Bonnell v Commissioner of Taxation

Relief Sought 9 The amended application filed by the appellant on 26 May 2008 stated: 'This Application is made under s 39B of the Judiciary Act 1903 to contest the validity of a Notice of Amended Assessment for the year of income ended 30 June 1999, which was communicated to the Applicant in a purported Notice of Amended Assessment issued on 29 July 2004.' 10 The claims for relief in the amended application included, inter alia: '1. A declaration that the Remission Decision is invalid; 2. An order pursuant to s 39B of the Judiciary Act 1903 quashing the Notice of Amended Assessment and such consequential orders as this Honourable Court sees fit …' 11 The amended statement of claim filed the same date repeated those claims for relief. Paragraphs 36 and 37 of the amended statement of claim as filed stated as follows: '36. In making the Remission Decision, the Respondent: (i) was under an obligation to make it in good faith; (ii) could only make it if and to the extent that it related to the subject mater of the Act; and (iii) could only make it if and to the extent that it was reasonably capable of reference to the powers given to the Respondent under s.227(3). 37. In making the Remission Decision, the Respondent: (i) acted arbitrarily and or capriciously and or without any intelligible basis; (ii) failed to have regard to any matter material to whether the power conferred by s.227(3) should be exercised; (iii) failed to adhere to his publicly announced policy in relation to the remission of penalties against participants in CIS fund arrangements; (iv) acted on the assumption that the Applicant was a promoter of CIS fund arrangements; (v) sought to punish the Applicant for the advice which he had given to the Applicant's clients in connection with implementing CIS fund arrangements; (vi) acted upon a suspicion or belief that the Application had obtained the Ruling improperly; (vii) acted upon an assumption that the Applicant was an associate of First Assistant Commissioner Petroulias.' 12 On the hearing before his Honour, the appellant sought to amend para 37 by inserting as the opening words "in breach of each of the matters pleaded in paragraphs 36(i) (ii) and (iii) of paragraphs 36". However, his Honour said that he would allow an amendment only to the extent of introducing as the beginning words of para 37, prior to the words "In making the Remission Decision", the words "In breach of the matter pleaded in paragraph 36(i)". Indeed, his Honour said that, but for a concession by the respondent, he would not have allowed even this limited amendment: see reasons for judgment (No. 4) [2008] FCA 990 dated 27 June 2008 at [5] - [7]. Consequently, as finally pleaded, the alleged contravention was confined to the first of the Hickman provisos (see [20] below).

Assessments and amended assessments 13 Section 166 of the ITAA 1936 provides that the Commissioner shall make an assessment of the amount of taxable income of any taxpayer, and of the tax payable thereon, from the returns and any other information in his or her possession. The Commissioner may make an assessment of the amount of tax owing for any person liable to pay tax: s 169. 'Assessment' is defined in s 6 as, relevantly, the 'ascertainment of the amount of taxable income ... and of the tax payable on that taxable income' (para (a)(i)) and 'the ascertainment of the amount of additional tax payable under a provision of Pt VII' (para (b)). 14 Section 170(1) empowers the Commissioner to amend any assessment 'by making such alternations therein or additions thereto as he thinks necessary'.

Assessments of penalty tax or additional tax 15 At the relevant time, Part VII of the ITAA 1936 was headed 'Penalty Tax' and dealt with what was referred to as 'additional tax'. Much of the Part operates by reference to the concept of a 'tax shortfall', defined in s 222A in relation to a given taxpayer and a given year as 'the amount, if any, by which the taxpayer's statement tax for that year at the time at which it was lowest is less than the taxpayer's proper tax for that year'. 'Statement tax' is defined as the tax that would have been payable if assessed on the basis of the taxpayer's tax return for the relevant year. 'Proper tax' is defined as what the taxpayer was properly liable to pay under the tax legislation. 16 Section 226K imposed additional tax of 25% of the shortfall amount where the taxpayer's statement tax was based on a view of the law that was not 'reasonably arguable'. This was the provision upon which the respondent relied for making an assessment of the appellant's additional tax liability. 17 Subsection 227(1) expressly provides for the assessment of additional tax; it has nothing to say about the assessment of taxable income and tax payable thereon ('primary tax'). Subsection 227(2) provides that nothing in the ITAA 1936 shall be taken to preclude notice of an assessment made in respect of a person under subsection (1) (assessment of additional tax) from being incorporated in notice of any other assessment made in respect of the person under the ITAA 1936; and subs 227(3) facilitates the exercise of the Commissioner's discretion in relation to remission of additional tax liability in whole or any part.

