It was Mr Duffus' view that the application came under both categories.
70 Dealing first with the question of non-compliance caused by delay of the taxpayer, Mr Duffus said that [85] of the Ruling referred to cases where no agreement had been made prior to lodgment of the return. Paragraph 88 indicated that the favourable exercise of the discretion would generally require the taxpayer to provide an acceptable explanation of the delay.
71 Mr Duffus referred then to the argument made by DRI and Development Finance that the transfer agreement was not entered into at the appropriate time because it had not been established that the relevant losses existed at the time of lodgment of DRI's 1999 return. Subsection 73B(1) of the ITAA 1936 had been amended in September 2001 after the date of lodgment of the return. The taxpayers had also referred to review processes involving the Board which were incomplete at the time of lodgment of the 1999 return. DRI had lodged a request for amendment on 14 May 2002 and had been advised on 13 August 2002 that the adjustment was allowed in full. A notice of assessment was not required to issue to DRI as it remained non-taxable. Although the adjustment was allowed in full DRI had been asked to provide the ATO with information about the claim as part of a specific risk review. That was completed on 4 February 2004 and DRI had been advised that the issue was rated as a low risk matter. Mr Duffus then said:
From 30 August 2002 the losses were available for transfer by BHPDRI. The taxpayers contend that no losses could be transferred with certainty until the ATO had completed its specific risk review. However, the ATO is of the view that this contention is not correct. Having been advised by the ATO of BHPDRI's adjusted loss position on 30 August 2002, the losses were available for transfer from this date. Nevertheless, BHPDRI chose not to immediately transfer the losses.
The ATO has formed the view that there is no basis to the claim that the taxpayers needed to await the finalisation of the ATO specific risk review to transfer the losses. Furthermore, the taxpayers waited until 8 June 2005 before requesting the loss transfer. This was less than a month after the issue of the amended assessment for BHPDF.
Mr Duffus concluded that, as there were both unavoidable and avoidable delays on the part of the taxpayers, the factor of delay should be taken into account but "… should not be weighted heavily against the favourable exercise of the discretion".
72 Mr Duffus then turned to the effect of ATO adjustments on the timing of the request for an extension. He referred to the imposition of primary tax of approximately $32 million in the amended assessment for Development Finance. Because Development Finance's behaviour had been culpable additional tax of approximately $8 million was imposed, being 25% of the tax avoided. A GIC in excess of $19 million was also imposed in the amended assessment. After the issue of the amended assessment a determination was also made under s 177F of Pt IVA of the ITAA 1936 in relation to Development Finance. He referred to the advice of the Panel that Pt IVA would apply in the event that the Court decided that a deduction were allowable under s 25-35 or s 8-1 of the ITAA 1997. Because the Panel recommended that Development Finance had a reasonably arguable position in relation to Pt IVA, a penalty of 25% was imposed and no further amendment was necessary because the rate of penalty was identical to that imposed in the amended assessment.
73 Referring then to [93] of Taxation Ruling TR 98/12, Mr Duffus observed that in cases where it cannot be said the conduct of the group is culpable in respect of its failure to comply with its obligations that would be a factor weighing in favour of an extension of time being granted. He then said:
In the matter under consideration, the Commissioner holds the view that [Development Finance] does not have a reasonably arguable position in relation to the bad debt claimed under either s 25-35 or 8-1 of the ITAA 97.
He cited [92] of the Ruling as indicating that nothing within the subject matter, scope and purpose of s 80G of the ITAA 1936 or Subdiv 170 of the ITAA 1997 would imply any limitation upon the Commissioner considering the conduct of a company group giving rise to an adjustment as being a relevant factor to the exercise of the discretion. He referred to examples given in [93] of factors weighing heavily against a favourable exercise of the discretion. He said:
The examples listed are where an adjustment is made as a result of fraud or evasion or a scheme to which Pt IVA applies. It is suggested in the ruling that these matters should be weighted heavily in considering whether to exercise the discretion. The heavy weighting reflects the need to penalise to a greater extent any taxpayers who are involved in these serious non-compliance activities. (emphasis added)
74 Mr Duffus noted that there was no indication in Taxation Ruling TR 98/12 of the weight to be placed on the fact that an adjustment had been made following audit activity which did not involve fraud or evasion or a scheme to which Pt IVA applies. Such an adjustment could result in the imposition of penalties if the taxpayer were found to be culpable. He considered that the fact of audit activity in those circumstances should not be weighted as heavily as the cases of fraud, evasion or Pt IVA schemes. He then said:
As [Development Finance's] behaviour has been found by the ATO to be culpable, it is considered that this factor should be taken into account in considering the exercise of the discretion. Given that an audit has been undertaken, the group's position on bad debts has been found to be unreasonably arguable and a penalty was imposed, it is appropriate to take this factor into account. It is therefore considered that a rating should be applied in relation to the culpable behaviour of [Development Finance] less than the high value ascribed in Taxation Ruling TR98/12 to, for example, tax avoidance.
