REASONS FOR JUDGMENT
introduction
1 Pursuant to s 39B of the Judiciary Act 1903 (Cth) ("the Judiciary Act"), the applicant ("ANZ") seeks declarations that two notices purporting to be notices of amended assessments ("the amended assessments") in respect of its taxable income for the year ended 30 September 1992 ("the 1992 year") are not valid assessments for the purposes of the Income Tax Assessment Act 1936 (Cth) ("the Act") and that two determinations purportedly made under s 177F(1)(a) of the Act ("the determinations") were not validly made. A Statement of Claim (amended at the hearing) supports the application for declaratory relief.
2 Besides a Defence (which has also been amended) the respondent Commissioner filed an affidavit affirmed by Kylie-Megan Davies producing copies of the notices of the amended assessments certified as true copies under the Second Commissioner's hand. The Commissioner also moved to stay or dismiss ANZ's Application and Statement of Claim filed in the s 39B proceeding on the grounds referred to in O 20 r 2 of the Federal Court Rules 1979 (Cth). In support of its motion, the Commissioner not only relied on the affidavit of Kylie-Megan Davies, but also on two affidavits of Frank Vitale (sworn 11 October 2002 and 7 March 2003 respectively), the affidavit of Jane Holden (affirmed on 4 February 2003) and two affidavits of Monika Schober (sworn on 4 February 2003 and 7 March 2003 respectively). ANZ relied on the affidavits of Irene Susan Trethowan (sworn on 22 August 2002) and Stephen Michael Green (sworn on 1 November 2002).
3 The hearing was, however, conducted on the basis that the Court would decide ANZ's application under s 39B finally, rather than deal merely with the Commissioner's motion.
background facts
4 Monika Schober, who was at the relevant time an officer of the Australian Taxation Office ("ATO"), made the determinations on 12 June 1999 and 15 June 1999 respectively. On the same dates, Ms Schober also prepared the amended assessments. The amended assessments gave effect to the determinations. The determinations are identical in terms, save that the determination of 12 June 1999 refers to a tax benefit of $65,678,571, whilst the determination of 15 June 1999 refers to a tax benefit of $65,477,725. This difference is reflected in the amended assessments (which are in all other respects identical to each other). The respondent made and issued the 15 June 1999 determination and the 15 June 1999 amended assessment in order to correct an arithmetical error in the earlier determination and amended assessment. Hereafter, I refer to the 15 June 1999 determination and the 15 June 1999 amended assessment as "the determination" and "the amended assessment" respectively. The parties did not contend that the earlier determination and the earlier amended assessment had any continuing effect or present significance: see, in this regard, Commissioner of Taxation v Stokes (1996) 72 FCR 160 ("Stokes") at 166 per Spender, Burchett and Hill JJ and Federal Commissioner of Taxation v S Hoffnung & Company Ltd (1928) 42 CLR 39 ("Hoffnung") at 54 per Isaacs J. In any event, what is said below concerning the 15 June 1999 determination, and the amended assessment that gave effect to it, would apply equally to the 12 June 1999 determination and 12 June 1999 amended assessment if the latter retained currency.
5 By the determination, the Commissioner purported to cancel a tax benefit, which was said by him to be the non-inclusion of amounts in ANZ's assessable income for the 1992 year. The Commissioner purported to give effect to the determination by making an amended assessment in which an amount equal to the alleged tax benefit ($65,477,725) was included in ANZ's assessable income. The determination read as follows:
"INCOME TAX ASSESSMENT ACT 1936
DETERMINATION UNDER SUBSECTION 177F(1) of PART IVA
I have concluded that in the year of income ended 30 September 1992 Australia and New Zealand Banking Group Ltd ('ANZ') and one or more of the following persons, namely ANZ Leasing (Vic) Pty Ltd, ANZ Leasing (NSW) Pty Ltd, Mr Peter Szabo, Manannan Pty Ltd, Standard Chartered Bank Australia Limited and the entities listed in column 1 of Appendix 1 entered into or carried out a scheme and the purpose of ANZ or one of those other persons in entering into or carrying out that scheme was to enable ANZ to obtain a tax benefit, within the meaning of paragraph 177C(1)(a), in connection with that scheme in years of income including the year ended 30 September 1992.
I have determined that ANZ has obtained, or would but for section 177F obtain, a tax benefit in connection with a scheme to which Part IVA applies.
The tax benefit is the whole of the assessable income which ANZ would have derived, or might reasonably have been expected to have derived, if it had directly disposed of its investments in certain depreciated plant and equipment.
I have determined that the amount of the tax benefit is $65,477,725 and that this amount would have been included, or might reasonably have been expected to have been included, in the assessable income of ANZ in its year of income ending 30 September 1992 if the scheme had not been entered into or carried out.
I hereby now determine by virtue of the powers conferred on the Commissioner of Taxation under paragraph 177F(1)(a) that the amount of $65,477,725 shall be included in the assessable income of ANZ for the year of income ended 30 September 1992 and I further determine pursuant to subsection 177F(2) that the amount shall be deemed to be so included by virtue of subsection 59(2).
[signed]
Monika Schober
EL2
Banking & Finance
LB&I
15 June 1999
PN451006"
6 A document headed "Application of s 177D of the Income Tax Assessment Act 1936" ("the s 177D Document") described the scheme referred to in the determination. It is inappropriate in this proceeding to say much of the details of the scheme that the Commissioner identified. It is enough to note that the alleged scheme relates to transactions into which ANZ entered in the 1992 year in relation to chattel leases under which ANZ was the lessor. The transactions apparently involved the formation of partnerships to acquire the chattels and the assignment by ANZ, for consideration, of its interests in the partnerships to an unrelated third party. ANZ claims to have received the amount of $29,086,863 for the assignments of its interests in the partnerships and to have returned this amount as assessable income in the 1992 year.
7 In written submissions, ANZ said the determination was:
"… made on the hypothesis that if the 'scheme' as identified in the s 177D Document had not been entered into or carried out, the applicant would have, or might reasonably be expected to have, not formed the partnerships but rather would have sold its interests as lessor in the chattels, the subject of the leases, directly to an unrelated third party or parties. The income which the respondent claims, on this basis, would have been included as assessable income of the applicant of the 1992 year is known as a 'balancing charge' for recouped depreciation which is assessable under s 59(2) of the Act. Upon that hypothesis, the respondent has worked out that the applicant would have derived some $65 million of assessable income as a result of a direct sale of the chattels and has calculated the tax payable as payable on a taxable income which includes that amount … ."
It is unnecessary, in this proceeding, to determine whether these statements are entirely accurate. The Commissioner did not contest that this explanation was adequate for the purposes of this proceeding.
8 It is not in contest that, by notices of objection dated 16 August 1999, ANZ objected to the amended assessments of 12 June 1999 and 15 June 1999. On 1 March 2001, ANZ served on the Commissioner notices under s 14ZYA(2) of the Taxation Administration Act 1953 (Cth) ("TAA"), requiring the Commissioner to make an objection decision in relation to each of the taxation objections. On 30 April 2001, pursuant to s 14ZYA(3), the Commissioner was taken to have made a decision under s 14ZY(1) to disallow the taxation objections. On 1 May 2001, ANZ instituted appeals to this Court under Pt IVC of the TAA, in relation to the objection decisions of the Commissioner. In consequence, the amended assessments and the determinations are the subject of proceedings instituted by ANZ under Pt IVC of the TAA ("the Pt IVC proceedings").
9 In the Pt IVC proceedings, ANZ contends, amongst other things, that it did not obtain a tax benefit within the meaning of s 177C of the Act, and that, if it obtained any tax benefit, this benefit must be reduced or adjusted to allow for a number of matters, including deductions for depreciation and "the excision from ANZ's assessable income of the amounts received by it as consideration for the assignment of its equitable interests in the various partnerships".
the parties' submissions
10 ANZ submitted that the amended assessment was invalid, because it was provisional or tentative, rather than definitive of its tax liability for the 1992 year and, in the alternative, that the Commissioner had not made a good faith determination of its taxable income for the 1992 year. ANZ also contended that the determination was invalid because it had been made without authority and that, in consequence, the amended assessment was ineffective.