Notices of assessment and the privative provisions 18 Section 174 provides that, as soon as is convenient after any assessment is made, the Commissioner is to serve a notice of the assessment in writing on the person liable to pay the tax. Subsection (3) provides that 'tax' includes additional tax under Pt VII. 19 Section 175 provides that the 'validity of any assessment shall not be affected by reason that any of the provisions of this Act have not been complied with' (emphasis added). By its terms, s 175 provides protection for each assessment made under the ITAA 1936. Subsection 177(1) provides that 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'. Except in proceedings under Pt IVC of the Taxation Administration Act 1953 (Cth) ('the TAA') on a review or appeal relating to the assessment, the production of the notice or a copy of it is also conclusive evidence 'that the amount and all particulars of the assessment are correct'. 20 In Deputy Commissioner of Taxation v Richard Walter Pty Limited (1995) 183 CLR 168 the High Court arguably held that the effect of ss 175 and 177 was to limit challenges to assessments (outside Pt IVC proceedings) to the grounds identified by Dixon J in R v Hickman; Ex parte Fox and Clinton (1945) 70 CLR 598 at 615, namely, that the decision was not a bona fide attempt to exercise the power or did not relate to the subject matter of the legislation or was not reasonably capable of reference to the power given to the relevant officer (the Hickman provisos). But see Commissioner of Taxation v Futuris Corporation Ltd [2008] HCA 32 (published 31 July 2008) where Gummow, Hayne, Heydon and Crennan JJ cast some doubt on the scope of operation of the Hickman provisos in respect of the construction and relationship between s 175 and subs 177(1) with the observation that 'Various views were expressed in Richard Walter' in respect of that matter (at [70]).

Notice of Appeal 21 The appellant's notice of appeal, as indicated in [3] above, raises twelve grounds of appeal, however, at paragraph 18 of his written outline of submissions the appellant submits that in essence there are two issues before this Court: (1) whether the primary judge erred in holding that the respondent's decision not to remit any part of the additional tax did not form part of the assessment process and, if invalid, did not invalidate the notice of amended assessment; (2) whether the primary judge erred in holding that, on the material before the Court, the proceeding had no reasonable prospect of success within the meaning of s 31A of the Federal Court Act. 22 The first of these issues is raised by grounds 1 and 2 of the appellant's notice of appeal and corresponds with the claims for relief sought in paragraphs 1 and 2 of the appellant's amended application (see [10] above). The second issue is raised by ground 12 of the appellant's notice of appeal. The appellant concedes that if he cannot succeed on the first issue, the question raised by the second must be answered in the negative and he must fail.

Some Observations 23 Before proceeding to consider the first issue, two observations are relevant to the analysis. 24 First, the document entitled 'notice of amended assessment' contains two separate assessments for the purposes of s 175 of the ITAA 1936. Against the words 'Your Amended Taxable Income' and 'Tax on Taxable Income', the notice evidences the making of an amended assessment of taxable income and of primary tax pursuant to subs 166(1) consistently with subs 170(1) of the ITAA 1936. The sentence beginning 'The amount at Label D [$2,106,915.40] consists of $606250.00 penalty and $1500665.40 interest', on the other hand, evidences the making of a separate assessment of 'additional tax' pursuant to subs 227(1) of the ITAA 1936. Subsection 227(2) makes it clear that the separate assessment could be included in the notice of the amended assessment of primary tax or, alternatively, be made the subject of a separate notice. 25 Second, the appellant did not mount any challenge to the assessment of primary tax under subs 166(1) and subs 170(1) evidenced by the notice of amended assessment. Nor did he make any direct challenge to the assessment of additional tax evidenced by the same notice. What the appellant challenged was the respondent's decision not to exercise the discretion to remit conferred by subs 227(3). Claim for relief 2 in the amended application and ground 2 of the notice of appeal are predicated on the premise that the establishment of error based on the first of the Hickman provisos in the remission decision would not only render that decision invalid but would lead to the invalidity of the entire notice of amended assessment.

