(a) The Decisions were based upon the Respondent's erroneous conclusion that it would be inconsistent with the general intention of the Act to grant an extension of time to transfer losses one Part IVA applied to disallow a deduction.
…
(b) The Decisions were based on the premise that Part IVA of the ITAA applied, yet Part IVA could have no application to the Applicant Companies' applications under Section 80G(6A)(b) of the ITAA if the Respondent's primary argument was correct.
(c) The internal ATO advice as set out in the particulars to paragraph 4 above and relied upon by the Respondent in making the Decisions was wrong in law in advising that it was necessary and appropriate to depart from orthodox legal principles in company law in administering section 80G(6A)(b).
…
(d) In considering and rejecting the submission made on behalf of the Applicant Companies concerning their conduct or culpability for the purposes of Part IVA of the ITAA, the Respondent directed his mind to the wrong time for determining whether there was uncertainty in the application of Part IVA and hence whether there was a good reason for the Applicant Companies not having entered into the subject agreement(s) to transfer revenue losses at or at any time before the time at which no extension was required. The relevant time was the date when the losses the subject of the Respondent's subsequent disallowance were originally transferred from AFT to the Applicant Companies, not the date of the Applicant Companies' submission of 8 June 2000 or the date of the Decisions, as found by the Respondent.
(e) Refusing the grant of an extension of time by reason of or, alternatively, by reference to an applicant's participation or involvement in a Part IVA arrangement gave an impermissibly extended operation or effect to Part IVA and the penal consequences attaching to a finding that a Part IVA arrangement existed.'
[Emphasis added]
95 In paragraph 41 of the Section 13 Statements, Mr Bridge stated that he considered that the scheme that gave rise to the interest deductions claimed by AFT was similar to, and was the successor of, the scheme that the High Court considered in the CPH Property litigation. He stated his view that:
'it would be inconsistent with the general intention of the Act and the anti-avoidance provisions contained within Part IVA of the Act if I allowed the Group additional time to transfer losses to the applicant once Part IVA applied to disallow a deduction claimed by AFT.'
Mr Bridge's view that it would be inconsistent with the general intention of the Act to grant an extension of time to transfer losses, once Part IVA applied to disallow a deduction, appears to me to exhibit a misapprehension of the law.
96 The view adopted by Mr Bridge fails to take account of the very purpose of s 80G of the Act, as acknowledged in TR 98/12, which is to permit and facilitate the transfer of losses within a group of companies so that there is no difference in the tax treatment of a group of companies, each carrying on separate enterprises, as against a single company that carries on the same separate enterprises in separate divisions. Using a Part IVA determination per se as a bar to, or a 'very weighty factor' against, the grant of an extension of time directly subverts the purpose of s 80G and is also inconsistent with the remedial and beneficial nature of s 80G(6). To disallow an extension of time substantially on the basis of participation in a Part IVA scheme, with significant adverse financial consequences to an income company, as that term is defined for the purposes of the Act, is effectively to increase the penalty beyond the limits set by the Act.
97 The Act contains its own penalties for participation in a Part IVA Scheme. Thus, s 226 of the Act provide for penalty tax where Part IVA applies. Under s 226(1) where the Commissioner has calculated the tax that is assessable to a taxpayer in relation to a year of income taking into account any determination made under s 177F(1) was taken into account and, either no tax would have been assessable if no determination had been made or the amount of tax that would have been assessable if no determination had been made is less than the amount of tax calculated by the Commissioner, the taxpayer is liable to pay, by way of penalty, additional tax as provided for in s 226(1). The additional tax is a percentage of the tax avoided by the scheme in respect of which the determination has been made.
98 The effect of the determinations by the Commissioner under s 177F(1), and the failure by the Commissioner to allow a further time within which to make an agreement for the purposes of s 80G(6)(c) of the Act, is to produce a windfall for the revenue. That is to say, if the Taxpayer Companies and CPF were all divisions of a single company rather than separate companies, the losses incurred by the CPF division would automatically be set off against the income of the Taxpayer Company divisions. To refuse to allow the extension of time to enable that set off to occur between CPF on the one hand and the Taxpayer Companies on the other, as individual companies, simply because there was an involvement in a scheme under Part IVA is to penalise those individual companies beyond the penalties contemplated by s 226.
99 The purpose of s 80G is, in part at least, to remove a disincentive to business activity by not allowing companies within a group to take advantage of losses within the group in the ways in which a single company with divisions would be allowed to (see the Treasurer's speech on the second reading of the Bill by which the relevant provisions were inserted in the Act, Hansard, House of Representatives, 21 August 1984, p 63). That is also clear from the terms of TR 98/12 itself (see above at [33]).
100 Thus, if a deduction claimed by a single company were found to violate Part IVA, with the consequence that it was disallowed and a penalty was levied, that company would not be prevented from taking advantages of losses sustained by one or more of its divisions in the same or previous tax years by reason of its involvement in a Part IVA scheme. The consequence of the decisions in the instant case, however, is to ensure just such a result when there is a group of companies, as opposed to a single company with a number of divisions. Even if the Taxpayer Companies were somehow tainted by the Part IVA scheme because of their membership of the CPH Group, it was an error to use that fact as a basis for disentitling the Taxpayer Companies to the extension of time.
101 Accordingly, the policy that Mr Bridge relied upon in making the decisions was unlawful. To the extent that it identified involvement in a Part IVA arrangement as disentitling conduct, it gave an impermissibly extended operation or effect to Part IVA and the penal consequences attaching to a finding that a Part IVA scheme existed.