11 The gravamen of the case for ANZ was that, in its return for the 1992 year, it had included in assessable income an amount of $29,086,863 derived as a consequence of the transactions that the Commissioner identified as the scheme in the s 177D Document, and that, at the time of making the determination and the amended assessment, the Commissioner knew that ANZ had returned this amount as assessable income in consequence of these transactions. It followed, so ANZ said, that the Commissioner was bound not to increase ANZ's taxable income by the amount of $29,086,863 because, to the Commissioner's knowledge, ANZ had already included the amount in its taxable income as a result of the transactions that the Commissioner treated, for Pt IVA purposes, as a scheme. That is, having determined that, as a consequence of the scheme, there was a tax benefit of $65,477,725, then the Commissioner was called on either to make a compensatory adjustment under s 177F(3) of the Act to exclude the amount of $29,086,863 in calculating ANZ's taxable income for the year and the tax payable thereon, or to take some other step to ensure that ANZ was not assessed on a taxable income exceeding a "bottom line" of around $65 million (e.g., by including no more than a further $36,390,862 in ANZ's taxable income, being the tax benefit of $65,477,725 less the amount returned of $29,086,863). ANZ submitted that the Commissioner knew that, in arriving at a taxable income of around $94 million ($65 million tax benefit plus $29 million previously included as taxable income) the amended assessment included in ANZ's taxable income an amount of $29,086,863 in excess of the amount that should have been included had the Commissioner properly exercised his powers under Pt IVA of the Act. ANZ claimed that the Commissioner knew at the time of the amended assessment that there was no substantial possibility that the amount of taxable income shown within the assessment was the true taxable income of ANZ for the 1992 year. According to ANZ, even though the Commissioner issued the amended assessment with a taxable income of $94 million, the Commissioner knew, at the time of the amended assessment, that, assuming he was correct on all points, ANZ's taxable income for the 1992 year was never more than around $65 million. Since the amended assessment assumed a taxable income of $94 million, the assessment assumed a taxable income that, however considered, was necessarily in error.
12 In written submissions, ANZ maintained that the amended assessment was invalid because it "defined [ANZ's] taxable income for that year and its tax liability consequent on the application of the provisions of Part IVA, without adjustment for, or excision of, the said amount of $29,086,863", notwithstanding that the Commissioner knew that:
"if [ANZ] was to be assessed upon the basis that the alleged scheme had not been carried out, then the $29,086,863 had to be excluded in calculating both the applicant's taxable income for that year and the tax payable thereon."
That is, ANZ's complaint was that, at the time of the amended assessment, the Commissioner knew that, in arriving at ANZ's taxable income for the 1992 year, he had "double counted" an amount of $29,086,863. A proper course would have been, so ANZ submitted, to issue an assessment for a taxable income of $65 million, and it would then have been open to the Commissioner to support this assessment on any of the bases he had identified. The result was, so ANZ submitted, that that the amended assessment was merely provisional or tentative, because the Commissioner knew that he would need subsequently to make a compensatory adjustment under s 177F(3) of the Act or otherwise correct the misstatement of ANZ's taxable income. Alternatively, since the amended assessment was issued on facts that the Commissioner knew to be untrue, the assessment was not the result of a bona fide process of ascertaining or determining ANZ's taxable income. In these circumstances, so ANZ said, it was not open to the Commissioner to rely on ss 175 and 177(1) of the Act, because the amended assessment was a nullity, and did not satisfy the test of Dixon J in R v Hickman; Ex parte Fox (1945) 70 CLR 598 ("Hickman").
13 The Commissioner contended that the amended assessment was a valid assessment and attracted the protection of ss 175 and 177(1) of the Act. There was, so he contended, nothing on the face of the amended assessment, or elsewhere, to show that it was provisional or tentative. On the contrary, it was an assessment definitive of ANZ's tax liability in a fixed and certain sum.
14 The Commissioner did not dispute that ANZ had included in its assessable income in its return for the 1992 year the amount of $29,086,863 (described by ANZ as an amount received from the sale of "lease tails"). He drew attention, however, to the fact that ANZ had objected, as a "precautionary measure", to the inclusion of this amount in the assessable income for that year, on the basis that it was not assessable income under s 25(1) of the Act or otherwise. This objection was, so counsel for the Commissioner said, still on foot. ANZ did not suggest otherwise. Further, as counsel for the Commissioner noted, ANZ's notices of objection of 16 August 1999 (referred to above) objected to the amended assessments on a number of bases, including that the amount of the tax benefit should be reduced (presumably to $36 million) or there should be a compensatory adjustment under s 177F(3) of the Act in respect of the $29 million. Thus, in connection with the amended assessment, the relevant notice of objection claimed:
"… if the purported amended assessment is valid (which is denied), then it is excessive and it should be reduced by the excision from the Taxpayer's assessable income of the year of income of an amount of $29,086,863 … and the Commissioner should determine under sub-section 177F(3) of the Act that the amount of $29,086,863 … should not have been included in the assessable income of the Taxpayer of the year of income and take such action as is necessary to give effect to such determination.
…
Further or alternatively, if there was a tax benefit within the meaning of Part IVA of the Act (which is denied), the amount of the tax benefit obtained in connection with the scheme is an amount less than the purported tax benefit specified in the adjustment sheet accompanying the purported amended assessment."
15 The Commissioner's counsel contended that, on the one hand, if the "precautionary" objection were to succeed, then there would be no case for any reduction in the tax benefit or any compensatory adjustment. On the other hand, if the objection to the amount of the tax benefit were to succeed, although a compensatory adjustment had already been made, then there would have been a "double excision". In these circumstances, the Commissioner submitted that it was appropriate not to do anything about the $29 million until the position became clear. Counsel for the Commissioner submitted that "it was a perfectly reasonable course to take" to delay making any compensatory adjustment, because if ANZ were to succeed then the adjustment might need to be undone, if that were possible, and, if it were not possible, then the position could not be remedied. As a consequence, so counsel submitted:
"… one shouldn't be looking at what's the, as it were, reasonable outcome at a particular point in time but as to a result of the whole process."
In submitting that what the Commissioner did was reasonable, counsel added:
"[O]ne has to remember that … the 29 million was properly included in the taxpayer's assessable income because it represented an income return. The fact a determination is made under Part IVA including the 65 million, which is an entirely different sum, does not have any effect itself on the inclusion of the 29 million".
16 Referring particularly to Asiamet (No 1) Resources Pty Ltd v Federal Commissioner of Taxation (2003) 196 ALR 692 ("Asiamet"), the Commissioner submitted that he was not required, at the time of the amended assessment, to make an adjustment under s 177F(3) of the Act in order to exclude from ANZ's assessable income the consideration that it received for the assignments that it returned as assessable income. In substance, the Commissioner's submission was that the time had not yet come for the Commissioner to make a compensatory adjustment under s 177F(3), or deal otherwise with the amount of $29 million. The fact that a compensatory adjustment might be made at a later stage did not, the Commissioner contended, make the assessment tentative or provisional.
17 The Commissioner submitted that ANZ's "bottom line" approach ignored "the various mechanisms involved in making the various assessments, determinations [and] compensating adjustments". If a determination were made under Pt IVA that there was a tax benefit in connection with a scheme of $65 million (as here), then the amount of $65 million would be included in the taxpayer's assessable income (unless there were a compensatory adjustment under s 177F(3)). If the amount of $29 million had also been returned and assessed as part of the taxpayer's assessable income, the $29 million would also be included in the taxpayer's assessable income. Counsel for the Commissioner observed:
"That would be included because it was included, as it were, on the legitimate basis, not on the anti-avoidance basis. At that moment you would have two amounts properly included in the assessable income."
18 The Commissioner submitted that, if he were to make a compensatory adjustment under s 177F(3) of the Act before there was certainty about the correct position, he might subsequently find that he should not have done so, because the amount of $29 million was ultimately found not to be assessable under s 25(1) of the Act and the tax benefit was in fact the amount of $65 million (as he had determined). The Commissioner's position would be equally, if not more, vulnerable if he were to determine that the tax benefit was merely $36 million, rather than $65 million: Commissioner of Taxation v Spotless Services Ltd (1996) 186 CLR 404 ("Spotless") at 423-4. Similarly, according to the Commissioner, if he were to determine that the tax benefit was $65 million and give effect to the determination by including only $36 million in the assessable income, the Commissioner would be unable to defend an assessment for an assessable income of $65 million if the amount of $29 million were found not to be assessable under s 25(1) of the Act, because the Commissioner had given effect to the determination of $65 million by including only the amount of $36 million in assessable income. As a result, according to the Commissioner:
"… you would end up with the assessment being decreased by 29 million and the Commissioner would miss out on the balance of the amount which might have been included if the whole of the amount of the determination had been included."
The position would be incapable of remedy if, as was the case here, the Commissioner was out of time to amend the assessment. Counsel for the Commissioner added:
"… even if what I have been putting to your Honour is in some respect flawed, which contrary to the submissions which my learned friends have already commenced, it is in our submission not, the position is obviously extremely complicated."
19 The Commissioner did not concede that he knew, or ought to have known, at the time of the amended assessment that ANZ's liability was less than that for which it was assessed. Counsel conceded only that:
"If a compensating adjustment was required, as it might very well be if the Part IVA assessment [and] determination stands up, then a proper compensating adjustment would have to be made or should properly be made if you like, but the question is not what is the right method of proceeding to achieve a final result."
20 The gist of the Commissioner's answer to ANZ's case was that the Commissioner was not obliged to make a compensatory adjustment or to take the approach that ANZ urged while there was doubt about whether the Pt IVA determination would stand. He maintained that the amended assessment was not provisional, because both the amount of $29 million and the amount of $65 million were properly included as assessable income in the amended assessment, and the assessment was not any less definitive because there would, in all likelihood, be a compensatory adjustment at a later date if the Pt IVA determination stood. Further, in the circumstances of the case, the fact that the Commissioner chose not to make a compensatory adjustment at the time of the amended assessment did not evidence a lack of a bona fide attempt to exercise the power to assess.