The Argument 26 As indicated above, it lies at the heart of the appellant's case as pleaded and argued that if the decision of the respondent not to remit the appellant's additional tax liability, in whole or in part, pursuant to subs 227(3) of the ITAA 1936 ('the remission decision') is invalid because it was not made in good faith, and, therefore, was made in contravention of the first of the Hickman provisos, it infected the entirety of the notice of amended assessment with invalidity for the same reason. The path along the way from invalidity of the remission decision to invalidity of the entirety of the notice of amended assessment was not pleaded, but Senior Counsel for the appellant put the following argument in support of that result: (1) The respondent conceded that the remission decision did form part of the process of assessment of additional tax, at least in the circumstances of the present case. (2) Invalidity of the remission decision renders the assessment of additional tax invalid. (3) Invalidity of the assessment of additional tax invalidates the assessment process, part of which is the issue of the notice of amended assessment. (4) The notice of amended assessment is invalid because it is the culmination of and part of the assessment process itself which is invalid. 27 Senior Counsel for the appellant conceded that if one could not travel the path from (1) above to get to the result, as argued, if not pleaded, in (4) above, then the appellant had no reasonable prospects of success and the appeal, or the leave application, must be dismissed. 28 We are unable to travel the path laid out for us, for the reasons set out below.

Step (1): (1) There will be circumstances where a remission decision is quite clearly not part of any assessment process, such as where a remission decision is made in response to a request made well after the issue of the notice of assessment. In this respect, such a decision under s 227(3) is in no different position to a decision made under its predecessor, subs 226(3): see Deputy Commissioner of Taxation v Mostyn (1987) 18 FCR 260 at 263 - 268. (2) Whether the position is different where a remission decision is antecedent but temporally proximate to the issue of the notice of assessment, as in the present case, is not clear. Arguably there is no difference since the power to remit assumes the existence of "additional tax payable", but in view of the respondent's concession that the remission decision was part of the process of assessment of additional tax, this issue can be put to one side.

Step (2) (1) The respondent does not concede the next step. Indeed, he contends that the establishment of a contravention of one or more of the Hickman provisos in the remission decision could not of itself affect either the assessment of additional tax or the entirely separate assessment of primary tax. (2) As noted in [25] above, the appellant did not mount any challenge to the assessment of primary tax. Even if invalidity of the remission decision were to infect the assessment of additional tax with invalidity (as to which see (3) below), it would not infect the separate assessment of primary tax with invalidity and the notice of amended assessment would continue to enjoy the benefit of subs 177(1) of the ITAA 1936 so far as that assessment is concerned. For this reason the appellant's case as pleaded must fail. (3) But the respondent submitted that even if the remission decision is invalid on account of one or more of the Hickman provisos, that invalidity does not infect the assessment of additional tax with invalidity. The assessment of additional tax involves nothing more than a calculation of the product of the 'shortfall', or relevant part of it, and 25% as mandated by s 226K. Perhaps this explains why the appellant did not make a direct challenge to the assessment of additional tax on the basis of one or more of the Hickman provisos. (4) The respondent's submission encounters a difficulty, however, arising from his concession that the remission decision did form part of the process of assessment of the additional tax. Arguably, inherent in that concession, is the further concession that invalidity of the remission decision renders the assessment of additional tax of which it formed part, invalid.

Steps (3) and (4) (1) The third and fourth steps confuse the amended assessment of the primary tax and the assessment of additional tax. Notwithstanding its title, the notice of amended assessment was a notice of the amended assessment of taxable income and the primary tax payable thereon, and of the assessment of additional tax. There is no occasion for saying that because the notice incorporated the assessment of additional tax, invalidity of the latter assessment invalidated the entire assessment process, including the issue of the notice of the amended assessment of the primary tax. (2) On the basis of the respondent's concession, the most that can be said is that invalidity of the remission decision because of bad faith would bring down the assessment of the additional tax and the notice of that assessment. There would be no effect on the amended assessment of the primary tax or on the 'notice of amended assessment' in so far as it was a notice of that amended assessment. (3) The appellant fails in the only attack that he makes: an attack on the notice in its entirety.

