Briglia v Commissioner of Taxation

Standard to be met for summary dismissal 4 These motions for summary dismissal or for permanent stay are governed by certain general principles. In order to succeed on his application under O 20 r 2, the Deputy Commissioner must show that each applicant's case is "so clearly untenable that it cannot possibly succeed": see General Steel Industries Inc v Commissioner for Railways (NSW) (1964) 112 CLR 125 at 130; also Walton v Gardiner (1993) 177 CLR 378 at 393. A court will not exercise the power that the Deputy Commissioner invokes unless the case clearly justifies it. If there is a real question of fact or law to be determined, then the Deputy Commissioner's application will fail: see Dey v Victorian Railways Commissioners (1949) 78 CLR 62 at 91.

Challenges under s 39B to assessments under the ITAA 5 By his amended statement of claim, the applicant Briglia challenges the power of the Deputy Commissioner to include in his taxable income the amount of $2,351,233 for the year ended 30 June 1995 and to assess him to income tax accordingly. Section 175 of the Income Tax Assessment Act 1936 (Cth)("the ITAA") provides: The validity of any assessment shall not be affected by reason that any of the provisions of this Act have not been complied with. Section 177(1) of the ITAA provides: 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 amount are correct. The Deputy Commissioner produced an extract from the notice of amended assessment issued to Briglia for the year ended 30 June 1995 and an extract from the notice of assessment issued to Christoforidis, also for the year ended 30 June 1995: see s 177(4) of the ITAA. 6 Section 177(1) makes the production of a notice of assessment conclusive evidence of the due making of the assessment and that the amount and all the particulars of the assessment are correct, except in challenges to the assessment brought under Pt IVC of the Taxation Administration Act 1953 (Cth). Section 175 preserves the validity of an assessment even though there has been some non-compliance with a provision of the ITAA. In cases of the present kind, a challenge to the assessment cannot succeed unless the applicant can show that the purported "assessment" is not protected by s 177(1). Section 177(1) will operate to preclude a court from examining the validity of an assessment once a notice of assessment is tendered, provided that (1) there has been a bona fide attempt by the Deputy Commissioner to exercise the power of assessment; (2) the attempt to exercise the assessment power relates to the subject matter of the ITAA; and (3) the exercise of the assessment power is reasonably capable of reference to the Commissioner's power of assessment. Put another way, s 177(1) will, in the circumstances of the present cases, preclude any challenge to the validity of the assessment if the power of assessment has been exercised in accordance with the principle set out in R v Hickman; ex parte Fox (1945) 70 CLR 598 at 614: see Deputy Commissioner of Taxation (Cth) v Richard Walter Pty Ltd (1995) 183 CLR 168 ("Richard Walter"); Sunrise Auto Ltd v Commissioner of Taxation (Cth) (1995) 61 FCR 446 at 472; Hoare Bros Pty Ltd v Commissioner of Taxation (Cth) (1996) 62 FCR 302 at 314; Madden v Madden (1996) 65 FCR 354 at 391; Darrell Lea Chocolate Shops Pty Ltd v Commissioner of Taxation (Cth) (1996) 72 FCR 175 ("Darrell Lea") at 185; and Pickering v Deputy Commissioner of Taxation (Cth) (1997) 97 ATC 4893 at 4899. Richard Walter establishes that s 177(1) does not deprive the Court of the jurisdiction conferred by s 39B(1) of the Judiciary Act. That case is also authority for the proposition that a purported assessment will lose the protection of ss 177(1) and 175 if it was not made in good faith or otherwise in compliance with the Hickman principle: see 183 CLR at 186, 197, and 211. That is not to say that a taxpayer cannot challenge any relevant exercise of the Commissioner's discretion. Such a challenge must, however, be brought in a proceeding under Pt IVC of the Act. 7 The authorities also establish that if a purported "assessment" is tentative or provisional in the sense that it does not create a definitive liability, then it is not an assessment for the purposes of the ITAA: see Commissioner of Taxation (Cth) v S Hoffnung & Co Ltd (1928) 42 CLR 39 ("Hoffnung") at 54-56, 58, 65; F J Bloemen Pty Ltd v Commissioner of Taxation (Cth) (1981) 147 CLR 360 at 378; Commissioner of Taxation (Cth) v Stokes (1996) 72 FCR 160 ("Stokes") at 171; Darrell Lea 72 FCA 175 at 188; and Richard Walter 183 CLR at 199-200, 219, 229, 237. Of course, an