21 The Commissioner also contended that the determination was valid as a person who was authorised for the purpose of making the determination did in fact make it.
statutory background
22 In order to evaluate the parties' submissions, it is necessary to refer to the relevant statutory regime. I am not now concerned with the detail of the Commissioner's assessments and the Pt IVA determinations or ANZ's objections, because the present proceeding is not an appeal under Pt IVC of the TAA. As already noted, ANZ invokes the Court's jurisdiction under s 39B of the Judiciary Act.
23 ANZ's submission is that the assessment was tentative and provisional, or not made in good faith, with the consequence that the notice of amended assessment is not protected by s 175 and subs 177(1) of the Act. These provisions read as follows:
"175 The validity of any assessment shall not be affected by reason that any of the provisions of this Act have not been complied with."
"177(1) The production of a notice of assessment, or of a document under the hand of the Commissioner, a Second Commissioner, or a Deputy Commissioner, purporting to be a copy of a notice of assessment, 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."
24 "Assessment" means, so far as relevant, the "ascertainment" of an amount of taxable income, net income, tax payable or additional tax payable: see s 6(1) of the Act. As Kitto J observed in Batagol v Commissioner of Taxation (1963) 109 CLR 243 at 252:
" … the definition of 'assessment' means … the completion of the process by which the provisions of the Act relating to the liability to tax are given concrete application in a particular case with the consequence that a specified amount of money will become due and payable as the proper tax in that case."
Pursuing this approach, there cannot be alternative figures for assessable income under the provisions of the Act: see Henderson v Commissioner of Taxation (1970) 119 CLR 612. Service of the notice of assessment on the taxpayer fixes the ascertainment of the amount of the taxable income and the amount of the tax payable by the taxpayer and brings to an end the process of assessment. In Commissioner of Taxation v Prestige Motors Pty Ltd (1994) 181 CLR 1 at 13, the Court explained the position thus:
"Service of the notice on the taxpayer brings the process of assessment to an end in the sense that, in conformity with s. 174(1), the notice, which necessarily reflects the requisite elements of the calculation that has been made, is served after the making of that assessment."
25 The Commissioner has a statutory duty to make an assessment of a taxpayer's taxable income and the tax payable thereon "[f]rom the returns, and from any other information in his possession, or from any one or more of these sources": see s 166 of the Act and Commissioner of Taxation v Ryan (2000) 201 CLR 109 at 119 per Gleeson CJ, Gummow and Hayne JJ. Part IVC of the TAA provides, amongst other things, for appeals to this Court by persons dissatisfied with objection decisions of the Commissioner on the ground, relevantly, that an assessment is excessive: see TAA, Pt IVC, ss 14ZZ and 14ZZO. The task of a taxpayer, upon a appeal to the Court, is to show that the amount of money for which tax is levied by a notice of assessment exceeds his actual substantive liability: see Commissioner of Taxation v Dalco (1990) 168 CLR 614 at 623, 625-626 per Brennan J and 631 per Toohey J.
26 In making the determination and the amended assessment, the Commissioner relied on Pt IVA of the Act. In order for Pt IVA to apply, there must be a scheme, as defined in s 177A, in connection with which the taxpayer has obtained a tax benefit. A "tax benefit", as defined by s 177C, includes an amount not being included in the assessable income of the taxpayer of a year of income where the amount would have been included, or might reasonably be expected to have been included, in the assessable income of the taxpayer of that year of income if the scheme had not been entered into or carried out. Further, having regard to the matters referred to in s 177D(b), it would be concluded that the person, or one of the persons, who entered into or carried out the scheme or any part of the scheme did so for the purpose of enabling the taxpayer to obtain a tax benefit in connection with the scheme.
27 Part IVA is attracted to a particular case when the Commissioner (or the Commissioner's delegate) makes a determination pursuant to s 177F. Section 177F confers a discretion on the Commissioner to cancel a tax benefit. Subsections 177F(1), (2) and (2B) relevantly provide:
"(1) Where a tax benefit has been obtained, or would but for this section, be obtained, by a taxpayer in connection with a scheme to which [Part IVA] applies, the Commissioner may -
(a) in the case of a tax benefit that is referable to an amount not being included in the assessable income of the taxpayer of a year of income - determine that the whole or a part of that amount shall be included in the assessable income of the taxpayer of that year of income; …
and, where the Commissioner makes such a determination, he shall take such action as he considers necessary to give effect to that determination.
(2) Where the Commissioner determines under paragraph (1)(a) that an amount is to be included in the assessable income of a taxpayer of a year of income, that amount shall be deemed to be included in that assessable income by virtue of such provision of this Act as the Commissioner determines.
…
(2B) A determination under paragraph (1)(c) or subsection (2A) must be in writing."
28 The joint judgment in the High Court in Spotless at 413 described the operation of Pt IVA of the Act in the following terms:
"Part IVA operates where (i) there is a 'scheme' as defined in s 177A; (ii) there is a 'tax benefit' which, in relation to income amounts, is identified in par (a) of s 177C(1) as an amount not included in the assessable income of the taxpayer where that amount would have been included or might reasonably be expected to have been included in that assessable income for the relevant year of income if the scheme had not been entered into or carried out; (iii) having regard to the eight matters identified in par (b) of s 177D, it would be concluded that there was the necessary dominant purpose of enabling the taxpayer to obtain the tax benefit; and (iv) the Commissioner makes a determination that the whole or part of the amount of the tax benefit is to be included in the assessable income of the taxpayer (s 177F(1)(a)). The Commissioner then 'shall take such action as he considers necessary to give effect to that determination' (s 177F(1))." [Citations omitted]
29 As a Full Court of this Court (Sackville, Merkel and Kenny JJ) observed in Commissioner of Taxation v Mochkin [2003] FCAFC 15 at [26]:
"The making of a determination under s 177F(1)(a) that the amount of a tax benefit is to be included in a taxpayer's assessable income is the 'pivot upon which the operation of Pt IVA turns': Spotless, at 413. It is in this sense that Pt IVA of the ITAA is not self-executing. The Commissioner is empowered to make a determination only where there is a tax benefit obtained in connexion with a scheme to which Pt IVA applies. That is, as a matter of 'objective fact', a taxpayer must have obtained a tax benefit in connection with such a scheme: Federal Commissioner of Taxation v Peabody (1994) 181 CLR 359, at 382, per curiam. The question in every case, therefore, is whether a tax benefit that the Commissioner has purported to cancel is in fact a tax benefit obtained in connexion with a Part IVA scheme and so susceptible of cancellation at the direction of the Commissioner: Peabody, at 382. If the Taxpayer has obtained a tax benefit in connection with a scheme to which Part IVA applies, the determination will be valid. If the Taxpayer has not obtained such a tax benefit, the determination will be invalid and will not support an assessment."
30 As already noted, ANZ relied, in this case, on the provision for compensatory adjustment in subs 177F(3) of the Act. This provision empowers the Commissioner, when a determination under s 177F(1) has been made, to make compensating adjustments to the taxpayer's assessable income. Subsection 177F(3) relevantly provides:
"Where the Commissioner has made a determination under subsection (1) or (2A) in respect of a taxpayer in relation to a scheme to which this Part applies, the Commissioner may, in relation to any taxpayer (in this subsection referred to as the 'relevant taxpayer'):
(a) if, in the opinion of the Commissioner -
(i) there has been included, or would but for this subsection be included, in the assessable income of the relevant taxpayer of a year of income an amount that would not have been included or would not be included, as the case may be, in the assessable income of the relevant taxpayer of that year of income if the scheme had not been entered into or carried out; and
(ii) it is fair and reasonable that that amount or a part of that amount should not be included in the assessable income of the relevant taxpayer of that year of income,
determine that that amount or that part of that amount, as the case may be, should not have been included or shall not be included, as the case may be, in the assessable income of the relevant taxpayer of that year of income; … ."
31 In the course of argument, the parties also referred to subs 177F(5) to subs 177F(7). These subsections provide as follows:
"(5) Where, at any time, a taxpayer considers that the Commissioner ought to make a determination under subsection (3) in relation to the taxpayer in relation to a year of income, the taxpayer may post to or lodge with the Commissioner a request in writing for the making by the Commissioner of a determination under that subsection.
(6) The Commissioner shall consider the request and serve on the taxpayer, by post or otherwise, a written notice of his decision on the request.