Conclusion 29 We are of the view that the appellant's case as pleaded and the relief claimed in paragraphs 1 and 2 in the amended application cannot succeed and the primary judge was correct in ordering that there be judgment for the respondent against the appellant in relation to the whole of the proceeding. 30 We heard full argument on the issues raised by the notice of appeal and received comprehensive written submissions from each party. If leave to appeal is not required then we would dismiss the appeal with costs. If leave to appeal is required, then we would refuse it with costs. 31 There is a cross-appeal which, by the terms of the notice of cross-appeal, is enlivened only if the orders made by the primary judge are set aside. In the circumstances, it is not enlivened, but it is appropriate nonetheless that we dismiss the cross-appeal. 32 There are also before the Court the respondent's notice of contention and motion seeking leave to appeal out of time from Order (8) made on 8 February 2008 in the primary proceeding. The latter would have required attention only if the judgment of 1 July 2008 was itself interlocutory and we had been minded to grant leave to appeal from it and to allow the appeal. It follows that the motion for leave to appeal from the order of 8 February 2008 is now otiose. It is appropriate that we dismiss that motion for leave to appeal. The notice of contention would have raised the same issues as an appeal from the order of 8 February 2008 would have done, and is, of course, otiose in the light of the result to which we referred at [30] above. I certify that the preceding thirty-two (32) numbered paragraphs are a true copy of the Reasons for Judgment herein of the Honourable Justices Lindgren and Edmonds.

NEW SOUTH WALES DISTRICT REGISTRY NSD 1038 of 2008

on appeal from a single judge of the federal court of australia

REASONS FOR JUDGMENT EMMETT J: 33 The appellant, Mr David Bonnell ("the Taxpayer"), seeks judicial review of a decision of the respondent, the Deputy Commissioner of Taxation ("the Commissioner"), not to remit pursuant to s 227(3) of the Income Tax Assessment Act 1936 (Cth) ("the ITAA 1936") additional tax imposed on the Taxpayer under s 226K of the ITAA 1936. A judge of the Court ordered that the proceeding commenced by the Taxpayer be dismissed summarily, pursuant to s 31A of the Federal Court of Australia Act 1976 (Cth) ("the Federal Court Act"), on the basis that the proceeding had no reasonable prospect of success. The Taxpayer wishes to appeal from the orders made by the primary judge. There is a question as to whether the orders are interlocutory or final. The Taxpayer has filed a notice of appeal as well as filing an application for leave to appeal, against the possibility that leave is required. The hearing of the appeal proceeded as if leave were not required.