It is also contended that as Pt IVA has been applied in the alternative to [Development Finance], it is not a factor that the Commissioner can ignore or disregard. It must therefore be a factor to be taken into account and heavily weighted in considering whether to apply the discretion to extend time to lodge the agreement under s 170-50 of the ITAA 1997.
75 Mr Duffus did not attach significance to the argument advanced by Development Finance that it would not need to apply to the Federal Court in relation to the disallowance of the objection if the loss transfer were allowed. The question whether a taxpayer proceeded to litigate a claim for a deduction was regarded as a separate issue to the exercise of the discretion for the transfer of a loss.
The grounds of review
76 The "grounds of review" in the application were preceded by 34 paragraphs of narrative reflecting the history outlined above. Omitting some of the lengthy particulars, the grounds are as follows:
35. The respondents had a duty in exercising the power under s 170-50(2)(d) of the 1997 Act to act fairly and in accordance with reasonable public standards.
36. The making of the decision was an improper exercise of the power conferred by s 170-50(2)(d) of the 1997 Act within the meaning of s 5(1)(e) of the ADJR Act because:
(a) the first respondent failed to take into account a relevant consideration or relevant considerations;
Particulars (of which there were 29)
(b) the first respondent took into account an irrelevant consideration or irrelevant considerations;
Particulars (of which there were 4)
(c) the first respondent exercised the power for a purpose other than a purpose for which the power is conferred;
Particulars
In the circumstances of this case, the decision is so unreasonable and unfair that such a purpose should be inferred.
(d) the first respondent exercised the power in accordance with a rule of policy, namely tax ruling TR 98/12 without regard to the merits of the particular case;
(e) the first respondent's exercise of the power resulted in unfairness amounting to an abuse of power;
(f) the first respondent's exercise of the power was so unreasonable that no reasonable person could have so exercised the power;
Particulars of subpars (e) and (f)
The conclusion by the first respondent that the applicants' delay in making the request until shortly after the issue of the BHPDF amended assessment should be weighed against the exercise of discretion was:
(i) so unreasonable that no reasonable decision-maker could have come to that conclusion;
(ii) so unfair so as to constitute an abuse of power.
37. The decision involved an error of law:
Particulars
(a) The first respondent made an error of law or fact in concluding that BHPDF's behaviour insofar as it prepared its income tax return on the footing that it was entitled to a deduction under s 8-1 or s 25-35 for a bad debt written off in the 1999 year was culpable.
(b) The first respondent made an error of law in concluding as he did that there was "nothing within the subject matter, scope and purpose of … Subdivision 170 of the [1997 Act] that would imply any limitation upon the Commissioner to consider the conduct of a company group giving rise to an adjustment as being a relevant factor to the exercise of the discretion".
(c) The first respondent made an error of law or fact in concluding that the applicants or any of them were involved in "serious non-compliance activities".
(d) The first respondent made an error of law in concluding that in the circumstances of this case where Part IVA was not applied when the BHPDF amended assessment was made and when the second respondent has conceded that it is reasonably arguable that Part IVA did not apply to deny the deduction of all or any part of the claim for a bad debt deduction, that the making of a Part IVA determination weighed heavily against the applicants in the exercise of discretion.
77 Alternatively, in reliance upon s 39B of the Judiciary Act, it was contended that the decision:
(a) was an improper exercise of the power to allow further time within which to make a loss transfer agreement;
(b) involved an error or errors of law;
(c) was not otherwise authorised by s 170-50(2)(d),
and accordingly each said decision was invalid, void and of [no] effect.
Statutory framework - transfer of tax losses within company groups
78 Section 170 of the ITAA as it applied to the tax year ended 30 June 1999 included the following provisions:
170-1 What this Subdivision is about
A company can transfer a surplus amount of its tax loss to another company so that the other company can deduct the amount in the income year of the transfer. Both companies must be members of the same wholly-owned group.
170-5 Basic principles for transferring tax losses
(1) A company can transfer a tax loss to another company so that the other company can deduct it in the income year of the transfer.
(2) Both companies must be members of the same wholly-owned group. There are other eligibility requirements that they must also satisfy.