assessment is necessarily subject to the Commissioner's power to review and amend it (subject to the constraints in s 170). The fact that it is subject to review and amendment does not, of course, make an assessment tentative or provisional in the Hoffnung sense. In consequence, an assessment is not relevantly tentative simply because the Commissioner informs the taxpayer that it might later be subject to revision: see e.g. Madden v Madden (1996) 65 FCR 354 at 392. There must be something more either on the face of the notice of assessment or elsewhere to show that the Commissioner has not made a definitive assessment of the taxpayer's tax liability and, in consequence, the so-called assessment is not protected by s 175. 8 What is a lack of bona fides in the Hickman sense? In R v Commissioner of Taxation (WA); ex parte Briggs (1986) 12 FCR 301, the Commissioner admitted that he had "never intended to embark and did not in fact embark upon the process of ascertaining the taxpayer's income"; and, instead, he had issued an assessment notice in order to engage the taxpayer in discussion with him and his officers: see 12 FCR at 308. The Court held that there was, in this case, a lack of bona fides in the exercise of the assessment power. In Stokes, the Commissioner purported to make three income tax assessments against the same taxpayer for the one income year, and served three notices of assessment on him on the one day. Although in respect of the same year, the notices referred to different taxable incomes and different amounts of tax payable. The Court held, at 171, that it was "impossible to determine what the fixed sum is that is definitely due and payable by the taxpayer in respect of the particular year of income". The process of assessment, which required the production of a definitive liability in a fixed and certain sum, had not been concluded. The Court also stated, in obiter dictum, that there was, in this circumstance, no bona fide attempt on the Commissioner's part to exercise his assessment power. Similarly, the Court in Darrell Lea held there was no bona fide exercise of the assessment power conferred by sales tax legislation where the Commissioner issued multiple and mutually inconsistent sales tax assessments in respect of the same goods in the knowledge that none of the assessments could be correct: see 72 FCR at 187. 9 Plainly enough, an incorrect assessment does not demonstrate an absence of bona fides on the Deputy Commissioner's part. The decision in Richard Walter also makes it clear that the existence of two assessments, which include the same amount in respect of the same year of income but issued to different taxpayers, does not demonstrate a want of bona fides on the Commissioner's part, providing that at the time the Commissioner made the assessments he was bona fide able to form the view that each assessment could be correct: see Richard Walter at 188, 200, 202 and Darrell Lea at 186. It follows from this that uncertainty on the Deputy Commissioner's part as to the facts relevant to the exercise of his power of assessment does not evidence an absence of bona fides in the Hickman sense. As Brennan J said in Richard Walter at 200-201: 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. The Commissioner is not required to determine on the balance of probabilities that one person rather than another is the person subject to the tax liability in respect of the particular income. Where the facts known to the Commissioner are such that he is unable to determine which of two or more persons is liable to tax on the same item of income in the same year, he may adopt the view in the case of any or all of those persons that there is a substantial possibility that the item of income is assessable income of that person. If that view is adopted in respect of two or more of those persons, he may validly assess each of them to tax. The making of an assessment on that view of the facts, provided it is not for the purpose of double recovery of the tax imposed by the relevant Taxing Act, is in my opinion a bona fide attempt to exercise the power to assess so that the assessment either is valid or is validated by s 175. And the notice of assessment attracts the protection of s 177(1). It is immaterial to the validity of an exercise of the power to assess one taxpayer to tax that the Commissioner believes it possible that another taxpayer is liable to tax in respect of the particular income. If, however, the Deputy Commissioner formed the view that there was no substantial possibility that an amount was part of the assessable income of a taxpayer, then the Commissioner could not bona fide assess that taxpayer as liable to tax in respect of that income: see Darrell Lea 187-188. 