102 By letter dated 19 June 2001, Mr Bridge, notified Ernst & Young that a twenty-five per cent culpability component was imposed on AFP pursuant to s 226 of the Act. The Act does not authorise further, collateral, punishment for participation in a Part IVA scheme, in addition to that prescribed by s 226. The Commissioner exercised his discretion in a way that wrought significant further and disproportionate penalties upon the Taxpayer Companies, assuming that the Taxpayer Companies can properly be regarded as having participated in the scheme. True it is that the discretion given to the Commissioner under s 80G(6A)(b) is unlimited in its terms. However, the discretion must be exercised with regard to, and within the context of, the object for which the discretion was conferred namely to equate companies in a group, where there is one hundred per cent common ownership, with divisions of a single company.
103 Further, the concept of the 'common controller' propounded by the report of the Losses Network of 6 March 2000, which was relied upon by Mr Bridge in making the decisions under s 80G(6A)(b), was wrong in law. The report advised that it was necessary and appropriate to depart from orthodox legal principles of company law in determining that the Taxpayer Companies had participated in a Part IVA scheme. The legal advice included the following propositions:
· the doctrine of companies as separate legal entities had to be ignored to some extent;
· a controlling mind had to be attributed to the activities of a group of companies in relation to their taxation affairs;
· there is a presumption that, in a case where Part IVA of the Act possibly applies, the common controller was aware of both the existence of a loss and how it was constituted;
· an income company is deemed to have the common controller's presumed awareness;
· an income company is obliged to be cognisant of the nature and integrity of any loss transferred to it from another company in the group;
· an income company has the same obligations as a loss company to enquire into and ascertain the propriety of a loss that is the subject of a transfer agreement.
104 Neither the circumstance that a company is completely subject to the ownership and the direction of another person nor the circumstance that that other person exercises directorial control of the activities of the company in ways that minimise the manifestations of the company's separate legal identity will justify a conclusion that acts in the law formally done by the company are to be regarded, for purposes of the kind here in question in relation to Australian income tax law, as acts in the law done by that other person (Dennis Willcox Pty Ltd v Federal Commissioner of Taxation (1988) 79 ALR 267 at 274).
105 The decision by the Commissioner to ignore the separate legal entity doctrine for the purposes of s 80G - which was central to the report of the Losses Network - was not open as a matter of law. Even if it was theoretically open to the Commissioner to circumvent a cardinal principle of modern company law, by piercing the corporate veil, that is not something that should be lightly done. It can only be done where evidence exists that justifies such a piercing in accordance with established principles. There was no such evidence in this case.
106 Of course, if the Commissioner had taken account of evidence specific to the Taxpayer Companies that they had not been given the opportunity to address, there may have been a denial of procedural fairness. However, the Commissioner does not appear to have had regard to any evidence in determining that there must be a common controller of companies in the CPH Group.
107 In paragraph 43 of the Section 13 Statements, Mr Bridge referred to the assertion by Ernst & Young in their letter of 8 June 2000 that there was uncertainty 'as to the application of Part IVA to AFT, by the Courts in these circumstances generally'. Mr Bridge said that he did not consider that there was 'either at the time the letter of 8 June 2000 was written or when I made my decision on 30 October 2001 any significant amount of uncertainty'. He referred to the fact that as at 8 June 2000, the Full Court had accepted the Commissioner's position in relation to s 79D and Part IVA and that, by 30 October 2001, the High Court had confirmed that position.
108 By expressing the view that, as at 8 June 2000 and 30 October 2001, there was no uncertainty as to the application of Part IVA to AFT by the Courts, Mr Bridge directed his mind to the wrong time for determining whether there was uncertainty in the application of Part IVA and hence whether there was a good reason for the Taxpayer Companies' not having entered into the subject agreements to transfer revenue losses at or at any time before the time at which no extension of time was required.
109 The relevant time must be the date when the Taxpayer Companies lodged their returns for the relevant years of income, not the date of the Ernst & Young letter of 8 June 2000 nor the date of Mr Bridge's decisions. As at the date of the lodging of the returns there was no relevant case law applying to the position. There were respectable and reasonably arguable views against the proposition that the analogous financial arrangements resulted in a tax benefit. Indeed, the High Court described those arguments as having 'considerable force' in the case of CPH Property.
110 By focusing his attention on the wrong dates, the Commissioner asked himself the wrong question and erred in law in so doing. It is implicit, moreover, in the fact that Mr Bridge asked himself the question as to whether there was uncertainty as to the application of Part IVA to AFT by the Courts (albeit directing his mind to the wrong time period), that he considered this question to be highly relevant. Whilst the Full Court had held that Part IVA did apply, Hill J had held that it did not and the High Court had seen the matter as raising a sufficiently important issue of principle with reasonable prospects of success for CPH Property to obtain special leave to appeal on 26 May 2000.
111 On the other hand, while there may well have been respectable and reasonably arguable views in relation to the position concerning CPH Property, the position was different in relation to AFT and the Taxpayer Companies. Certainly, there was no case law concerning the question of a Part IVA scheme or s 79D. However, s 79D had been amended prior to the years of income in question such that there could be no doubt, if there was a scheme, that the Taxpayer Companies derived a benefit for the purposes of the application of Part IVA of the Act.
112 Nevertheless, in determining whether the Taxpayer Companies were 'culpable' for the purposes of the exercise of the discretion, Mr Bridge turned his mind to the wrong time. As a consequence, he appears to have taken into account, as a consideration in the exercise of the discretion, the state of knowledge of the Taxpayer Companies as to whether they had participated in a scheme at a date that was quite irrelevant to the question of their culpability in relation to that participation. While that is not of itself an error of law, it may indicate a misapprehension on the part of the decision-maker as to the task required of him, from which an inference might be drawn that he misdirected himself as to the law. Since Mr Bridge did not give evidence, that inference is more easily drawn.