(7) If the taxpayer is dissatisfied with the Commissioner's decision on the request, the taxpayer may object against it in the manner set out in Part IVC of the Taxation Administration Act 1953."
the relationship between ss 175, 177(1) and 177F of the act
32 The Commissioner has produced to the Court a document under the hand of a Second Commissioner of Taxation purporting to be a copy of the relevant notice of assessment for the 1992 year. By virtue of subs 177(1) of the Act, the production of this document in this proceeding is "conclusive evidence of the due making of the assessment and … that the amount and all the particulars of the assessment are correct". Section 175 of the Act preserves the validity of an assessment even though there has been some non-compliance with the provisions of the Act. For the reasons stated by Lindgren J in Dan v Federal Commissioner of Taxation 2000 ATC 4,350 ("Dan"), the making of a determination pursuant to s 177F(1) of the Act forms part of the "making of the assessment" for the purposes of s 177(1): see further below and Dan at 4,357 [37] to [40]. This is consonant with the statement of Mason CJ in Deputy Commissioner of Taxation v Richard Walter Pty Ltd (1995) 183 CLR 168 ("Richard Walter") at 178 that:
" … the making of the determination forms part of the process of assessment and goes to the ascertainment of the substantive liability of the taxpayer to tax." [Emphasis original]
In the same case, Brennan J said at 203:
"The exercise of the Pt IVA power is therefore properly to be regarded as part of the process of assessment. It is not open to the Commissioner to defend an assessment merely by asserting its conformity with an antecedent determination. The antecedent determination, being itself part of the process of assessment, must itself be supported as a valid exercise of power or be validated by s 175 as a bona fide attempt to exercise the power."
judicial review under s 39B
33 Generally speaking, once a document of the kind mentioned in subs 177(1) of the Act is produced, neither an assessment nor a determination under s 177F is open to challenge in a proceeding under s 39B of the Judiciary Act. In this event, the taxpayer must proceed under Pt IVC of the TAA. That is, once a document is produced under subs 177(1) (sometimes described as a privative clause) it is not open to the Court to entertain a challenge under s 39B as to the validity of an assessment unless the applicant can establish that the "assessment" is not an assessment for the purposes of subs 177(1) of the Act. As the authors of the joint judgment in Plaintiff S157/2002 v Commonwealth of Australia (2003) 195 ALR 24 ("Plaintiff S157") at 41 said:
" … a privative clause cannot protect against a failure to make a decision required by the legislation in which that clause is found or against a decision which, on its face, exceeds jurisdiction."
34 The Court in Plaintiff S157 held that where a statute incorporates a privative clause, this clause must be reconciled with other statutory provisions that confer limited power or authority: see Plaintiff S157 at 29-30 per Gleeson CJ and 41-42 per Gaudron, McHugh, Gummow, Kirby and Hayne JJ.
35 In Hickman, Dixon J propounded a rule of construction to achieve a measure of reconciliation between a privative clause (contained in the National Security (Coal Mining Industry Employment) Regulations 1941 (Cth)) and other provisions conferring only limited jurisdiction. In connection with the privative clause, Dixon J said at 615:
"Such a clause is interpreted as meaning that no decision which is in fact given by the body concerned shall be invalidated on the ground that it has not conformed to the requirements governing its proceedings or the exercise of its authority or has not confined its acts within the limits laid down by the instrument giving it authority, provided always that its decision is a bona fide attempt to exercise its power, that it relates to the subject matter of the legislation, and that it is reasonably capable of reference to the power given to the body."
36 It follows, I think, from the statutory conception of an "assessment" (discussed above) that there will be no assessment for the purposes of the Act, including subs 177(1), if a purported assessment is tentative or provisional in the sense that it does not create a definitive liability: see Hoffnung at 54-56 per Isaacs J, 58 per Higgins J and 65 per Starke J; F J Bloemen Pty Ltd v Commissioner of Taxation (1981) 147 CLR 360 ("Bloemen") at 374-378 per Mason and Wilson JJ (with whom Stephen J agreed) and 380-381 per Aickin J; Stokes v Federal Commissioner of Taxation (1996) 136 ALR 632 at 637-8 per Davies J; affirmed in Commissioner of Taxation v Stokes (1996) 72 FCR 160 ("Stokes") at 168-171, 174 per Spender, Burchett and Hill JJ; Richard Walter at 199-200 per Brennan J, 219 per Dawson J, 229 per Toohey J and 237 per McHugh J; R v Commissioner of Taxation (WA); Ex parte Briggs (1986) 12 FCR 301 ("Briggs") at 309 per Bowen CJ, Sheppard and Beaumont JJ; McCleary v Federal Commissioner of Taxation 97 ATC 4,266 ("McCleary") at 4269 per Hill J; Briglia v Federal Commissioner of Taxation 2000 ATC 4,247 ("Briglia") at 4249 per Kenny J; and Madden v Madden (1996) 65 FCR 354 ("Madden") at 391-2 per Foster J (with whom Sheppard J agreed).
37 Although the matter is, perhaps, not utterly free from doubt, Australian courts have apparently adopted the Hickman test as the "rule of construction allowing for the reconciliation" of subs 177(1) and other provisions of the Act: see Plaintiff S157/2002 at 41; Richard Walter 195, 199-200 per Brennan J, 211 per Deane and Gaudron JJ and 219 per Dawson J; Sunrise Auto Ltd v Commissioner of Taxation (1995) 61 FCR 446 at 472 per Beaumont and Beazley JJ; Hoare Bros Pty Ltd v Commissioner of Taxation (1996) 62 FCR 302 at 314 per Black CJ, Einfeld and Sackville JJ; Madden (1996) 65 FCR 354 at 391 per Foster J; Darrell Lea Chocolate Shops Pty Ltd v Commissioner of Taxation (1996) 72 FCR 175 ("Darrell Lea") at 185 per Spender, Burchett and Hill JJ; Pickering v Federal Commissioner of Taxation 97 ATC 4893 at 4899; McCleary at 4269-4270 per Hill J; San Remo Macaroni Company Pty Ltd v Federal Commissioner of Taxation 99 ATC 5,138 at 5,149-5,150 per Hill J; Dan at 4,354-4,356 per Lindgren J; and Briglia at 4,249. Accordingly, a purported assessment will lose the protection of ss 177(1) and 175 of the Act if it was not made in good faith or did not otherwise satisfy the Hickman test.
has anz made out its case?
38 The evidence that ANZ had in fact returned an amount of $29,086,863 as assessable income in the 1992 year was contained in the affidavit of Mr Green, ANZ's General Manager - Taxation. Mr Green deposed that, in its return for the 1992 year, ANZ included in its assessable income the amount of $29,086,863, which, according to him, was the consideration for the assignment of ANZ's interests in the partnerships (referred to in the s 177D Document). At the hearing, the Commissioner conceded that ANZ had in fact returned such an amount.
39 By reference to a document dated 17 September 1997, ANZ sought to make good the proposition that, at the time of making the determination and the amended assessment, the Commissioner knew that ANZ had returned this amount in consequence of the transaction said to form a scheme for the purposes of Pt IVA. This was a document headed "Brief for Counsel to Advise - ANZ Lease Assignment" ("the Brief"). ANZ obtained the Brief following requests to the Australian Taxation Office ("ATO") for access to documents under the Freedom of Information Act 1982 (Cth). The authors of the Brief were recorded as John Smith, Tax Counsel, and Bernard Finnegan, Acting Tax Counsel. The Commissioner did not dispute that, at the material time, they were taxation officers employed by the ATO. ANZ submitted that the Brief showed that these officers (and, therefore, the Commissioner) were aware that ANZ had returned the amount of $29,086,863 as assessable income of the 1992 year, and that this amount was the consideration received by it in consequence of the transactions said to form the Pt IVA scheme.
40 In order to understand how ANZ sought to make out its case, it is necessary to refer to parts of the Brief. The Brief sought the advice of internal tax counsel "on the possible application of Part IVA to a lease assignment arrangement entered into by ANZ Banking Group Limited in the 1992 year". The Brief specifically noted that it had been:
"prepared on the basis of the information presently available. Further information in respect of this arrangement will be required before conclusive views can be drawn".
41 The Brief described the relevant scheme in three ways. In connection with what was referred to as the "Wide Scheme", the Brief stated:
"In terms of legal form, ANZ Bank has maintained a legal interest in all of the leased assets and yet in terms of the economic substance of the scheme it has effectively disposed of its interests in the leased assets during the 1992 year.
If ANZ Bank had disposed of its legal interest in the leased assets during the 1992 year for the amounts which came home to it during that year as a consequence of the scheme, the taxpayer would have exposed itself to an assessable balancing charge under s. 59(2). In summary the amount of the tax benefit would be determined as follows:
Consideration received in respect of the disposal: $
Cash consideration received from SCBAL 29,086,863
Repayment of Equity Investment in Partnerships
using the funds arising from the Debt Injection
into the Partnerships by ANZ Bank 145,402,253
174,489,116
Less: Depreciated Value of Leased Assets 108,810,545
Assessable balancing charge 65,678,571
Less: Consideration already included in assessable
income in 1992 year 29,086,863
Tax Benefit obtained in connection with scheme 36,591,708"
I note that "SCBAL" was a third party, to whom ANZ assigned its partnership interests.