(3) The transferred loss must be "surplus" in the sense that the transferring company cannot use it because there is not enough assessable income to offset it. The other company must have enough assessable income to offset the transferred tax loss.
(4) Neither company must be prevented from deducting the loss by Division 165 or 175.
(5) The tax loss is transferred by an agreement between the 2 companies.
(6) The tax loss can be transferred in the same year as it is incurred. In that case different rules apply.
170-10 When a company can transfer a tax loss
(1) A company (the loss company) can transfer an amount of its tax loss for an income year (the loss year) to another company (the income company) if the conditions in this Subdivision are met.
(2) The amount transferred can be the whole or part of the tax loss.
170-15Income company is taken to have incurred transferred loss
(1) If an amount of a tax loss is transferred, the amount is taken to be a tax loss incurred by the income company in the loss year.
(2) However, if the loss year is the same as the income year of the transfer, the income company is taken to have incurred the tax loss in the income year before the loss year.
170-20 Who can deduct transferred loss
(1) If an amount of a tax loss is transferred, the income company can deduct the amount in accordance with section 36-15 (which is about how to deduct a tax loss), but only for the income year of the income company for which the amount is transferred. That income year is called the deduction year.
(2) The loss company can no longer deduct the transferred amount and is taken not to have incurred the tax loss to the extent of that amount.
170-25 Tax treatment of consideration for transferred tax loss
(1) If the loss company receives any consideration from the income company for the amount of the tax loss:
(a) so much of the consideration as is given for the amount of the tax loss is neither assessable income nor exempt income of the loss company; and
(b) a capital gain does not accrue to the loss company because of the receipt of the consideration.
(2) If the income company gives any consideration to the loss company for the amount of the tax loss:
(a) the income company cannot deduct the amount or value of the consideration; and
(b) the income company does not incur a capital loss because of the giving of the consideration.
79 Section 170-45 provides for the maximum amount that can be transferred.
170-45 Maximum amount that can be transferred
(1) The amount transferred cannot exceed the amount of the loss company's tax loss that, apart from the transfer, the loss company would carry forward to the next income year after the deduction year.
(2) The amount transferred also cannot exceed the amount worked out as follows:
Method Statement
Step 1 Add together the income company's assessable income and net exempt income (if any) for the deduction year.
Step 2 Subtract the income company's deductions for the deduction year, except deductions for amounts of tax losses transferred to the income company (by the loss company or any other company).
Step 3 Subtract the income company's deductions for the deduction year for amounts of tax losses transferred to the income company (by the loss company or any other company) by agreements made before the agreement by which the first amount is transferred.
…
170-50 Transfer by written agreement
(1) The transfer must be made by a written agreement between the loss company and the income company.
(2) The agreement must:
(a) specify the income year of the transfer (which may be earlier than the income year in which the agreement is made); and
(b) specify the amount of the tax loss being transferred; and
(c) be signed by the public officer of each company; and
(d) be made on or before the day of lodgement of the income company's income tax return for the deduction year, or within such further time as the Commissioner allows.
Legislative history relating to extension of time for transfer of losses in company groups
80 Section 80G of the ITAA 1936, which was replaced by s 170-50 of the ITAA 1997, was enacted in 1984 by the Income Tax Assessment Amendment Act (No 4) (1984)(Cth). As originally enacted, it contained no requirement for a written transfer agreement. The relevant equivalent condition of the treatment of the transferred loss as a loss of the "income company" was set out in s 80G(6)(c):
The loss company and the income company give to the Commissioner, on or before the date of lodgment of the return of income of the income company for the income year or within such further time as the Commissioner allows, a notice in writing signed by the public officer of each of the companies stating -
(i) that the right to an allowable deduction under sub-section 80(2), 80AAA(7) or 80AA(4), as the case requires, in respect of so much of the whole or a specified part of the loss as has not been allowed as a deduction should be transferred to the income company in the income year; and
(ii) the year of income in which the loss was incurred by the loss company;
81 In 1992 the Taxation Laws Amendment (Self Assessment) Act 1992 (Cth)(SAA) amended s 80G by amending s 80G(6)(c) and inserting a new s 80G(6A). The new provisions read as follows:
(c) the loss company and the income company agree that the right to an allowable deduction under subsection 79E(3), 79F(6), 80(2), 80AAA(7) or 80AA(4), as the case requires, in respect of so much of the whole or part of the loss as has not been allowed as a deduction should be transferred to the income company in the income year;
(6A) An agreement under paragraph (6)(c) must be:
(a) in writing and signed by the public officer of each of the loss company and the income company; and
(b) made before the date of lodgment of the return of income of the income company for the income year or within such further time as the Commissioner allows.