10 When is an assessment shown to be tentative in the Hoffnung sense? In Simons Pty Ltd v Commissioner of Taxation (Cth) (1981) 147 CLR 360, the High Court considered the question in relation to an assessment which was accompanied by an adjustment sheet stating "Your assessment will be reviewed upon determination of the objection against your assessment for 30 June 1977". Was the notice of assessment valid? In the principal judgment delivered by Mason and Wilson JJ, with whom Stephen J agreed, their Honours said at 378: 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 Aickin J at 381-382. In other words, the note on the adjustment sheet did not establish that the assessment was tentative in the relevant sense. 11 Subsequently, as we have seen, the High Court held, in Richard Walter, that the mere 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 relevantly tentative. After discussing the facts, McHugh J said, at 237: 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. As already noted, it is otherwise where an assessment does not result in a definitive liability in a fixed and certain sum: see Stokes at 171.

Is there an arguable case pleaded? 12 On the facts pleaded in his amended statement of claim and in the particulars, has the applicant Briglia alleged facts which, if proven at trial, would establish that the Deputy Commissioner has not made a bona fide attempt to exercise the assessment power in issuing the amended assessment, or that the amended assessment is tentative in the relevant sense? 13 The critical part of the amended statement of claim is par 6, which reads as follows: The Notice of Amended Assessment is not a bona fide assessment or alternatively was issued in bad faith and constitutes an abuse of process. As counsel for the Deputy Commissioner pointed out, the material facts that are said to justify this conclusion are not separately pleaded but are set out in the form of particulars. Although the amended statement of claim is defective in this respect, the defect is, plainly enough, capable of ready correction. Accordingly, counsel for the Deputy Commissioner did not principally rely on this matter in support of her submission that the proceeding should be dismissed or permanently stayed. She relied instead on what she submitted was the applicant's failure to set out, by way of particulars, matters that could constitute an arguable case of lack of bona fides. 14 The matters upon which the applicant Briglia relied to make out his case were: (a) a letter from the Australian Taxation Office ("the ATO"), signed by Mr Greg Trewin, to the applicant, dated 20 April 1998; (b) a conversation on 7 May 1998 between Mr Greg Trewin for the Deputy Commissioner and Mr Graeme Halperin, solicitor for the applicant; (c) a document entitled "Actual Flow of Funds in Bolshoi Sham" provided by Mr Trewin to the applicant's accountants on 14 May 1998 and a conversation between Mr Trewin and the accountants on that day; (d) that the cash flow chart received on 14 May 1998 was substantially the same as the diagram referred to in the conversation of 7 May 1998; (e) that the Deputy Commissioner knew that the income assessed to the applicant represented the proceeds of the sale of a business by Amyowa Pty Ltd and constituted income assessable to it; (f) alternatively, that the Deputy Commissioner knew that Kelhar Pty Ltd was the recipient of the funds; (g) that the Deputy Commissioner knew that in the relevant income year he should have assessed Kelhar Pty Ltd pursuant to s 99A of the ITAA in respect of the liability alleged to be due and owing from the applicant; and (h) that the Deputy Commissioner knew the applicant was not a beneficiary of the Briglia Investment Trust ("the Trust"), who was presently or otherwise entitled in the relevant year to the taxable income assessed to him. 15 The letter of 20 April 1998, which followed the issue of the Notice of Amended Assessment on 17 April 1998, made it clear that the Deputy Commissioner had formed the view that an amount of $2,333,333 came to the applicant following a series of sham transactions, and that the Deputy Commissioner had endeavoured to calculate the applicant's taxable income on the basis of the facts known to him. The letter relevantly read: Reference is made to the current audit of your financial affairs. You are advised an amended assessment for your personal income tax covering the financial year ended 30.6.1995, issued on 17.4.1998. This assessment includes an amount of $2,333,333 