42 The Brief also set out another analysis of the possible "tax benefit". This analysis was as follows:
$
"Balancing Charge based on Cash Received 65,678,571
Deemed Balancing Charge Tax Benefit under
s.177C(2) 55,870,123
Difference 9,808,448
Amount of consideration already assessed 29,086,863
Less: Difference 9,808,448
Compensating Adjustment limited to 19,278,415
Deemed Balancing Charge Tax Benefit
under s.177C(2) 55,870,123
Less: Limited Compensating Adjustment 19,278,415
Net Increase in Taxable Income 36,591,708"
43 Counsel for ANZ particularly relied on the facts that, in these analyses, the amount of $29,086,863 is described as the consideration "already included in assessable income in 1992 year" or "already assessed"; in each case, the bottom line figure was the same, namely, $36,591,708; and there was a balancing charge of $65,678,571 in both calculations. The amount of $65,678,571 was the amount of the tax benefit in the 12 June 1999 determination, which was "corrected" to $65,477,725 in the 15 June 1999 determination.
44 The Brief included a statement that, if the Commissioner were to proceed under Pt IVA in respect of a scheme identified in the Brief, then there might subsequently be a need to consider a compensatory adjustment under s 177F(3) of the Act. The Brief recorded:
"The issue of Compensating Adjustments may need to be considered, albeit only after any disputes arising from the application of Part IVA have been resolved.
Under the Gross approach, the following compensating adjustments would seem necessary:
- Exclusion of the consideration received by ANZ Bank for the assignments from its assessable income for the year ended 30 September 1992.
- Exclusion of the interest (ie discount) derived by ANZ Bank from the Partnerships under the Facility Agreements in each of the years 1993 to 2002.
- Exclusion of the 1% share of partnership net income included by ANZ Leasing in its assessable income for each of the years 1993 to 2002.
- Exclusion of the 99% share of partnership net income included by SCBAL in its assessable income for each of the years 1993 to 2002.
…
Note that under s 177G(2) there is no time limit for amendments to effect to compensating adjustment determinations."
45 Counsel for ANZ submitted that the authors of the Brief were in error in assuming that it was open to the Commissioner to defer making a compensatory adjustment under s 177F(3) of the Act until any dispute about the determination under s 177F(1) was resolved. ANZ contended that, in the circumstances of the case, the Commissioner was bound to make a compensatory adjustment once the determination was made and before the amended assessment issued. It was not open to the Commissioner, so ANZ said, to defer making a compensatory adjustment in a case where, as here, the Commissioner knew, at the time of the determination and the amended assessment, that an adjustment would be required in respect of the taxpayer's assessable income in respect of the income year with which the assessment was concerned.
46 In support of these submissions, ANZ referred to a passage in the judgment of Hill J in Commissioner of Taxation v Jackson (1990) 27 FCR 1 ("Jackson") at 18. For present purposes, it assists to set out not only this passage but also his Honour's general remarks concerning the task of the Commissioner in making a determination under s 177F(1). His Honour said, at 16-18, as follows:
"When the Commissioner came to consider Pt IVA, he must be presumed to have taken the view that the relevant tax benefit obtained by [the taxpayer] was referable to an amount not being included in [the taxpayer's] assessable income, which but for the scheme would have been so included or might reasonably be expected to have been so included. At least prima facie, this would seem to be the gross amount of the income derived by the trustee. Thus, if the prerequisites for the operation of Pt IVA are satisfied, the Commissioner is empowered by s 177F(1) to make a determination that the whole or a part of that amount is to be included in assessable income.
A prerequisite of the Commissioner making the determination, however, will be his conclusion that but for the operation of Pt IVA the whole of the amount would not have been included in the assessable income. Notionally, therefore, the Commissioner will commence the process of making a determination under Pt IVA, in a case such as the present, by excluding the amount included in assessable income in the previous assessment … presumably because he has taken the view that that amount was not assessable income of the taxpayer. Having done so, he then proceeds to make his determination under s 177F(1). …
The result of this process can be seen, therefore, to be that the Commissioner must be taken to have removed from the assessable income theretofore calculated the amount of gross income derived by the trustee, and to have added to that assessable income the amount referred to in his determination. …
Against this view of s 177F, it was submitted by counsel for the Commissioner that if the legislature had intended that the words 'give effect' to the determination meant no more than make an assessment, it could have said so quite simply. But this criticism implies that no more is involved in giving effect to a determination than making an assessment of taxable income and tax payable thereon. This is not so.
First, once a s 177F(1) determination is made, the making of that determination leads to the making of a determination, if appropriate, under s 177F(2). It also requires the Commissioner to consider the question of the making of compensatory adjustments under s 177F(3), by way of further determinations. It is true that if the Commissioner does not act under s 177F to make compensatory adjustments, a taxpayer not being the taxpayer whose tax benefit was the subject of the s 177F(1) determination, and perhaps the taxpayer himself, may at any time request the Commissioner to make a s 177F(3) determination, and is given rights if dissatisfied with the Commissioner's decision in respect of that request to object and appeal. But this does not exclude the Commissioner's obligation to consider the issue of the making of such adjustments once he has made the s 177F(1) determination."
47 Accepting this analysis as correct, in the present case, when the Commissioner made the determination under s 177F(1) of the Act, he must be taken to have been of the view that the tax benefit obtained by ANZ was referable to an amount not included in ANZ's assessable income, which but for the scheme would have been so included or might reasonably be expected to have been so included. Pursuant to s 177F(1), the Commissioner made a determination that the whole of that amount ($65,477,725) was to be included in ANZ's assessable income. As Hill J said in Jackson, in making that determination, the Commissioner is taken to have concluded that, but for the operation of Pt IVA, the whole of the amount would not have been included in the assessable income of ANZ. His Honour also said that, at a time after a s 177F(1) determination has been made, the Commissioner is obliged to consider whether it is appropriate to make a determination under subs 177F(3) of the Act.
48 In Jackson, Hill J did not say, however, that, in every case, the Commissioner had an obligation to consider whether to make a compensatory adjustment, and to make any such compensatory adjustment, at the time he made the s 177F(1) determination. Indeed, this proposition would be at odds with the decision of the Full Court of this Court in Fletcher v Commissioner of Taxation (1988) 19 FCR 442, in which the Court held that, in reviewing the Commissioner's decision under s 186 of the Act, the Administrative Appeals Tribunal was free to exercise the same discretion if, upon the material before it, it seemed proper to do so. In relation to s 177F(3) of the Act, Lockhart, Wilcox and Burchett JJ observed at 453-4:
"In coming to that conclusion, we appreciate that s 177F(3)-(8) provides a regime whereunder the Commissioner may make compensating adjustments in respect to any taxpayer. That taxpayer may be a person different from the taxpayer in connection with whose affairs a determination has been made under s 177F(1). In a case where the requisite adjustment is to an assessment which is before the Tribunal at the time of the exercise by it of its discretion under s 177F(1), we see no difficulty about the Tribunal making the adjustment. The Tribunal would only be doing what the Commissioner could himself do in connection with that assessment at the time of considering the objection. In a case where the requisite adjustment needs to be made to an assessment not before the Tribunal - either because it relates to some other taxpayer or to some other year of income - the Tribunal could not itself make an adjustment under s 177F(3). But we see no difficulty about the Commissioner following up the decision of the Tribunal by making the appropriate adjustment, in the same way as he would do if he himself had made the original s 177F(1) determination."
That is, in some circumstances, it is not open to the decision-maker to make a s 177F(3) determination immediately after a s 177F(1) determination, and the making of a s 177F(3) determination must necessarily be delayed.
49 Two decisions of Emmett J are also helpful. In Metal Manufactures Ltd v Federal Commissioner of Taxation 99 ATC 5,229, Emmett J accepted that the Commissioner may defer exercising his discretion under s 177F(3) until the Court had decided whether a determination under Pt IVA should stand: see 5,238 at [30]. More recently, in Asiamet, his Honour specifically declined to find that the Commissioner erred in deferring the determination of the taxpayer companies' requests, pursuant to s 177F(5) of the Act, for a determination, under s 177F(3) of the Act, of the amount of compensatory adjustments for the various income years in question. The taxpayer companies claimed that the Commissioner should make compensatory adjustments pursuant to s 177F(3), in respect of certain interest expenses that gave rise to tax losses transferred to the taxpayer companies. The Commissioner declined to decide the taxpayers' application for compensatory adjustments pending the determination of taxation objections. The Commissioner maintained that s 177F(3) of the Act had no application in the circumstances at hand, because, in addition to relying on Pt IVA of the Act, the Commissioner was of the view that the deductions for interest were not allowable deductions by virtue of s 51(1) of the Act. In what was a judicial review proceeding under s 7 of the Administrative Decisions (Judicial Review) Act 1977 (Cth), Emmett J stated at 724-725:
"Whether or not s 177F(3) would be applicable if the interest payments were otherwise deductible under s 51(1), the commissioner maintains that the interest is not deductible under s 51(1). The commissioner may be right or wrong about that question. However, that question still remains to be determined. In so far as the commissioner is deferring the making of a decision as to the exercise of the discretion under s 177F(3) until that question is determined, that is a legitimate reason for doing so in circumstances where the commissioner takes the view, rightly or wrongly, that whether or not Pt IVA applies, the interest is not deductible under s 51(1).