STATUTORY FRAMEWORK 34 At the relevant time, ss 226K and 227(3) could be found in Part VII of the ITAA 1936. However, it is convenient to describe first the operation of Part IV, which concerns the making of returns and assessments, and Part VI, which concerns the collection and recovery of tax. 35 Section 161(1) of the ITAA 1936 requires that every person must give to the Commissioner a return for each year of income. Section 166 requires the Commissioner to make an assessment from the return, and any other information in the Commissioner's possession, of the amount of the taxable income of a person and of the tax payable on that taxable income. Under s 174(1), as soon as conveniently may be after any assessment is made, the Commissioner must serve notice of the assessment in writing on the person liable to pay the tax. 36 Section 175 provides that the validity of any assessment is not affected by reason that any of the provisions of the ITAA 1936 have not been complied with. Under s 177(1), the production of a notice of assessment, or of a document under the hand of the Commissioner purporting to be a copy of a notice of assessment, is to be conclusive evidence of the due making of the assessment and that the amount and all the particulars of the assessment are correct. Section 177(1) provides an exception in the case of proceedings under Part IVC of the Taxation Administration Act 1953 (Cth). That is not presently relevant. 37 Section 170(1) of the ITAA 1936 provides that the Commissioner may, subject to certain time limits, amend any assessment by making such alterations therein or additions thereto as the Commissioner thinks necessary. Section 173 provides that, except as otherwise provided, every amended assessment shall be an assessment for all the purposes of the ITAA 1936. 38 Section 204(1), which is in Part VI of the ITAA 1936,provides that any income tax assessed is to be due and payable by the person liable to pay the tax on the date specified in the notice of assessment as the date upon which the tax is due and payable or, if no date is so specified, on the thirtieth day after the service of the notice. Under s 204(2), "income tax" includes additional tax under Part VII. 39 Part VII of the ITAA 1936 deals with penalty tax. Section 226K relevantly provides that, subject to Part VII, if a taxpayer has a tax shortfall for a year, and the shortfall was caused by the taxpayer's treating, in a tax return, an income tax law as applying in relation to a matter in a particular way, and it was not reasonably arguable that the way in which the application of the law was treated was correct, the taxpayer is liable to pay, by way of penalty, additional tax equal to 25% of the amount of the shortfall. 40 Section 227 deals with the assessment of additional tax. Under s 227(1), the Commissioner must make an assessment of the additional tax payable by a person under a provision of Part VII. However, under s 227(3) the Commissioner may, in the Commissioner's discretion, remit the whole or any part of the additional tax payable by a person under Part VII. Section 227(2) provides that nothing in the ITAA 1936 is to preclude notice of an assessment made in respect of a person under s 277(1) from being incorporated in notice of any other assessment made in respect of that person. 41 Section 6 of the ITAA 1936 provides that the term "assessment" relevantly means: (a) the ascertainment of: (i) the amount of taxable income… and of the tax payable on that taxable income … or (b) the ascertainment of the amount of additional tax payable under a provision of Part VII…

THE NOTICE OF AMENDED ASSESSMENT 42 In his return to the Commissioner for the year of income ended 30 June 1999, the Taxpayer claimed a deduction in respect of the sum of $5 million contributed by the Taxpayer to the Bonnell No 2 Superannuation Fund ("the Fund"). The contributions were made to the Fund between 15 February 1999 and 30 June 1999. By notice of assessment dated 17 July 2000 ("the Original Notice"), the Commissioner gave notice to the Taxpayer that the Taxpayer had been assessed to income tax in accordance with that return. 43 However, in or about late July 2004, the Commissioner amended the assessment of which notice was given by the Original Notice. In the amended assessment, the Commissioner disallowed, as a deduction, the $5 million of contributions made by the Taxpayer to the Fund. The Commissioner decided that the additional tax imposed under s 226K should not be remitted under s 227(3) of the ITAA 1936. Accordingly, the Commissioner assessed the Taxpayer to additional tax under s 226K in the sum of $606,250. In addition, the Commissioner assessed the Taxpayer for interest in respect of the short fall amount. 44 On 29 July 2004, the Commissioner gave to the Taxpayer a notice of amended assessment in respect of the year of income ended 30 June 1999 ("the Amended Notice"). The Amended Notice was relevantly in the following terms: NOTICE OF AMENDED ASSESSMENT Income Tax Assessment Act 1936 and Income Tax Assessment Act 1997 For the year ending 30 June 1999 (or substituted accounting period) Your Amended Taxable Income is $5936606 $ ¢ Tax on Taxable Income A 2780806.82DR Medicare Levy O 89049.09DR Understatement Penalty and Interest D 2106915.40DR Credit for 1999 Provisional Tax F 76756.00CR Tax Offsets and Other Credits G 225.00CR Balance of this Assessment L 4899790.31DR Balance of your previous 1999 Assessment M 367874.91DR Difference between this and previous Assessment N 4531915.40DR Net amount payable 4531915.40DR This amount is payable by 02 SEP 04 Additional Information

Included in Tax Offsets and Other Credits above is a Savings Tax Offset of $225.00. The amount at Label D consists of $606250.00 penalty and $1500665.40 interest. This interest is tax deductible for the income year in which it is incurred.