82 DRI and Development Finance submitted that the requirement to enter into an agreement to transfer losses was procedural only. The 1992 amendment to s 80G requiring an agreement, where previously a notice had been sufficient, did not alter the procedural character of the conditions for effective transfer of losses. The changes simply reflected the introduction of the self-assessment regime.
Statutory framework - public taxation rulings
83 Given the emphasis upon the application of TR 98/12 in the decision under review, it is helpful to have regard to the statutory provisions relating to public rulings which were in place at the time the decision was made.
84 Internal directions or rulings by the Commissioner about the way in which tax laws should be applied by officers of the ATO have been a feature of the administration of the Australian tax system for a long time. However from 1 December 1982, following the introduction of Commonwealth Freedom of Information legislation, Taxation Rulings were publicly promulgated in a formal way. The development of a statutory basis for such rulings and the attachment to them of legal consequences binding on the Commissioner, followed the November 1987 Report of the Senate Standing Committee on Legal and Constitutional Affairs entitled "Income Taxation Rulings". The 1991 Budget papers issued by the Commonwealth Government included an Information Paper entitled "Improvements to Self-Assessment Priority Tasks (August 1991). That paper foreshadowed the introduction of the Taxation Rulings system which occurred in the following year: see Cooper, Deutsch and Krever, Income Taxation Commentary and Materials (2nd ed, Law Book Co 1993) at 2-25 et ff.
85 A statutory provision for Taxation Rulings was introduced, as an incident of the self-assessment system by the SAA. The SAA enacted a new Pt IVAAA of the Taxation Administration Act 1953 (Cth) (TAA). It commenced to operate from 1 January 1992 and continued operating until the end of 2005 when it was repealed by the Tax Laws (Improvements to Self-Assessment) Act (No 2) 2005 (No 161 of 2005). By that amending Act PT IVAAA was replaced by Div 357 in Schedule 1 of the TAA. In the present case the relevant ruling was made under Pt IVAAA of the TAA which was the applicable Act governing taxation rulings at the material times.
86 It is important to observe from the outset that the rulings made under the Act were not statutory rules. They had statutory consequences binding the Commissioner in such a way that taxpayers who had relied upon a rule were not disadvantaged if the ruling turned out to be more favourable than the law which it purported to apply.
87 The term "public ruling" in Pt IVAA was defined in s 14ZAAA as:
… a ruling under s 14ZAAE, 14ZAAF or 147AAG.
Section 14ZAAD made provision for public rulings relating to the exercise of discretions by the Commissioner:
A public ruling on the way in which a tax law applies may be a ruling on the way in which a discretion of the Commissioner under that law would be exercised.
The kinds of ruling that the Commissioner could make under Pt IVAAA were set out in ss 14ZAAE, 14ZAAF and 14ZAAG. Each respectively authorised public rulings on the way in which, in the Commissioner's opinion, a tax law or tax laws would apply to:
(i) any person in relation to a class of arrangements (s 14ZAAE);
(ii) a class of persons in relation to an arrangement (s 14ZAAF);
(iii) a class of persons in relation to a class of arrangements (s 14ZAAG).
88 The term "arrangement" was defined broadly and non-exhaustively in s 14ZAAA to include scheme, plan, action, proposal, course of action, course of conduct, transaction, agreement, understanding, promise or undertaking and also included "part of an arrangement". The term "tax law" was defined to include "an income tax law". Sections 14ZAAI and 14ZAAJ provided respectively for the procedures for publication of a public ruling and the date upon which such rulings came into effect. The withdrawal and effect of withdrawals of public rulings were dealt with in s 14ZAAK and 147AAL. The legal effect of the application of a public ruling to a person, a class of persons or an arrangement or class of arrangement was not stated.
89 The legal consequences of taxation rulings relevant to income tax were to be found in ss 170BA to 170BI of the ITAA 1936. If under a public ruling the income tax law was applied in a way more favourable to a taxpayer than the law actually allowed, then the amount of tax in an assessment relevant to that purpose could not exceed what it would have been under the public ruling.
