Income Tax Assessment Act 1936 - Part IVA - s 177D

Income Tax Assessment Act 1997 - s 8-1

Taxation Administration Act 1953 - s 14ZW(1) - s 14ZW(2) - s 14ZQ - s 14ZX - s 14ZZK

Brown v Commissioner of Taxation [1999] FCA 563

Calder v Commissioner of Taxation [2005] FCA 911

Practice Statement Law Administration PS LA 2003/7

1. Mr Jonshagen seeks a review of the Commissioner's decision to refuse his request for an extension of time in which to lodge an objection against amended assessments for the 1998 and 1999 income years.
2. The only issue between the parties is whether Mr Jonshagen's request for an extension of time under s 14ZW(2) of the Taxation Administration Act 1953 (TAA) should be agreed to under s 14ZX(1) of the TAA.

1. Mr Jonshagen participated in the Chalice Bridge Estate 1998 Project (Project). The Project was a winery project located at Rosa Glen, south east of Margaret River in Western Australia.
2. On 18 August 1998, Mr Jonshagen lodged his income tax return for the 1998 income year, claiming a deduction under s 8-1 of the Income Tax Assessment Act 1997 (ITAA 1997) for fees paid in relation to his participation in the Project in the amount of $18,395 (1998 Return).
3. On 28 August 1998, the Commissioner issued Mr Jonshagen with a notice of assessment for the 1998 income year in accordance with the 1998 Return (1998 Assessment).
4. On 9 September 1999, Mr Jonshagen lodged his income tax return for the 1999 income year, claiming a deduction under s 8-1 of the ITAA 1997 for fees paid in relation to his participation in the Project in the amount of $8,995 (1999 Return).
5. On 20 September 1999, the Commissioner issued Mr Jonshagen with a notice of assessment for the 1999 income year in accordance with the 1999 Return (1999 Assessment).
6. The Commissioner reviewed the Project and formed the view that the fees paid by Mr Jonshagen in relation to his participation in the Project were not deductible under s 8-1 of the ITAA 1997 as Mr Jonshagen claimed in the 1998 Return and the 1999 Return.
7. The primary basis for the Commissioner's view was that the general anti-avoidance provisions in Part IVA of the Income Tax Assessment Act 1936 (ITAA 1936).
8. On 18 January 2001 the Commissioner provided Mr Jonshagen with a document, titled "ATO Position Paper Chalice Bridge", setting out his position on the Project (ATO Position Paper).
9. The ATO Position Paper states:

2. The form and substance of the scheme;

The form of the scheme is that on executing the various agreements, the investor(s) are required to provide their contributions to cover the cost of the initial project fees and may take out a loan to pay these fees. In return for the management fees the manager purportedly managed and operated the business for the investor(s).

The substance of the scheme is the creation of an inflated tax deduction, not the provision of funds for the management of underlying business activity. The investor buys a tax deduction with minimal funds contributed by themselves and the majority provided by way of a limited recourse loan. Part of this tax benefit is subsequently used to finance the underlying commercial activity.

• We believe that the fees are 'excessive' relative to the cost of the work carried out on the underlying commercial activity.
• The 'excessive' nature of the fees is indicated by the arrangement being underpinned by an artificial loan agreement between the Grower and Churchill Finance. At the time Growers entered into the loan arrangement, Churchill Finance was not in a financial position to provide the funds it contracted to advance on behalf of the Grower. The round robin transactions were blatant, artificial and contrived, and resulted in no real money being provided to the manager.
• The artificial inflation of the consideration and use of the round-robin transactions were present in the scheme for tax reasons, to obtain a greater tax deduction than would otherwise be the case.
• The arrangement the taxpayer entered into were structured so they received a tax refund greater than the cash contributions they were required to make under the project agreements.
• The terms of the various agreements limited the actual outgoings of the investor to the payment of only part of the initial project fees. The management fees were able to be sourced by a guaranteed loan, the bulk of the principal and any capitalised interest thereof being limited recourse. The limited recourse finance has the practical effect of securing the bulk of future income from investors.
• Management fees for the years 4 to 17 may only be recovered from the proceeds of the sale of project produce. The terms of the LMA [i.e. the Lease and Management Agreement] provides for the forgiveness of debt. [Emphasis added]