which this office asserts is rightfully assessable to yourself and represents your share of the profits of Amyowa Pty Ltd received from the sale of Mobiletronics. It is asserted by this office that, via a series of sham transactions and convoluted cash flows, you have effectively removed these profits from the company. It is further asserted that at the time, you derived assessable income. It is alleged that you have created, or had created, Hong Kong entities from which you have received funds and claimed them to represent loans to yourself or your investment trust. It is asserted that the funds from Hong Kong are in fact a portion of the proceeds of the Mobiletronics sale, sent overseas under the guise of sponsorship of the Bolshoi Ballet. This was partly funded through the cash portion of the sale proceeds from Cellular Custodians, and later through the sale of share in Mobile Communication Holdings. The proceeds from the share sale were on your instruction given to Leif Schipper who again remitted the funds to Hong Kong and again were brought back and claimed as loans. The figure of $2,333,333 is arrived at by examination of your investment trust. The trust claims it has loans of $1,633,333 to "Easy Link Telecommunications" in 1994 and $220,000 to "Parratree" in 1995, both Hong Kong companies. In 1995 the Easy Link Telecommunications loan disappears and a corresponding entry in the beneficiaries loan account indicates a capital contribution of $1,633,333. There is no evidence such a loan ever existed, no contracts, no actual interest paid (interest was journalised), and no record of these funds coming from Hong Kong. The sudden disappearance of the loan in 1995 and change to a capital contribution are pieces in a larger jigsaw which in its totality forms a sham. I believe the $1,633,333 is actually representative of your one third portion of the shares in Mobile Communications Holdings, which formed part of the Mobiletronics sale. (Shares were held in the name of Totico Pty Ltd of which you are a director.) The $220,000 from Parratree I believe formed part of the round robin of funds sent to Hong Kong via SKH Management Pty Ltd, disguised as sponsorship of the Bolshoi Ballet. Again no loan documents have been found and no interest actually paid. The books of account for the trust do not show the true picture of how the money was received, what it represented or even where it is/was located, however when you strip away the Hong Kong "loans", the book entries I believe show the intention of how the funds from the Mobiletronics sale, were to be distributed. It is apparent each director was to receive a third of the net profits, and these profit distributions have been disguised as loans. In your case the trust indicates Parratree provided $220,000. I believe your entitlement from the sale would be the same as the other directors namely $1,633,333 plus $700,000. I believe funds are still held in Hong Kong in the name of Paratree which would account for the difference. I have stripped away what I allege are the sham aspects viz, Hong Kong loans, and using the investment trusts as a guide, have assessed you with what I believe is your one third share of the profits on the sale of Mobiletronics. I believe the funds are assessable to yourself, and NOT your investment trust. The trust in my opinion is only holding funds on your behalf and had no entitlement or otherwise to the profits of Amyowa Pty Ltd. I refer you to Section 19 of the Income Tax Assessment Act. In my opinion, by removing the "loan" aspect, we are left with income according to normal concepts whether it be payment of directors fees, dividends, or any other form of income. It could also fall under the realm of Section 108 "deemed dividends". Whilst I believe these transactions over step the mark of tax minimisation via "a scheme" and fall within the realms of fraud, I would rely on Part IVA should it be found the transactions do not amount to a sham or fraud. Accordingly the assessments would remain based on Part IVA. In particular (a) (to par 6 of the amended statement of claim), the applicant Briglia stated that the letter "asserts without any reason and contrary to the fact that the funds from the sale of the Mobiletronics business by Amyowa Pty Ltd are assessable to the applicant and not Kelhar Pty Ltd as the trustee of the Briglia Investment Trust". The applicant added, "the amount of funds referred to … are incorrect and the sum received by Kelhar Pty Ltd as acknowledged in the letter only totalled $1,853,333". As we have seen, however, the fact that the Deputy Commissioner assessed the wrong