A taxation ruling about taxation rulings
90 On 1 July 1992 the Commissioner published a Taxation Ruling TR 92/1 entitled "Income tax and fringe benefits tax: public rulings". It was said in [1] to outline the system of public rulings under the income tax and fringe benefits tax laws after the SAA became law. The ruling explained in [16] that "A public ruling is binding if it can be said to be favourable to a person". A public ruling about an arrangement would be said to be favourable if:
(i) the way in which a tax law applies to a person in relation to that arrangement is different from the way the public ruling states that the law applies; and
(ii) the tax payable under an assessment or the amount of withholding tax payable would (apart from the binding public ruling provisions) be more than it would have been if the interpretation of the law stated in the public ruling had been applied, (sections 170BA & 170BD of the ITAA, section 74A of the Fringe Benefits Tax Assessment Act 1986 (FBTAA)).
A favourable public ruling concerning a tax other than withholding tax was said in [17] to be "binding" in the sense that:
… the assessment and the amount of tax payable must be what they would have been if the interpretation of the law stated in the public ruling applied (section 170BA of the ITAA; section 74A of the FBTAA). Accordingly, a taxpayer can, and we believe should, self assess in line with a favourable public ruling. If the Commissioner makes an assessment involving that matter, the law compels the Commissioner to act in accordance with the favourable public ruling.
91 Taxation Ruling 92/1 was withdrawn on 5 April 2006. Its withdrawal followed the issue of Draft Taxation Ruling TR 2006/D6 which was described as outlining "the system of public rulings following the enactment of the Tax Laws Amendment (Improvements to Self-Assessment) Act (No 2) 2005 (Cth).
Taxation Ruling TR 98/12
92 Taxation Ruling TR 98/12 which was dated 8 July 1998 was entitled "Income tax: transfer of losses: section 80G (Subdivision 170-A)". It was said, in its Preamble, to be a "public ruling" in terms of Pt IVAAA of the TAA and legally binding on the Commissioner.
93 The Ruling comprised a Preamble, a paragraph describing its subject matter under the heading "What this Ruling is about" ([1]), two paragraphs under the heading "Date of effect" ([2] and [3]) and a paragraph relating to "Previous Rulings" ([4]). Paragraph 5 set out "Definitions". Paragraphs 6 to 20 inclusive appeared under the heading "Ruling". They were followed by [21] to [94] inclusive under the heading "Explanations". There then followed a heading "Examples" covering [95] to [101] inclusive. The last heading was "Detailed contents list". The Ruling parts of the document therefore appeared to be contained in [6] to [20] inclusive. Paragraphs 17 to 20 inclusive appeared under the subheading "Exercise of the discretion under subsection 80G(6A) (paragraph 170-50(2)(d))". Under the heading "Explanations" there was another section which dealt with the exercise of the discretion. This covered [81] through to [94] inclusive.
94 Paragraphs 18 to 20, dealing with the exercise of the discretion, under the general heading "Ruling" stated, inter alia:
18. In exercising the discretion under subsection 80G(6A) (paragraph 170-50(2)(d)), the Commissioner is guided by administrative law principles. These include an obligation to identify and consider all factors that may be relevant to the exercise of the discretion and to give them an appropriate weighting. In determining the relevant factors and their weighting, the Commissioner has regard to the policy of section 80G (Subdivision 170-A) and its context within the Act. Although each case must be decided on its merits, this Ruling provides a guide to taxpayers and ATO officers as to what factors may be relevant in the exercise of the discretion.
19. In cases where there has been delay on the part of the relevant companies in effecting an agreement, the principles outlined in Hunter Valley Developments Pty Ltd & Ors v Minister for Home Affairs and Environment … (1984) 3 FCR 344 … and subsequent supporting authorities in respect of statutory discretions to extend time, is relevant to the subsection 80G(6A) (paragraph 170-50(2)(d)) discretion. Following Hunter Valley Developments, the statutory time limit is not to be ignored and, prima facie, agreements must be made within time. Therefore, the onus is on the taxpayer to demonstrate to the Commissioner that the case is an appropriate one for the favourable exercise of the discretion. This generally requires the taxpayer to provide an adequate explanation for the delay.
20. In cases where an agreement is sought to be made out of time as a result of an adjustment to the tax position of the company group by the Commissioner, a relevant factor is the conduct giving rise to the adjustment. For example, where there is fraud or evasion, or a scheme to which Part IVA of the Act applies, this factor weighs heavily against a favourable exercise of the discretion. Conversely, where an adjustment stems from conduct which could not be regarded as culpable, this factor would be weighted in favour of the extension of time being granted.