1. On 14 February 2002, the Commissioner announced a settlement offer to participants in various mass marketed investment schemes (including the Project) in order to encourage and assist taxpayers to resolve their scheme debts to the Australian Taxation Office (ATO) (ATO Settlement Offer). The ATO Settlement Offer closed on 21 June 2002.
2. On 8 May 2002, the Commissioner advised Mr Jonshagen that amended assessments would issue and provided Mr Jonshagen with information about his objection rights, a settlement fact sheet and copies of various determinations made under Part IVA of the ITAA 1936.
3. On 11 June 2002, the Commissioner issued Mr Jonshagen with amended notices of assessment for the:
   • 1998 income year, disallowing his claimed deduction of $18,395 for fees paid by Mr Jonshagen in relation to his participation in the Project; and
   • 1999 income year, disallowing his deduction of $8,995 relating to fees paid by Mr Jonshagen in relation to his participation in the Project (1998 and 1999 Amended Assessments).
4. On 17 June 2002, Mr Jonshagen requested an extension of time to consider the ATO Settlement Offer.
5. The Commissioner granted Mr Jonshagen an extension of time to consider the ATO Settlement Offer from 21 June 2002 to 5 July 2002.
6. On 21 June 2002, Mr Jonshagen signed five settlement deeds with the Commissioner in relation to five mass marketed investment schemes he had participated in, including one relating to the Project (Project Settlement Deed), which was received by the Commissioner on 8 July 2002.
7. The Project Settlement Deed states:

........I wish to settle this dispute on the following terms.

My obligations

I agree that is settling this matter I will:

• provide a true and correct declaration concerning my eligibility for nil penalties and interest and the two year interest free period;
• not lodge and objection/s nor request an amendment or review in respect of the matter;
• withdraw any objection/s I have lodged and not lodge any appeal/s in respect of the matter;
• not seek a review of any matters dealt with under this settlement under the Administrative Decisions (Judicial Review) Act 1977 or other legal avenues;
• agree that the Tax Office will not need to take any further action on any Freedom of Information applications made in relation to the issue agreed to as part of this settlement;
• pay all outstanding debts relating to my participation in Chalice Bridge 1998 either in full within 14 days of receipt of the amended assessment notice or within an agreed period by entering into and meeting the terms of a payment arrangement acceptable to the Tax Office; and
• waive any entitlement to interest on overpayments under the Taxation (Interest and Overpayments and Early Payments) Act 1983.

Tax Office obligations

The Tax Office, in accepting this offer, agrees to allow a deduction equal to the cash payments that I contributed to the scheme/s excluding the amounts for capital items if any particularised in the Cash Payment Settlement Schedule 2 and, if I am eligible, to:

• Remit tax shortfall penalty to nil;
• Remit interest to nil;
• Allow a period of two years interest free from the date of my amended assessment advising me of my liability.

If I fail to fulfil my obligations

I acknowledge that if I fail to fulfil my obligations under this deed the Commissioner can:

• Request that I rectify my breach;
• Take legal action to force me to rectify my breach; or
• Take action to enforce full payment of all amounts due by me including primary tax, penalties and interest (at the full statutory rate).

General

I acknowledge that in settling this matter:

• I have read the covering letter, dated 28 March 2002, and understand all points outlined in that letter;
• No promises, threats or inducements have been made to me;
• This settlement is commercial in nature; and
• This settlement is confidential to the parties and shall not be disclosed by any of the parties, except as required or permitted by any law or by the taxpayers to their auditors, bankers, tax advisors or legal advisors. [Emphasis added]

1. On 18 July 2003, the Commissioner issued Mr Jonshagen with further amended notices of assessment for the 1998 and 1999 income years reflecting the agreement set out in the Project Settlement Deed.
2. During the ten year period from 2004 to 2014, Mr Jonshagen made numerous complaints to the Commissioner, the Ombudsman and Members of Parliament regarding statements in the ATO Position Paper, the Commissioner's interpretation of Part IVA of the ITAA 1936, the validity of the Project Settlement Deed and the deductibility of the payments he made in relation to his participation the Project. These complaints include the following:
   • On 25 June 2004, Mr Jonshagen emailed the Commissioner requesting that he cancel the Project Settlement Deed and amend the 1998 and 1999 Amended Assessments to allow the deductions claimed. In that email, Mr Jonshagen asserted that the ATO Position Paper contained the following errors, citing information given by a Project manager to support his claim:

It is stated on page 2 that the loan arrangements were "artificial, blatant and contrived round-robin transactions, with no real provision of funds".