taxpayer, even if proven, would not by itself establish a lack of bona fides on the Commissioner's part. 16 In particular (b) the applicant claims that Mr Trewin told Mr Halperin that (i) he had drawn a diagram setting out the transactions upon which the amended assessment was based, although the Deputy Commissioner was "going to have difficulties in piecing it all together"; (ii) that the Deputy Commissioner "required access to information concerning the Bolshoi Ballet transactions"; (iii) that the Deputy Commissioner knew Briglia did not control the funds; (iv) that the Commissioner relied on s 19 of the ITAA; (v) that "if it was a sham it would still be the company's money"; (vi) that "his clients can't just close their eyes to the situation"; (vii) that "Part IVA was not applicable because it would just go back to the company"; and (viii) "that perhaps the assessments should not have been raised against the individuals". The matters mentioned in particular (b) would, if proven, establish that, after the amended assessment had been made, the Commissioner was still uncertain about the true identity of the relevant taxpayer. The particulars would, if proven, demonstrate that, after the amended assessment had issued, the Commissioner tried to establish, with more certainty than before, the facts pertinent to the assessment, including the precise nature of the transactions upon which the assessment was based. As we have seen, however, no want of bona fides is shown simply because assessments including the same taxable amount in the same year are issued to different taxpayers, providing the Commissioner is of the view that any of the taxpayers assessed could be liable. An assessment is not vitiated because of uncertainty on the Commissioner's part about the transactions on which the assessment is based, or about the identity of the correct taxpayer. If the Commissioner is wrong, these matters can be determined in a Pt IVC proceeding. There is no allegation (that could amount to lack of bona fides) that at the time the Deputy Commissioner made the amended assessment, he had not made a genuine effort to assess the applicant, or that he had assessed the applicant for an illegitimate collateral purpose. 17 The matters referred to in particular (c) would, if proven, again show that, having made the amended assessments, the Deputy Commissioner continued his efforts to ascertain with greater certainty the facts upon which the assessment was based and that he found that task difficult. The applicant claims that Mr Trewin stated that "he had guessed" when raising the amended assessment. If that statement was made, it had to be understood in light of the 20 April letter, set out above. In that letter and, so it seems, in subsequent conversations, Mr Trewin stated that the Deputy Commissioner made the amended assessment on incomplete information, although after a genuine investigation of the material available to him at the time. The fact that an assessment is made on incomplete information has been held not to vitiate the assessment process, although it may provide grounds for a successful challenge in Pt IVC proceedings. It is not asserted in these particulars that Mr Trewin told the applicant's accountants that he had not bothered to undertake any real investigations at all. 18 The matter asserted in particular (d), if proven, is indicative of a genuine attempt to identify the transactions on which the amended assessment is based, and of the fact that the Deputy Commissioner recognised that the material on which he based that identification was incomplete. As already noted, the applicant asserted, in particular (e), that the Commissioner knew that the income assessed to him represented the proceeds of sale of a business by Amyowa Pty Ltd. In this connection, the applicant referred to the letter of 20 April 1998 (set out above), a letter of 27 February 1998 from the ATO to Amyowa Pty Ltd dated 27 February 1998, a letter of 16 March 1998 from the ATO to Amyowa Pty Ltd, and two notices of assessment, both dated 24 March 1998, for the years ending 30 June 1993 and 30 June 1994, issued to Amyowa Pty Ltd. Particular (e) does not, however, support a case of want of bona fides on the Deputy Commissioner's part. As we have seen, the Deputy Commissioner is entitled to issue more than one assessment, in respect of the same amount and in the same year, to different taxpayers. The fact that the Deputy Commissioner knew that the income assessed to the applicant was said to represent the proceeds of sale of a business by another taxpayer (Amyowa Pty Ltd) is beside the point in a case where