95 In the section under the heading "Explanations" which dealt with the discretion it was said, in [82]:
This part of the Ruling provides a general guide for taxpayers and officers of the ATO when considering the exercise of the discretion. This is desirable in the interests of consistent, efficient administration and equity among taxpayers in similar circumstances. However, the decision-maker must exercise the discretion according to the merits of each case and should not fetter the discretion by inflexibly applying, or acting in blind obedience to a policy or rule …
There were then set out in [83] and [84] "Factors relevant to the exercise of the discretion". Those two paragraphs provided:
83. The exercise of the discretion under subsection 80G(6A) (paragraph 170-50(2)(d)) includes a two-step process of identifying relevant factors and applying a weighting to each of those factors, having regard to the circumstances of the case. Further, it is for the decision-maker to determine the appropriate weighting to be applied to these factors - see Minister for Aboriginal Affairs and Anor v Peko-Wallsend Ltd and Ors (1986) 162 CLR 24.
84. Applications for the exercise of the discretion usually fall into one of two broad categories. The first is where it can be said that there has been delay on the part of the taxpayer that results in non-compliance with the … time limit. The second is where the request for an extension of time to make an agreement arises out of an adjustment to the tax position of the company group by the Commissioner. The following paragraphs outline the factors the Commissioner considers to be relevant to the exercise of the discretion … in both categories, although they are by no means exhaustive.
96 Paragraphs 85 through to 90 dealt with non-compliance with the time limit caused by delay of the taxpayer. Paragraph 85 provided:
This category encompasses cases where no agreement has been made prior to the date of lodgment of the income company's return or, where an agreement has been made, the group subsequently discovers, for example:
(i) there are further losses within the group available for transfer to the income company; or
(ii) the income company has additional income against which unused losses within the group can be offset.
The relevant principles applied were those in Hunter Valley Developments v Cohen (1984) 3 FCR 344:
86. In these cases, the Commissioner considers that the principles outlined by Wilcox J in Hunter Valley Developments in respect of statutory discretions to extend time are relevant to the subsection 80G(6A) (paragraph 170-50(2)(d)) discretion, although the case was decided in the context of a different statutory provision.
87. The Commissioner also considers these general principles need to be balanced with a consideration of the underlying policy of section 80G (Subdivision 170-A) (to broadly align the treatment of company groups with divisional companies) and the wider consideration of the proper administration of the Act.
88. In Hunter Valley Developments, Wilcox J stated that statutory time limits are not to be ignored and the onus is on the applicant to convince the decision-maker that the case is an appropriate one for a favourable exercise of the discretion. This would generally require the taxpayer to provide an acceptable explanation of the delay.
89. The length of the delay in making an agreement after the prescribed time is relevant to the exercise of the discretion. Generally, the longer the delay, the greater the onus is upon the applicant to demonstrate an acceptable explanation for the delay (see Stergis and Ors v Boucher and Anor (1989) 86 ALR 174; … Also, it should not be assumed that the Commissioner will automatically exercise this discretion in circumstances where the request is lodged within the objection period relating to assessments.
90. The Commissioner will weigh the explanation of delay with the other relevant factors referred to in Hunter Valley Developments (for example, public interest considerations and the question of prejudice to either party arising from the exercise or non-exercise of the discretion).
97 Extension of time requests arising from ATO adjustments were dealt with in [91] to [93] which provide:
91. In this category, there is generally compliance with the requirement to enter into loss transfer agreements within the time stipulated in subsection 80G(6A) (paragraph 170-50(2)(d)). However, as a result of an adjustment to the taxation position of the group by the Commissioner, there is a request for an extension of time to enter into a further agreement or further agreements.
92. In Bond Corporation Holdings Ltd and Ors v Australian Broadcasting Tribunal (1988) 84 ALR 669, Gummow J stated the range of factors that can be considered in the exercise of an unfettered discretion (such as that contained in subsection 80G(6A) (paragraph 170-50(2)(d)) is unconfined, subject to any implied limitation within the relevant legislation. It is considered there is nothing within the subject matter, scope and purpose of section 80G (Subdivision 170-A) (or the rest of the taxation legislation) that would imply any limitation upon the Commissioner to consider the conduct of a company group giving rise to an adjustment as being a relevant factor to the exercise of the discretion.
93. Accordingly, where an adjustment is made, for example, as a result of fraud or evasion, or a scheme to which Part IVA applies, then this factor generally weighs heavily against a favourable exercise of the discretion. In a sense, it could be said in these circumstances the delay is directly attributable to the actions of the taxpayer. Conversely, in cases where it cannot be said the conduct of the group is culpable in respect of its failure to comply with its obligations under the law, this is a factor which weighs in favour of an extension of time being granted (eg, where a company was unclear as to the appropriate tax treatment for bill discounts prior to the High Court decision in Coles Myer Finance Ltd v FC of T (1993) 176 CLR 640).