It is also stated further down on that page that it is the artificial nature of these loans that have lead the ATO to the conclusion that the dominant purpose of the project was to give inflated up front tax deductions to participants.

The ATO allegations are false;

• On 9 July 2004, Assistant Commissioner Bruce replied to Mr Jonshagen's email dated 25 June 2004. The Assistant Commissioner provided Mr Jonshagen with information about the operation of the "Part IVA Panel" and advised him that the Commissioner did not agree to revoke the Project Settlement Deed, as follows:

In submitting your signed deeds you have clearly accepted the terms of the settlement made by the Commissioner. A legitimate characteristic of a settlement is to bring a particular matter to finality. Accordingly, in your case there is a legally enforceable settlement agreement. The Commissioner is not prepared to agree to a revocation of that agreement;

• On 24 August 2004, Mr Jonshagen emailed the Commissioner regarding the withdrawal of the Project Settlement Deed, requesting compensation, asking for the name of the officer who prepared the ATO Position Paper, asserting that the ATO has not acted in accordance with the "Taxpayer's Charter" and claiming that he signed the Project Settlement Deed under duress;
• On 31 August 2004, Assistant Commissioner Bruce replied to Mr Jonshagen's email dated 24 August 2004. In that reply, Assistant Commissioner Bruce: (i) confirmed that the Commissioner did not agree to revoke the Project Settlement Deed; (ii) confirmed the Commissioner's view that the deductions claimed in connection with the Project are disallowed; (iii) noted that by entering into the Project Settlement Deed Mr Jonshagen had reduced the amount he owed to the ATO;
• On 30 September 2005, Mr Jonshagen complained to the Australian Securities and Investments Commission (ASIC) about Churchill Finance, which company was involved in the loan arrangements for the Project;
• On 28 October 2005, ASIC responded to Mr Jonshagen's complaint about Churchill Finance. After noting that the prospectus for the Project mentioned the risk of investing in a tax effective scheme, ASIC advised Mr Jonshagen that it would not take any further action in relation to the issues raised by Mr Jonshagen;
• On 25 January 2007, Mr Jonshagen wrote to the Commissioner regarding the Commissioner's statement in the media "that the ATO would like the public to let us know if the ATO has been wrong". Mr Jonshagen asserted that the ATO Position Paper contained erroneous statements "claiming that tax refunds could exceed cash contributions......These ATO statements are wrong";
• On 24 July 2007, Assistant Commissioner Martin responded to Mr Jonshagen's letter to the Commissioner dated 25 January 2007. In that letter, Assistant Commissioner Martin: (i) noted that the Commissioner had provided his views on the issues raised by Mr Jonshagen in previous correspondence; (ii) noted that the matter was also addressed in a letter "from Ruth Gibson, Chief of Staff to the Minister for Revenue and Assistant Treasurer on 8 May 2007"; and (ii) invited Mr Jonshagen to meet with one of the ATO's senior officers in Perth;
• Mr Jonshagen subsequently met Assistant Commissioner Hammersley at the ATO's offices in Northbridge, Perth;
• On 25 October 2007, Assistant Commissioner Hammersley wrote to Mr Jonshagen addressing his complaint about the accuracy of the ATO Position Paper;
• On 19 November 2007, Mr Jonshagen emailed Assistant Commissioner Hammersley about the accuracy of the ATO Position Paper and copied the email to members of Parliament and the Commonwealth Ombudsman;
• On 23 November 2007, the Commonwealth Ombudsman requested that the ATO treat Mr Jonshagen's views on ATO's interpretation of Part IVA of the ITAA 1936 as a complaint;
• In November 2007, Mr Jonshagen requested the appointment of another ATO officer to address his complaint about the accuracy of the ATO Position Paper;
• On 13 December 2007, ATO officer, Ms Elizabeth Goli, wrote to Mr Jonshagen advising him that the ATO remained of the view that the information in the ATO Position Paper was correct and that "should this matter be raised in the future without any fresh issues being raised the correspondence will be noted but no response provided";
• On 9 September 2008, Mr Jonshagen wrote again to the Commissioner about the accuracy of the ATO Position Paper, stating:

