Bonnell v Commissioner of Taxation - [2008] FCAFC 146 - FCAFC 2008 case summary — Zoe

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Bonnell v Commissioner of Taxation

[2008] FCAFC 146

Federal Court of Australia (Full Court)|2008-08-18|Before: Edmonds JJ

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Source facts

Court

Federal Court of Australia (Full Court)

Decision date

2008-08-18

Before

Edmonds JJ

Source

Original judgment source is linked above.

Judgment (26 paragraphs)

[1]

Introduction 1 This is an appeal, or an application for leave to appeal, from an order of the Court made on 1 July 2008 that there be judgment for the respondent against the appellant in relation to the whole of the proceeding. The order gave effect to the primary judge's opinion (Bonnell v Commissioner of Taxation (No 5) [2008] FCA 991 at [95]) that the appellant had no reasonable prospect of successfully prosecuting claims for relief 1 and 2 in his amended application (see [10] below): see subs 31A(2) of the Federal Court of Australia Act 1976 (Cth) ('the Federal Court Act'). 2 Section 31A of the Federal Court Actrelevantly provides: '31A … (2) The Court may give judgment for one party against another in relation to the whole or any part of a proceeding if: (a) the first party is defending the proceeding or that part of the proceeding; and (b) the Court is satisfied that the other party has no reasonable prospect of successfully prosecuting the proceeding or that part of the proceeding. (3) For the purposes of this section … a proceeding or part of a proceeding need not be: (a) hopeless; or (b) bound to fail; for it to have no reasonable prospect of success. (4) This section does not limit any powers that the Court has apart from this section.' 3 There being some doubt as to whether the judgment was interlocutory or final, on 4 July 2008, the appellant filed a notice of motion seeking leave to appeal and on 9 July 2008, the appellant filed a notice of appeal raising twelve grounds. The hearing before this Court proceeded as if on an appeal.

[2]

[3]

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).

[6]

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]).

[17]

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…

[18]

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

[21]

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.

Bonnell v Commissioner of Taxation

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Judgment (26 paragraphs)

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