Any determination by the commissioner under s 177F(3) would, of necessity, be provisional. That is to say, it would depend upon whether or not the commissioner's contention, that the interest payments are not deductible under s 51(1), is ultimately shown to be correct. Until that question is determined, the commissioner has a legitimate basis for not making a decision."
Emmett J held that, in consequence, no error of law was shown in the Commissioner's decision to delay making a s 177F(3) determination.
50 In at least one respect, Asiamet was a different case to the present one. The Commissioner does not deny, in this case, that there is a real possibility that he will ultimately be obliged to make a compensatory adjustment under s 177F(3), but he contends that there is no occasion to do so yet, since the outcome of the Pt IVC proceeding and the objection to the assessability of what the taxpayer has described as the receipts on the sale of lease tails is unknown.
51 ANZ's complaint is, essentially, that the Commissioner's approach is unfair, since, even if the Commissioner were correct in his s 177F(1) determination, ANZ's assessable income could not exceed $65 million. Asiamet was distinguishable, so counsel for ANZ submitted, because each of the assessments in that case could have been correct, although, as in Richard Walter, the Commissioner did not know, when the assessments issued, which one was correct. In this case, as already noted, ANZ submitted that the proper course would have been for the Commissioner to have issued an amended assessment for a taxable income of no more than $65 million. As ANZ observed in a Pt IVC proceeding, ANZ will only succeed if the Court finds that ANZ has established that the amount of the assessment was excessive (cf Dalco at 627 and 631) and it would be open to the Commissioner to support the assessment on any ground he thought fit (see Commissioner of Taxation v Australia and New Zealand Savings Bank Ltd (1994) 181 CLR 466 at 479). Counsel for ANZ submitted:
"[T]he point is this: if for example the Commissioner were to issue an assessment to a taxpayer on the basis that he derived assessable income and the Commissioner wasn't sure whether the amount was assessable say under section 25 or under the capital gains tax provisions or under a balancing charge under [section] 59 or under some other provision that brought into account profits from profit-making schemes for example, the Commissioner could issue an assessment, and if he assumed that the amount of taxable income was a hundred million dollars, he could issue that on the basis that the taxable amount was either under [ss] 25 or 59 or some other basis. He wouldn't go to each of the sections and take the amount and add them all together."
52 Moreover, the effect of the Commissioner's approach was, so ANZ submitted, to increase unjustifiably the amount of penalty tax. Pursuant to s 226, penalty tax is attracted where Pt IVA applies. Pursuant to s 226(1), where the Commissioner has calculated the tax assessable to a taxpayer in relation to a year of income, taking into account any s 177F(1) determination, and either no tax would have been assessable if no s 177F(1) determination was made or the amount of tax that would have been assessable if no s 177F(1) determination was made is less than the amount of tax calculated by the Commissioner, then 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. ANZ submitted that, by adopting a bottom line for taxable income that was more than $65 million, the Commissioner subjected ANZ to additional tax beyond the penalties that s 226(1) in fact contemplated.
53 Whilst ANZ's submissions initially had some attraction, I am not ultimately persuaded that it has made out its case in this proceeding. The Court is not now engaged in judicial review of the Commissioner's determination, or failure to make a determination, under s 177F(3) of the Act. As the Commissioner's counsel said, assuming the amount of $29 million was an integer in the tax benefit of $65 million and the amount of $29 million was also properly included as a separate item in ANZ's assessable income, then "it would be unfair to leave the position like that forever". The Act, however, provides for the procedures of objection, review and appeal, and it also provides that a compensating adjustment under s 177F(3) can be made at any time. In these circumstances, having regard to the operation of Pt IVA, especially s 177F(1)(a) and s 177F(3), I accept, as the Commissioner submits, that the matter falls properly to be judged at the conclusion of the objection, review and appeal processes and not earlier.
54 As already noted, the Commissioner submitted that, until the outcomes of these processes were known, any compensatory adjustment under s 177F(3) could prejudice the revenue. It cannot, I think, be said that the Commissioner's concern is entirely groundless. The effect of the determination under s 177F(1) was to include the whole of the tax benefit ($65,477,725) in ANZ's assessable income. This conforms to the decision in Spotless at 423-424: see also s 177C(1)(a) and s 177F(1). If the determination under Pt IVA stands, then the Commissioner has properly included this amount in ANZ's assessable income. Further, the amount of $29,086,863 has presently also been properly included as an amount returned as assessable income. Under the Act, these amounts represent different things, although their connection may ultimately lead the Commissioner to make an adjustment under s 177F(3). As counsel for the Commissioner said, if the Commissioner were to make a compensatory adjustment before the outcome of the objection to the assessability of the receipts on lease tails was known, he might subsequently find that the objection should be allowed. Alternatively, in the Pt IVC proceeding, ANZ may succeed in establishing that the s 177F(1) determination was in error and, for example, the tax benefit was less than the amount fixed by the Commissioner. In events such as these, if he had already made an adjustment under s 177F(3), the Commission might well find that he had acted to the prejudice of the revenue. I accept, as counsel for the Commissioner submitted, that it is unclear whether, in circumstances of the postulated kind, a s 177F(3) determination could be withdrawn. Further, with the passage of time, it appears that the Commissioner would be unable to amend the amended assessment for the 1992 year in the ordinary way.
55 It must be borne in mind that, where the Commissioner has made a s 177F(1) determination, s 177F(3) gives the Commissioner a limited discretion to excise an amount from the taxpayer's assessable income for the relevant income year. The Commissioner can exercise this discretion if, in his or her opinion, there has been included (or would but for s 177F(3) be included) in the taxpayer's assessable income for the income year an amount that would not have been included (or would not be included) in the taxpayer's assessable income of that income year if the scheme had not been entered into or carried out and it is fair andreasonable that that amount (or a part of that amount) should not be included in that assessable income for that year. Unless it can be said that the Commissioner was bound, in the circumstances of the case, to make a compensatory adjustment under s 177F(3) at the time of the determination, it would have been open to the Commissioner, in considering whether to make a s 177F(3) determination, to consider the possibility of risk to the revenue if he made a premature determination in the taxpayer's favour. For the reasons advanced by the Commissioner (and set out above) I am not persuaded that the revenue would necessarily have been adequately protected if the Commissioner had adopted the bottom line approach for which ANZ contended.
56 Further, there was in evidence correspondence between the parties that showed that, although they had discussed the matter of compensatory adjustments, ANZ had specifically refrained from requesting the Commissioner, under s 177F(5), to make a determination under s 177F(3). Counsel for ANZ submitted that this consideration had little, if any, bearing on the Commissioner's duty to make a s 177F(3) determination at the time of the s 177F(1) determination. As counsel for ANZ pointed out, the Explanatory Memorandum that accompanied the Income Tax Laws Amendment Bill (No 2) 1981 (which, when enacted, introduced Pt IVA) stated that subs 177F(5) and associated subsections were designed to extend the benefit of the ordinary objection and appeal provisions to a taxpayer who is dissatisfied with any decision of the Commissioner to not make a s 177F(3) determination. This includes a taxpayer who would not otherwise have objection and appeal rights because the Commissioner had not issued an assessment to that taxpayer to give effect to a s 177F(1) determination, although the determination had consequences for the taxpayer's taxation position. As the Explanatory Memorandum observed, at p 18, the objection, review and appeal "procedures may not be available to a taxpayer in a situation where Part IVA has been applied against another taxpayer and the Commissioner considers that the case is not one calling for him to make a compensating adjustment …". As the Court recognised in Mochkin at [13], however, the terms of s 177F(5) are wide enough to include a taxpayer who, like ANZ, has objection, review and appeal rights. Further, counsel for ANZ ultimately conceded, there was nothing to prevent ANZ from making a request, under s 177F(5), for the Commissioner to make a determination in its favour, pursuant to s 177F(3). In light of these matters, in delaying the making of a s 177F(3) determination, it was open to the Commissioner to have regard to the fact that ANZ expressly stated that it had not made a request under s 177F(5) for a compensatory adjustment under s 177F(3). If ANZ had made such a request, then the Commissioner would have been obliged to consider it: see s 177F(6) of the Act. If the Commissioner were subsequently to make a determination under s 177F(3) in favour of ANZ, the Act contemplates that the Commissioner will give effect to the determination by making an amended assessment to reduce ANZ's liability. By virtue of s 177G(2) of the Act, the Commissioner is authorised to amend an assessment at any time to give effect to a determination under s 177F(3).