ATO did get it wrong. The fact is that the tax savings did NOT generate the project cash payments even on the top marginal tax rate;

• On 13 October 2008, Assistant Commissioner Hammersley wrote to Mr Jonshagen addressing Mr Jonshagen's complaint about the accuracy of the ATO Position Paper in his letter to the Commissioner dated 9 September 2008. In this letter, the Assistant Commissioner stated:

We have considered the points raised in your letter and concluded you have not raised any fresh issues in relation to this matter. The matters raised in this letter were addressed in the correspondence sent to you under my signature on 25th October 2007.

• On 2 December 2008, Mr Jonshagen wrote to the Commissioner complaining that by Assistant Commissioner Hammersley responding to his letter to the Commissioner, dated 9 September 2008, Assistant Commissioner Hammersley had effectively investigated the complaint himself. In that letter, Mr Jonshagen again stated:

ATO did get it wrong. The fact is that the tax savings did NOT generate the project cash payments even on the top marginal tax rate;

• On 13 January 2009, Assistant Commissioner Hammersley responded to Mr Jonshagen's letter to the Commissioner dated 2 December 2008. That letter contains a comprehensive response to Mr Jonshagen's complaint, including the following:

The application form contained in the prospectus for [the Project] made it quite clear that only full payment of the fees would be accepted on application.

For the year ended 30 June 1998 the actual arrangement you entered into was structured so that a participant received a tax refund greater than the cash contribution.

The tax deduction claimed of $30,387 for the years ended 30 June 1998 to 30 June 2000 far exceeded the actual cash contributed by you to the scheme of $16,197.

The position paper described the tests applied in determining the dominant purposes of [the Project] as well as the range of features of the scheme that led to our view that the scheme was carried out by the promoter with the dominant purpose of obtaining a tax benefit for investors.

You have made it clear during our discussions that you consider that the Tax Office has not treated you fairly or provided justice and that the position paper is premised on lies.

.............

You have raised this matter on 13 separate occasions either with the Tax Office directly or with members of Parliament. On each occasion the matter has been thoroughly investigated and you have been advised that the position paper was correct and your circumstances had been appropriately dealt with.

..............

This matter was settled over six and a half years ago. It is considered to be closed.

Should this matter be raised in the future without any fresh issues for consideration the correspondence will be noted, but no response provided;

• On 16 February 2009, Mr Jonshagen wrote to the Commissioner stating, in summary, that:

There is a serious error in the ATO position paper on the [Project] (attached). The ATO claims, three times, that the project can give cash refunds larger than the cash contributions so that a taxpayer can make a profit from the tax deductions alone. This is NOT true - it is a false allegation.

I hereby ask that my assessments for 98/99 to 00/01 be amended to include my original deductions for the [Project] investment. The decision to consider my investment in the [Project] as tax avoidance (dominant purpose to avoid tax) was based on the ATO position paper containing erroneous statements of a central nature. The settlement I signed, admitting to being a tax cheat, was based on the false allegations made by the ATO. It must now be cancelled;

• On 1 May 2009, Assistant Commissioner Collins wrote to Mr Jonshagen addressing the accuracy of the ATO Position Paper;
• On 14 October 2009, Assistant Commissioner Collins again wrote to Mr Jonshagen addressing the accuracy of the ATO Position paper;
• On 8 June 2010, Assistant Commissioner Collins emailed Mr Jonshagen concerning the accuracy of the ATO Position Paper;
• On 10 June 2011, Assistant Commissioner Collins emailed Mr Jonshagen in response to a communication from Mr Jonshagen. In this email, Assistant Commissioner Collins wrote:

Essentially, the statement made in the ATO position paper that people could make more money from the tax refunds than the cash outlay on the investment was not accurate from an investor perspective, based upon what you and other investors were told in the prospectus.

