private in nature. 49 It is also unnecessary to deal with the taxpayer's challenge to the conclusion of the Court below that a question of law within s 44 of the AAT Act was not raised. That issue is otiose as the Court nevertheless did not dismiss the appeal as incompetent and dealt with the taxpayer's contention that the Tribunal fell into error in concluding that the payments were not deductible under s 8-1 of the 1997 Act.

Grounds 4 and 5 50 Both these grounds relate to the same issue: whether the Tribunal erred in holding that the taxpayer had not discharged its burden under s 14ZZK of the TAA of proving that the additional tax imposed was excessive. It was argued that the Tribunal failed to take into account probative evidence and failed to give adequate reasons for its decision. The argument advanced was that the Tribunal was wrong to conclude that there was "no basis" for finding that the burden of proof was not discharged as probative evidence was not addressed by the Tribunal. The probative evidence was said to be the documentary evidence that Mr Gould gave consideration to the legal effectiveness of the scheme, evidence that legal advice was sought by the scheme's originators from two eminent senior counsel, evidence given by the taxpayer's accountant and also evidence of the structure and design of the scheme. 51 The Tribunal did not specifically refer to any of this evidence but, as the Court below pointed out, the Tribunal found that the Fund was set up on the recommendation of Mr Gould, Allan left it to Mr Gould to set up the Fund and Mr Gould "was the driver of the arrangement and the creator of many of the implementation documents". Relevantly also the Tribunal had identified nine "significant problems" about the way in which the Fund was set up and then operated. Those problems included various unsatisfactory and opaque aspects of the establishment, constitution and operation of the fund, the absence of any relationship between the quantum of the contributions to the Fund and the needs of those who were to benefit from the contribution but a relationship between the quantum and the amount otherwise of taxable income of the taxpayer for the income years, the fact that the taxpayer's contributions to the Fund were very substantially repatriated back to the taxpayer soon after it made them and, to the extent that they were expended, were used to pay private health insurance premiums for Allan and Douglas, the fact that only one minor payment had been made out of the fund after 15 years and that payment was unsupported by documents to explain the making of that payment, and the fact that there was doubt about the true identity of the trustee of the Fund. 52 Mr Gould did not give evidence. The accountant who did give evidence was not involved in the Fund's establishment and the extent of his evidence was to produce documents from records at Gould Ralph Pty Ltd, Mr Gould's accountancy firm. Mr Gould was not called as a witness to explain those documents and the opinions of the two senior counsel were not put into evidence. 53 It was therefore plainly open for the Tribunal to conclude that absent testimony from Mr Gould there was no basis on which the Tribunal could be satisfied that the shortfall did not result from intentional disregard of the law. The "probative" evidence referred to could only be given through Mr Gould. It follows also that the reasons given by the Tribunal were adequate. As the Court below correctly said, the Tribunal's reasons, while short, were cogent and disclose no error of principle.

conclusion 54 For the above reasons the appeal should be dismissed with costs. I certify that the preceding fifty-four (54) numbered paragraphs are a true copy of the Reasons for Judgment herein of the Honourable Justices Siopis, Davies and Wigney.

Pt IVC Income Tax Assessment Act 1997(Cth)s 8-1

Income Tax Assessment Act 1936(Cth)ss 170, 171A, 175, 177, 226J, 226X

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