THE PROCEEDING 45 In a proceeding commenced in the Court by the Taxpayer, the Taxpayer claimed a declaration that the decision not to remit the additional tax is invalid. The Taxpayer also claimed an order, pursuant to s 39B of the Judiciary Act 1903 (Cth), quashing the Amended Notice in its entirety. The Taxpayer claimed that he is entitled to that relief, relevantly for present purposes, on the basis that: · in making the decision not to remit additional tax, the Commissioner was under an obligation to make that decision in good faith; · the Commissioner did not act in good faith in making the decision not to remit the additional tax. The Taxpayer provided particulars of the matters said to demonstrate an absence of good faith. For present purposes, the particulars are not relevant. 46 The Taxpayer accepts that, in order to succeed in obtaining the relief claimed, he must demonstrate, not only that the decision not to remit was not made in good faith, but that the Amended Notice is invalid in its entirety and must be set aside simply by reason of the fact that the decision not to remit was invalid. In other words, the Taxpayer does not suggest that the Amended Notice is invalid pro tanto. The proceeding has been conducted on the basis that, unless the Amended Notice is to be set aside in its entirety, the proceeding must be dismissed.

THE TAXPAYER'S PROSPECTS OF SUCCESS 47 The Taxpayer's contentions are misconceived. The first basis upon which the Commissioner supports the summary dismissal of the proceeding is that, whether or not the decision not to remit additional tax was invalid, the Amended Notice is valid at least to the extent that it constitutes notice of the amended assessment of tax in the sum of $2,780,806.82, made following the Commissioner's decision to disallow the deduction for the contributions of $5 million into the Fund. The Commissioner says that that conclusion follows inexorably from the language of the ITAA 1936. 48 Thus, the definition of assessment in s 6 makes clear that an assessment may relate to the ascertainment of the amount of taxable income or of the tax payable on that taxable income as well as to the ascertainment of the amount of additional tax payable under Part VII. That is to say, the ascertainment of the amount of taxable income and the tax payable on that taxable income is a different and distinct assessment from the ascertainment of the amount of additional tax payable under a provision of Part VII. That distinction is confirmed by the language of s 227(2), which expressly contemplates that a single document may incorporate notice of more than one assessment, including an assessment of the amount of additional tax payable under a provision of Part VII, such as s 226K. 49 The Amended Notice clearly notifies the Taxpayer of two separate and distinct assessments. The first is that the Taxpayer's amended taxable income is $5,936,606 and that the tax on the Taxpayer's taxable income is $2,780,806.82. The second is in the third line of the Amended Notice, which refers to understatement penalty and interest of $2,106,915.40 and the note at the foot of the Amended Notice, stating that that latter amount consists of $606,250.00 penalty and $1,500,665.40 interest. The sum of $606,250 is the additional tax payable under s 226K. The effect of s 204(1) and the Amended Notice was that, on 2 September 2004: · tax, on taxable income, of $2,780,806.82 became due and payable; · additional tax of $606,250 became due and payable; · interest in the sum of $1,500,666.40 became due and payable. 50 Even if the decision not to remit additional tax was not made in good faith, the only consequence would be that the sum of $606,250 may not be due and payable by the Taxpayer. Nevertheless, the Amended Notice is effective, for the purposes of s 204, to create a liability to pay other amounts. It is valid at least to that extent.

CONCLUSION 51 The Taxpayer is not entitled to an order that the Amended Notice be set aside in its entirety. As indicated above, the Taxpayer does not seek any lesser relief. Accordingly, it is not necessary to express any view as to whether the Amended Notice could be set aside pro tanto, assuming that the decision not to remit any of the additional tax was made in bad faith by the Commissioner. It follows that there is no reasonable prospect that the Taxpayer can successfully prosecute the proceeding and there was no error on the part of the primary judge in dismissing the proceeding pursuant to s 31A of the Federal Court Act. 52 Since writing the above, I have read the joint reasons of Lindgren and Edmonds JJ in draft form. I agree with their Honours' conclusions and the reasons for those conclusions. I also agree with the orders proposed by their Honours. I certify that the preceding twenty (20) numbered paragraphs are a true copy of the Reasons for Judgment herein of the Honourable Justice Emmett.

Counsel for the Appellant: Mr M Cashion SC and Mr C Robinson

Solicitor for the Appellant: Blaxell Watson Lawyers

Counsel for the Respondent: Mr R Beech-Jones SC and Mr B O'Donnell

Solicitor for the Respondent: Australian Government Solicitor