Once again I request that you discuss with me any proposal circulate these communications to other persons, given the extended context of our discussions;

• On 26 February 2013, Mr Jonshagen made an online complaint about the accuracy of the ATO Position Paper, requesting that his assessments for the years ended 30 June 1999 to 30 June 2001 be amended to include the deductions originally claimed in respect of the Project and that the Project Settlement Deed be cancelled (Online Complaint). The Online Complaint contained the following statement:

The ATO published a position paper to outline the reason for why the dominant purpose of my investment was to avoid tax. There is a serious error in the ATO position paper on the [Project] ....The ATO claims, three times, that the project can give cash refunds larger than the case contributions so that a taxpayer can make a profit from the tax deductions alone.

This is NOT true - it is a false allegation. The truth is that no investor/taxpayer can make a profit from just the tax returns.

............

I have an email from ATO Assistant Commissioner, Mr Bruce Collins....where he confirms that the ATO position paper is not accurate

.............

The ATO officer who made the decision, based on the position paper, that investing in the project constituted tax avoidance, did not know that the position paper contained the error. The decision was based on false information; and

• On 2 May 2013, Assistant Commissioner Barford responded to the Online Complaint and Mr Jonshagen's subsequent two emails, dated 15 and 20 March 2013 respectively, stating:

Our records indicate that the issues raised by you have been addressed on numerous occasions. I note that the ATO position was explained at length in our letters dated 1 May and 14 October 2009 signed by Bruce Collins and in email correspondence from Bruce Collins to you dated 8 and 11 June 2011. I also note that you have not raised any fresh issues or evidence for consideration in your recent correspondence. Notwithstanding that, I have considered the issues raised in your complaint and concluded that the Part IVA conclusion in the ATO position paper for the [Project] remains correct.

1. On 15 February 2014, Mr Jonshagen applied to the Tribunal for a review in relation to his complaints to the Commissioner.
2. On 4 April 2014, there was a hearing in the Tribunal on the question of jurisdiction. The Tribunal ordered that it did not have jurisdiction in respect of Mr Jonshagen's review application (i.e. as there was no "reviewable objection decision" within the meaning of s 14ZQ of the TAA).
3. On 28 April 2014, Mr Jonshagen emailed Mr Richard McGrade, Senior Lawyer, Review and Dispute Resolution, ATO, objecting to the Commissioner's treatment of him in relation to the Project. In his email of 28 April 2014, Mr Jonshagen states:

Attached is my complaint officially lodged 26 February 2013 regarding the ATO handling of my tax deductions for my Chalice Bridge investment....Mr Wayne Barford claims to have dealt with my complaint and is dismissing my requests without any motivations in a letter dated 2 May 2013 [attached]. In my complaint I requested the settlement be set aside and my tax assessments corrected.

I am objecting in writing to how I have been treated. Found guilty by a secretive court [the Pt IVA panel] that deliberated based on false information/evidence [the position paper] and sentenced me to sever penalties. These penalties were used to force through the settlement. After years of asking for it, the ATO have not been able to produce any notes from the Pt IVA meeting, from the officer who made the decision or any verifications regarding any of the allegations against me.

I must have committed a crime. This is a fundamental principle of justice. Police cannot hand out speeding fines before the speed limits are posted. The ATO has not been able to produce any such evidence.

I was sentenced to sever penalties.

I request the settlement be set aside and ask that the tax deductions be reinstated. This would in my mind be the logical conclusion when we know that a mistake was made. It is quite obvious that a decision based on false information cannot be allowed to stay. It is a fundamental issue of justice!

In what sort of justice system could such a decision be a lawful decision? North Korea perhaps.

1. On 29 April 2014, Mr McGrade responded, by email, to Mr Jonshagen's email of 28 April 2014l. In his email of 29 April 2014, Mr McGrade stated that Mr Jonshagen's email of 28 April 2014:

.....incorporating by reference, as it does, your on-line complaint of 26 Feb 2013, probably does satisfy the requirements of a valid objection against the relevant amended assessments for the years ended 30 June 1998, 30 June 1999 and 30 June 2000 which disallowed your claimed deductions relating to the Chalice Bridge 1998 Project.