The legal nature of a public ruling
98 Public rulings under Pt IVAAA of the TAA were not a species of delegated legislation. They were not given statutory force by the legislation. However certain legal consequences attached to them. Those could be found in ss 170BA to 170BI (inclusive) of the ITAA 1936. If, under a public ruling, the income tax law were applied in a way more favourable to the taxpayer than under the law properly construed, the amount of final tax, in an assessment in relation to that person, could not exceed what it would have been under the ruling. These provisions were repealed at the same time as Pt IVAAA of the TAA by No 161 of 2005.
99 In each of the three categories of ruling defined by s 14ZAAE to s 14ZAAG the subject matter was "… the way in which, in the Commissioner's opinion, a tax law or laws would apply …" to persons and arrangements or classes of persons and arrangements. The logic of that language confined the subject matter of the rulings which it authorised to "the Commissioner's opinion" on the way in which the law would apply. A ruling about the Commissioner's opinion in that context was a statement about how the Commissioner would apply the law. It was not the law. The power to make rulings did not authorise the application of the tax law in a way that was inconsistent with the law properly construed. It could neither narrow nor extend its application.
100 Section 14ZAAD of the TAA stated that a public ruling on the way in which a tax law applied could be a ruling on the way in which a discretion of the Commissioner under that law would be exercised. It did not thereby create a class of ruling outside those defined in ss 14ZAAE to 14ZAAG. Rather it indicated that a ruling about the exercise of statutory discretions could be made under one or other of those three sections. It would still, in that event, be a ruling "on the way in which, in the Commissioner's opinion, …" a discretion of the Commissioner under the relevant tax law would be exercised. The logical fit of s 14ZAAD rulings in the categories of rulings defined by ss 14ZAAE to 14ZAAG was not perfect. It was evidently designed to allow the Commissioner to promulgate, under the public rulings system, administrative policies about the exercise of statutory discretions. Such "rulings" did not differ in their legal character from administrative policies guiding the exercise of discretions published outside the framework of the public ruling system. In particular no such policy, whether ruling or not, could lawfully narrow the Commissioner's discretion. On general principles of administrative law the Commissioner would be entitled to apply a ruling so made as a general policy provided that each case were considered on its merits. To apply an administrative policy, ruling or not, on the basis that it must be applied in every case regardless of the particular circumstances of the case would involve anerror of law. The administrative law principles governing the application of administrative policy to the exercise of statutory discretions was recognised by the Commissioner in [82] of Taxation Ruling TR 98/12.
101 There were of course legal consequences which attached to a public ruling relating to a discretion where it could be said to be "favourable" to the taxpayer for the purposes of s 170BA. Just how such a circumstance would arise in relation to a public ruling about the way in which a discretion would be exercised is not apparent and did not arise in the present case.
102 Part IVAAA was considered by the Full Court in Bellinz v Commissioner of Taxation (1998) 84 FCR 154. The Court drew the following conclusions from the legislative scheme of Pt IVAAA:
1. … the issue of a public ruling is to be made in accordance with the Act as interpreted by the Commissioner and not in accordance with some practice which the Commissioner may have adopted, to the extent that that is inconsistent with the Assessment Act. What is to be ruled upon is the way in which, inter alia, the Act under which the extent of a liability for income tax of the appellants is to be worked out would apply.
2. A public ruling which is inconsistent with a prior public ruling may be made if the Commissioner decides that the law is otherwise than as stated in the initial public ruling. However the new ruling will not operate retrospectively in respect of arrangements commenced or brought into operation prior to the earlier ruling.
3. A public ruling which is inconsistent with a prior private ruling may be made if the Commissioner determines that the initial private ruling was wrong. In that case the initial private ruling will be taken to have been withdrawn: …
4. The binding quality which the legislation gives to a public ruling applies to the tax consequences of the arrangement or class of arrangements to which the ruling relates, and not, …, to the underlying philosophy behind the ruling. That this is so follows inexorably from the language of s 14ZAAE …
The Court was also of the view that Pt IVAAA left no room for the operation of any doctrine of estoppel or the reintroduction of that doctrine through administrative law remedies. Their Honours said (at 169):
The public ruling operates as if it is the statutory basis upon which tax is to be levied. No question arises as to whether it is or is not relied upon.
I take that last statement not to be a statement that a public ruling has statutory force. Rather, it reflects a commitment on the part of the Commissioner to a particular approach to the law in those cases to which it applies. That commitment will necessarily be qualified by the extent to which the ruling itself embodies qualifications and conditions in its own terms.