57 In summary, the Commissioner is not, in every case, obliged to make a determination under s 177F(3) at the same time as he makes a s 177F(1) determination or, in any case, prior to issuing any assessment to give effect to the s 177F(1) determination. In many cases, a determination under s 177F(3) would, if made at such a time, itself be provisional: see Asiamet at 724-725. There is, moreover, nothing shown in this case to warrant a finding that the Commissioner was bound to make an adjustment under s 177F(3) before issuing the amended assessment. The Brief did not, in my view, constitute evidence that the Commissioner knew, at the time of the s 177F(1) determination and the amended assessment, that he would necessarily be obliged to make an adjustment under s 177F(3). It is plain enough that the authors of the Brief thought of this merely as a possibility. I accept that, as counsel for the Commissioner contended, this fell well short of an acknowledgement, on the Commissioner's part, that there would necessarily be a need for a compensatory adjustment if the Commissioner were to proceed under Pt IVA. In the circumstances of the case, it was open to the Commissioner to delay making a determination under s 177F(3) of the Act for reasons that included the possible risk to the revenue if a premature determination were made and the fact that the taxpayer had not, in any event, made a request under s 177F(5) for a compensatory adjustment under s 177F(3) of the Act.
58 Further, the Commissioner's state of mind, if relevant at all, can only be relevant as at the time of the amended assessment: see Kolotex Hosiery (Australia) Pty Ltd v Commissioner of Taxation (1975) 132 CLR 535 at 541 per Barwick CJ. The Brief, as I have called it, was prepared over 18 months before the determination and the amended assessment. Prima facie, it is not evidence of the Commissioner's state of mind in June 1999. ANZ submitted, however, that, if the Commissioner knew, in September 1997, that ANZ had returned the amount of $29,086,863 in its assessable income for the 1992 year and that this amount had to be taken into account in making a s 177F(1) determination and issuing an assessment to give it effect, then such knowledge was not lost at the time of the amended assessment since there was no change in circumstances in the intervening period. Referring to the Brief, counsel for ANZ submitted that:
"All this amounts to is an acknowledgment as early as September 97 that the $29 million had been included and that a determination of $65 [million], with an assessment to take you to a total of $94 [million] would involve double counting. Once we fix that knowledge in the Commissioner, it's really for him to show … that something has changed."
59 I do not, however, accept ANZ's submission that, having regard to the Brief, ANZ has discharged its evidentiary burden in establishing that, at the time of the amended assessment, the Commissioner's state of mind was as ANZ alleges. I reject ANZ's submission that it was incumbent on the Commissioner to produce evidence to show that he did not have the alleged knowledge. I doubt that the Brief is admissible evidence of the Commissioner's state of mind in June 1999, at the time of the amended assessment. As already noted, the authors of the Brief themselves noted that there was a need for further information before "conclusive views can be drawn". Whatever the advice of internal tax counsel, it was not before the Court. It is, of course, likely that there was material on the Commissioner's file that would, if in admissible form, provide evidence of the Commissioner's state of mind at the relevant time, but none of this was in evidence before me.
60 By his defence, the Commissioner admitted that, at the time of the determination and the amended assessment, he knew that ANZ claimed to have returned the amount of $29,086,863 as assessable income for the 1992 year. The terms of the Brief support this concession. At most, if in admissible form, the Brief would be evidence of the Commissioner's provisional reasoning processes some 18 months prior to the issue of the amended assessment. There is, however, no evidence concerning the Commissioner's reasoning at the time of the amended assessment. As already noted, no officer of the Commissioner gave evidence as to the reasoning that led to the making of the determination and the amended assessment. Ms Schober, the officer of the Commissioner responsible for the determination and the preparation of the amended assessment, was available for cross-examination and in court during the hearing. It would have been open to ANZ to have cross-examined her on her reasoning process at the time of the assessment. ANZ did not do so. In this circumstance, I would not draw any inference against the Commissioner from the very partial evidence before me. The fact is that ANZ did not put to Ms Schober that the process through which she went in making the determination and preparing the amended assessment was anything other than a proper process. It follows from the foregoing that I reject ANZ's submission that the Brief can be relied on as evidence that the amended assessment was tentative or provisional.
61 In support of its contention that, in the absence of a compensatory adjustment, the amended assessment was provisional or tentative, counsel for ANZ also relied on the decision of the High Court in Hoffnung, in which Isaacs J said at 55-6:
"If an assessment definitive in character is made, it assumes that, so far as can there be seen, a fixed and certain sum is definitely due, neither more nor less. In short, it ascertains a precise indebtedness of the taxpayer to the Crown. But if an assessment is made which recognizes that one matter is unsettled and remains for settlement, and until it is settled - and probably to the advantage of the taxpayer - then, if that is the basis of the assessment, it is not the assessment contemplated by the Act. Every assessment, of course, contemplates that it may appear thereafter that an alteration or addition is necessary. But that is a different thing - there is no then existing matter known to be a presently necessary factor and put aside for future adjustment."
62 As Mason and Wilson JJ remarked in Bloemen at 374, in Hoffnung and in Kellow-Falkiner Pty Ltd v Federal Commissioner of Taxation (1928) 34 ALR 276 at 279:
"Visual inspection alone was sufficient to compel the conclusion that the document was not a notice of assessment for the purpose of the relevant Act."
Also in Bloemen, Aickin J said at 380-381:
"In [Hoffnung] the Commissioner at the time of making the 'assessment' had intimated to the taxpayer that 'this matter remained to be adjusted and that pending such adjustment payment of tax was to remain in abeyance. … . In [Hoffnung] it is important to observe that, as well as the fact that the paper accompanying the original assessment described it as tentative, in the notification of the amendment of the assessment made in August 1923 the Commissioner struck out the printed words on the notice which specified the time within which an objection could be lodged."
Hoffnung was, plainly enough, a very different case from the present. It provides little, if any, support for ANZ's submissions in this case.
63 In Simons v Commissioner of Taxation ("Simons"), which was heard and reported with Bloemen, the High Court held that an assessment was not tentative or provisional merely because a notice of assessment was accompanied by an adjustment sheet that said (at 147 CLR 363):
"Your assessment will be reviewed upon determination of the objection against your assessment of 30 June 1977."
In Bloemen and Simons, Mason and Wilson JJ, with whom Stephen J agreed, said at 378:
"The Bloemen notice of assessment is in form an assessment. It sets out the ascertainment of the taxpayer's taxable income and the tax payable thereon. It is therefore appropriate to bring s. 177(1) into operation. Its production will put beyond contention the due making of the assessment so that the Court cannot find that no assessment was made or that, if made, it was made for an inadmissible purpose.
The Simons notice, if read with the adjustment sheet, is more debatable. However, we read it as a definitive assessment by the Commissioner intended to create a legal liability to pay the tax specified, coupled with an intimation that the Commissioner will review the taxpayer's liability in a certain event. If it be assumed that the Commissioner lacks power to amend the assessment in the circumstances contemplated this does not affect our conclusion. It merely means that the Commissioner is mistaken in supposing that he has power to review. Accordingly, the notice of assessment will, on production, bring s. 177(1) into play."
See also Bloemen (and Simons) at 381-382 per Aickin J. Although the notice contemplated a review of the assessment, this fact did not establish that the assessment was tentative at the time it was issued.
64 In Bloemen, Mason and Wilson JJ said at 377-8:
"It is one thing to say that a notice of tentative assessment is not touched by ss. 175 and 177. That is clearly correct. But it is difficult to understand how it can be said, consistently with those sections, that a notice which appears to be a final notice of assessment is nevertheless not what it appears to be because there is no assessment at all. … .
The Commissioner may be right or wrong in his view of the facts, but it would appear to be incontrovertible that the figure on the notice of assessment which records the Commissioner's view of the taxable income evidences that a process of assessment was actually undertaken however cursory or inadequate that process may have been. … . In Trautwein v Federal Commissioner of Taxation [(1936) 56 CLR 63 at 87-88] Latham CJ was discussing the difficulty of the Commissioner's task in making an assessment when the materials were inadequate. He continued:
'The application of sec. 39 (cf s 177), is not, in my opinion, excluded as soon as it is shown that an element in the assessment is a guess and that it is therefore very probably wrong. It is prima facie right - and remains right until the appellant shows that it is wrong.'
In our opinion, it must follow that a notice in proper form of an assessment necessarily compels the conclusion that there was an assessment made in fact."
65 Whilst subsequent cases have explored the limits of these principles, they have not altered them. In Richard Walter, the High Court held that the fact that two assessments, against different taxpayers, included the same amount in the assessable income of each in the same year, did not require the conclusion that the assessments were tentative. Brennan J explained at 200-201:
"Richard Walter submits that two persons cannot be severally liable each in its own right to have included in its individual assessment the same income for the same year. This is the submission which the unsuccessful taxpayer made in Richardson v Federal Commissioner of Taxation [(1932) 48 CLR 192 at 205]. It cannot be accepted now. The function of the Commissioner in making an assessment is to take a view of the facts, so far as a view can reasonably be taken from the information in his possession, and to apply the general provisions of the Act so as to arrive at the taxpayer's taxable income and to define the tax liability accordingly. … .
It must be remembered that the Commissioner's function is administrative, not judicial. The power to assess is, as s 167 shows, not limited to cases where the Commissioner has enough information on which to make a positive finding of fact."