the Commissioner alleges that the moneys flowed through to the applicant by means of a series of sham transactions. The Deputy Commissioner may be mistaken, but that is a matter for determination in Pt IVC proceedings, not in proceedings under s 39B of the Judiciary Act. There is nothing on the face of the letters of 27 February 1998 or 16 March 1998 or in the notices of assessment issued to Amyowa Pty Ltd that might raise any further issues supportive of the case the applicant seeks to make. 19 In relation to Kelhar Pty Ltd, a company mentioned in particulars (f) and (g), there is no allegation in the pleadings or in any document referred to in the pleadings to which I have been taken, to support the proposition that Kelhar Pty Ltd was the proper taxpayer to be assessed on receipt of the moneys in question. In any event, it was open to the Deputy Commissioner to issue assessments to the applicant, Amyowa Pty Ltd and/or Kelhar Pty Ltd if he should think that either of them could be the correct taxpayer to be assessed for those moneys. 20 The matter that forms the subject of particular (h) is dealt with in the letter of 20 April 1998, set out above. The letter records that the Deputy Commissioner did not assess the applicant Briglia on the basis assumed in particular (h), that is, as a beneficiary of the Trust who was presently entitled to the sum in question. Instead, the letter mentions s 19 of the ITAA as being the basis for the assessment; and particular (h) does not relevantly advance the applicant's case. The basis of the applicant's assessment may or may not turn out to be wrong, but, as I have said, that is a matter to be decided in proceedings under Pt IVC, not in a proceeding of the present kind. 21 In par 7 of the amended statement of claim, the applicant alleges that the amended assessment is "tentative" and he relies on the particulars already discussed. Even if the amended statement of claim were re-pleaded to allege as material facts the particulars set out under par 6 and referred to under par 7, they would not make out an arguable case that the amended assessment was tentative, or that there was a lack of bona fides on the Deputy Commissioner's part. The particulars would not, if proven, establish that the Deputy Commissioner did not genuinely undertake the task of assessment, or that he assessed the applicant to income tax in the knowledge that the applicant could not be so liable. Even if Amyowa Pty Ltd or Kelhar Pty Ltd turn out to be the proper taxpayer, the particulars, if proven, would not establish that the Deputy Commissioner did not assess the applicant in good faith on the material then available to him. The particulars would not establish that the amended assessment did not impose on the applicant a liability to pay income tax in a fixed and certain sum. 22 Counsel for the applicant attempted to support the pleading on the basis that there was an alleged conflict between the accounts contained in the letter of 20 April 1998 and that which emerged in subsequent conversations with the Deputy Commissioner's representative. The applicant, so his counsel submitted, ought to have the opportunity to test the evidence (none of which was, of course, yet before the Court) at trial. I do not accept this. As will be plain from what I have said, there was, in my view, no relevant conflict, as suggested by the applicant, between the 20 April letter and what is alleged to have been said in subsequent conversations. All pointed to the fact that the Deputy Commissioner made the amended assessment after genuine investigation and consideration, although on incomplete material. The Commissioner's uncertainty as to the proper taxpayer did, it seems, lead him to issue more than one assessment for the same amount in the same year to different taxpayers. He was, however, entitled to take that course. 23 In light of the agreement reached between the parties that the outcome in VG 570 of 1998 would also determine the outcome in VG 571 of 1998, I would dismiss both proceedings pursuant to O 20 r 2 of the Federal Court Rules upon the basis that the applicant in each matter pay the respondent's costs.

I certify that the preceding twenty-three (23) numbered paragraphs are a true copy of the Reasons for Judgment herein of the Honourable Justice Kenny.

Associate: Dated: 7 April 2000 VG 570 of 1998: Counsel for the Applicant: Mr F G A Beaumont QC with Mr A Herskope

Solicitor for the Respondent: Australian Government Solicitor

VG 571 of 1998: Counsel for the Applicant: Mr F G A Beaumont QC with Mr A Herskope

Solicitor for the Respondent: Australian Government Solicitor