103 Where the Parliament has conferred wide discretions on an official decision-maker, particularly in relation to high volume decision-making, it is entirely consistent with the legislative intention in conferring such a discretion that its exercise will be guided by administrative policies. Indeed it may be inferred that the creation of such policies is contemplated by the legislature when it confers such discretions. As Drummond J and I said in Minister for Immigration, Local Government and Ethnic Affairs v Gray (1994) 50 FCR 189 (at 206):
This is particularly so in the case of a power which involves high volume decision-making, or which may, in any event, because of its subject matter, be expected to attract policy guidelines … Common concepts of justice suggest that, while each case is to be considered on its individual merits, like cases will generally be treated similarly. The imputed legislative contemplation of such policies for that purpose must be limited to those which are consistent with the general purposes and requirements, express or implied, of the legislation in question. They cannot be expressed to fetter the exercise of the relevant discretion.
And as we observed in that case an administrative policy may amount to a mandatory relevant consideration such that a significant failure to properly construe and apply the policy may cause the discretion to miscarry. The public rulings issued by the Commissioner are expressly provided for by the TAA. They can have legal consequences in favour of the taxpayer. A failure by the Commissioner to have regard to a public ruling relating to the exercise of a discretion under the tax law could vitiate the decision made in the exercise of that discretion. Whether it would or not, would depend upon the circumstances and the factors properly considered by the decision-maker. That is not to say that the Commissioner is bound to apply any ruling which he has issued. The Act does not say so and there is no principle of estoppel in the exercise of his functions which would prevent him from doing so. Questions of procedural fairness may require the taxpayer to be heard against an unexpected departure from policy with consequences unfavourable to the taxpayer and against which there is no statutory protection.
104 The word "ruling" has an obvious capacity to mislead. It is capable of conveying the impression that rulings published by the Commissioner have legal force. Insofar as it relates to the interpretation of the law, a ruling has no greater status than an administrative opinion. In so far as it relates to the way in which a discretion conferred by law would be exercised, it has no greater status than an administrative policy. There is a risk of an unwarranted elevation of rulings, by virtue of their terminology to a kind of "de facto law". This risk has been discussed in a helpful review of the subject generally in Scolaro D, Tax Rulings: Opinion or Law? The need for an Independent 'Rule-Maker' (2006) 16 Revenue Law Journal 109. The footnotes in that article also make reference to a number of other papers on the topic.
105 Importantly the Taxation Ruling in issue in this case, so far as it related to the exercise of the Commissioner's discretion to extend the time for making an agreement to transfer losses, stated that the Commissioner was "guided by administrative law principles". It identified two particular factors of significance. The first was the explanation for the taxpayer's delay. The second was the culpability of the taxpayer in relation to any adjustment to the tax position of the company group which gave rise to an application to make an agreement out of time.
106 The "Explanations" part of Taxation Ruling TR 98/12 did not, in terms, form part of the substantive ruling which, in relation to extensions of time was confined to [18] to [20] inclusive. Paragraph 82 and the succeeding paragraphs were of an expository character. They included justifications for the approach taken. So the provision of a general guide for taxpayers and ATO officers when considering the exercise of the discretion was justified in [82] as "… desirable in the interests of consistent, efficient administration and equity among taxpayers in similar circumstances". The administrative law principle that the discretion cannot be confined by an inflexible rule of policy was also recognised in [82] which said:
However, the decision-maker must exercise the discretion according to the merits of each case and should not fetter the discretion by inflexibly applying, or acting in blind obedience to a policy or rule.
In so far as the ruling identified factors which could be considered by the Commissioner in the exercise of his discretion and recognised that no inflexible policy was being laid down, it did not offend against general principles of administrative law.
The nature and purpose of the discretion to extend time under s 170-50(2)(d) of the ITAA 1997
107 Statutory time limits affecting the exercise of legal rights, the imposition of liabilities or the exercise of powers are created for a variety of purposes. Limitation Acts which bar various categories of proceedings not commenced within a certain time after a cause of action has accrued may serve the following purposes:
- To protect defendants from claims relating to incidents which occurred many years ago and about which they, and their witnesses, may have little recollection and no records;
- To discourage plaintiffs from sleeping on their rights; it is in the public interest for disputes to be resolved as quickly as possible; and
- To give an assurance to defendants that after a given period of time any possible claim against them arising out of a particular incident is at an end, that is, to operate as an "act of peace": see The Laws of Australia (Lawbook Co, subscription service) 5 at [5.10.120] and also Halsbury's Laws of Australia (Butterworths, subscription service) Vol 16, at [255.5].