66 After referring to the observations of Mason and Wilson JJ in Bloemen, McHugh J said, at 237, of each of the notices in Richard Walter, that:
"On its face, each of the documents issued to the taxpayer is in the form of an assessment within the meaning of s 6 of the Act. It specifies that a fixed sum is definitely due and payable by the taxpayer. There is nothing tentative or provisional about the tax liability that it assumes."
67 In considering ANZ's submissions in this case, the policy of the Act, and in particular s 175 and s 177(1), should be borne in mind. In McAndrew v Federal Commissioner of Taxation (1956) 98 CLR 263 at 270, Dixon CJ, McTiernan and Webb JJ said:
"The ground over which s 177(1) gives conclusiveness to the assessment is described as the due-making of the assessment and the correctness of the amount and all the particulars of the assessment. But that appears to us to comprise the whole ground. It is the manifest policy, one may now almost say the historical policy, of the legislation on the one hand to give to the taxpayer full opportunity on objecting to his assessment of contesting his liability in every respect before a court or before a board of review but on the other hand to require that in proceedings for the recovery of the tax the taxpayer will be concluded by the assessment and will not be entitled to go behind it for any purpose."
68 This is not a case in which the assessment was merely a figure "pulled out of the air" as in Briggs: see Briggs at 308, as discussed by Hill J in McCleary at 4,270. Further, the present case is not like Stokes, where the Commissioner, on the one day, issued to the one taxpayer, three notices of amended assessment, each referring to a different taxable income and a different tax payable. As the Full Court said in Stokes at 173 "the Commissioner had not exercised the function of assessment so as to create a definitive liability [and] a fortiori there had not been a bona fide exercise of that function".
69 In this case, the Commissioner apparently considers that, depending upon the outcome of the Pt IVC proceeding and the objection process, it may well be appropriate for him to issue a further amended assessment, in consequence of the need to make a compensatory adjustment or otherwise to give effect to the decision of the Court. It does not follow from this, however, that the amended assessment is tentative or provisional in the Hoffnung sense. To adopt what Hill J said in McCleary at 4,270:
"In summary, it can be said that the conclusion that an assessment is tentative will ordinarily emerge from an examination of the assessment itself, as in Hoffnung. The mere indication that an assessment will be reviewed later does not require the conclusion that the assessment is tentative … . Nor will an assessment be regarded as tentative in the relevant sense, even if two assessments have been issued to different taxpayers concerning the same income with the consequence that one of them must necessarily be reduced to nil: Richard Walter. Provided the notice of assessment purports to create a definitive liability and at least there is no evidence to the contrary, the assessment will not be tentative." [Emphasis original]
70 In the present case, the evidence falls short of demonstrating that the amended assessment in question was tentative or provisional. It is not to be treated as tentative, simply because officers of the Commissioner contemplated that it might be the subject of a compensatory adjustment in the future, or may not entirely survive a proceeding under Pt IVC.
71 Further, the evidence does not show a want of bona fides in the Hickman sense. ANZ relied on the decision in Darrell Lea in support of its submission that the Commissioner had failed to satisfy the Hickman test with respect to the amended assessment. In Darrell Lea, the Commissioner issued four notices of assessment of sales tax, each purporting to give notice of different assessments in respect of the same goods. The Commissioner conceded that, at the time the assessments were made, he knew that none of the assessments could be correct: see Darrell Lea at 179. The Full Court observed at 186-7:
[I]t was critical in Richard Walter that at the time the Commissioner made each of the two assessments he was bona fide able to form the view that each could be correct. While it is true that both could not stand together, it was equally true that one or other of them could be completely correct. Which one, if either was completely correct, of course, was not at that stage known by the Commissioner.
…
There will of course be cases where there will be uncertainty as to the facts. But that uncertainty will not invalidate a bona fide attempt to assess. 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 of ascertaining or determining the real sale value and sales tax payable on the relevant transaction.
…
[O]nce 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.
72 In this case, the Commissioner has made no concession or admission of the kind made in Briggs or Darrell Lea that he assessed ANZ on facts known to be wrong, or that he made no attempt to assess the taxpayer's taxable income at all. Bearing in mind that the Brief did not provide evidence of the Commissioner's state of mind at the time of the determination and the assessment, the evidence falls short of the proof of circumstances that could constitute bad faith: cf Dan at 4,355-4,356 [34] per Lindgren J; San Remo at 5,154 [83] per Hill J; and Bloemen at 375-376 per Mason and Wilson JJ. For the reasons already stated, I would not infer from the documentary material on which ANZ relied that the Commissioner knew that the view of the facts that led him to make the determination and to issue the amended assessment to give effect to it was wrong, or that he knew that he would necessarily be obliged to make a compensatory adjustment under s 177F(3) of the Act.
73 In summary, the Commissioner conceded that a compensatory adjustment might be required if the amended assessment and the determination withstood challenge in the Pt IVC proceeding (but not that he knew ANZ's liability was less than that for which it had been assessed). The force of ANZ's submission was that the Commissioner's approach worked an unfairness to it that was not contemplated by the Act. But even on the assumption that the Commissioner knew that he might have proceeded in error and that ANZ might succeed in the Pt IVC proceeding in showing the amended assessment is excessive, I would not infer bad faith on the Commissioner's part. Even if the Commissioner's approach is erroneous, I accept that, for the reasons given by his counsel, it would be open to the Commissioner to take the view that his approach is necessary to protect the revenue and that any unfairness to ANZ can be remedied at the end of the objection, review and appeal processes.
74 For these reasons, I reject ANZ's submissions that either the amended assessment of 15 June 1999 or the amended assessment of 12 June 1999 was tentative or provisional, or that there has been no bona fide attempt on the Commissioner's part to exercise his power to assess ANZ's taxable income for the 1992 income year.
the issue of authority
75 ANZ also submitted that the determination was invalid because the officer who made the determination made it in her own name and not "in the name of and on behalf of" a Deputy Commissioner of Taxation, as the terms of the officer's authorisation required.
76 The Commissioner contended that the Court should not entertain this submission, which is raised in the Pt IVC proceeding. In the alternative, the Commissioner submitted that the submission as to lack of authority was ill-founded and that the relevant officer had properly exercised the authority, which was duly conferred upon her, in making the determination.
77 As already stated at [32] above, the making of a determination under s 177F(1) of the Act forms part of the "making of the assessment" for the purposes of s 177(1) of the Act: see Meredith v Commissioner of Taxation (2002) 192 ALR 418 ("Meredith") at 429; Dan at 4,357 [37] to [40]; and Richard Walter at 178 per Mason CJ and 203 per Brennan J. ANZ did not dispute that the determination was a bona fide attempt to exercise power pursuant to s 177F(1)(a) of the Act. Apart from the issue of authority, there was no other basis upon which ANZ contended that the determination was not in truth a determination under s 177F(1). Absent a lack of bona fides or some other failure to satisfy the Hickman test, the determination under s 177F(1) is protected by s 177(1) of the Act. It follows that the Court cannot, in this proceeding, consider and determine ANZ's submission on the question whether the determination was made in the proper exercise of authority.
78 In Meredith v Federal Commissioner of Taxation 2001 ATC 4595 at 4,603-4,604, French J agreed with Lindgren J in Dan, that the making of a determination under s 177F, when followed by an assessment tendered by the Commissioner in evidence, was part of the making of the assessment and within the protection of s 177(1) of the Act. Accordingly, subject to the Hickman principle, a s 177F(1) determination could be challenged in a Pt IVC proceeding but not otherwise. His Honour's decision was upheld on appeal: see Meredith. On the appeal, Lee and Cooper JJ (with whom RD Nicholson J agreed) said at 429:
"The making of determinations under s 177(1) [sic] and (2A) of the [Act] are part of the process of assessment and give rights of objection and appeal under Part IVC of the Taxation Administration Act 1953 (Cth). … .
…
The argument in respect of judicial review under s 39B of the [Judiciary Act] can be quickly disposed of. The amended notices of assessment which issued following the determination under s 177F(1)(a) of the [Act] were in evidence before French J. Section 177(1) of the [Act] operated to make the amended notices of assessment conclusive evidence of the due making of the assessment. As the making of the determination under s 177F(1)(a) was part of the process of making the assessment to which the notice related, French J was obliged to find that the determination under s 177F(1)(a) had been duly made. … . Accordingly, the proceedings seeking to invoke the jurisdiction of this court under s 39B of the [Judiciary Act] were bound to fail … ."
In challenging the authority of the officer who made the determination under s 177F(1) in this case, ANZ challenged part of the making of the assessment, which had been tendered in evidence. By virtue of s 177(1), this cannot be done in this proceeding and such a challenge can be pursued only in the Pt IVC proceeding.
disposition
79 For these reasons, I would dismiss the application brought by ANZ for declaratory relief pursuant to s 39B of the Judiciary Act. ANZ should pay the Commissioner's costs of and incidental to the proceeding, including the motion, notice of which was filed 12 October 2002.
I certify that the preceding seventy-nine (79) numbered paragraphs are a true copy of the Reasons for Judgment herein of the Honourable Justice Kenny.