However, the objection will be well out of time in terms of the time limits specified in s 14ZW of the Taxation administration Act. But, as mentioned previously, you have a right to request an extension of time, and the Commissioner has a discretion to grant that extension, under s.14ZX of the Taxation Administration Act. If the Commissioner refuses to grant you that extension (which, without wanting to pre-empt anything, is possible in this case given the time that has passed since those assessments issued) then you have the right to ask the Tribunal to review any such decision to refuse to extend time.

1. On 7 May 2014, Mr Jonshagen requested an extension of time to lodge an objection against the 1998 and 1999 Amended Assessments.
2. On 16 May 2014, Mr Jonshagen emailed ATO officer, Ms Camelia Ocello, challenging the accuracy of the ATO Position Paper and, in particular, statements made in it that investors in the Project can make money from tax refunds alone, that the loan arrangements involved round-robin transactions with no real provision of funds and that the up-front establishment fees were inflated.
3. On 14 August 2014, Mr Jonshagen again emailed Ms Ocello requesting an extension of time in which to lodge an objection to the 1998 and 1999 Amended Assessments and that the Project Settlement Deed be cancelled.
4. On 3 October 2014, the Commissioner refused Mr Jonshagen's request for an extension of time in which to lodge objections against the 1998 and 1999 Amended Assessments (Refusal Decision). The "Reasons for decision", attached to the Refusal Decision, provide the following summary of statements made by Mr Jonshagen in support of his position:

The reasons for your delay in lodging objections against amended assessments were:

The ATO only recently understood that there was a major error in their position paper for the [Project]; and

You have been unwell with anxiety and depression.

You consider that the ATO position paper is not factual and contains a serious error regarding receiving profits from tax refunds alone which invalidate the finding of tax avoidance.

The ATO has not provided you with evidence that Churchill Finance did not have funds to advance on behalf of the Grower and [ASIC] informed you that they could see no reasons to take any action against them.

You consider that the up-front fees were not excessive or unreasonable for the business and you have read Product Rulings for schemes which were structured in a similar manner to the [Project] with high establishment costs at the beginning which were considered allowable deductions.

Private rulings had been issued for similar schemes at the time of the investment which allowed the round robin arrangements and that the decisions made on the schemes showed that the Commissioner was inconsistent with these rulings.

You claim you were pressured into a settlement for the [Project].

You consider that the ATO position regarding Part IVA of the ITAA 1936 and the dominant purpose of the [Project] was based on incorrect information.

1. On 19 November 2014, Mr Jonshagen applied to the Tribunal for a review of the Refusal Decision.

SHOULD MR JONSHAGEN'S REQUEST FOR AN EXTENSION OF TIME TO LODGE AN OBJECTION TO THE 1998 AND 1999 AMENDED ASSESSMENTS BE AGREED TO?

1. Section 14ZW of the TAA imposes time limits for the lodgement of taxation objections against taxation decisions, including objections to income tax assessments.
2. Section 14ZW(2) of the TAA provides that, even though the prescribed time for lodging an objection has passed, an objection may still be lodged with the Commissioner together with a written request asking the Commissioner to deal with the objection as if it had been lodged within the required period.
3. Section 14ZW(3) of the TAA provides that such a request must state fully and in detail the circumstances and the reason for the failure to lodge the objection within the required period.
4. Section 14ZX(1) of the TAA provides that after considering an extension of time request, the Commissioner must decide whether to agree to it or refuse it.
5. The onus is on the taxpayer to establish why the Commissioner (and, in his shoes, the Tribunal) should agree to his or her request for an extension of time.
6. The leading case concerning the discretion in s 14ZX(1) of the TAA is the Federal Court's decision in Brown v Federal Commissioner of Taxation 99 ATC 4516 (Brown) wherein Hill J said (at 4527):
   1. In summary when a taxpayer seeks an extension of time in which to lodge an objection the following matters will require consideration:
      1. The taxpayer's explanation for the delay in lodging an objection against the assessment within the time stipulated by Parliament.

2. The circumstances attendant upon that delay.

1. Whether the objection is one which, on its face, is frivolous or which in law must fail, or, to the extent that this is indeed a different test, is one in which the taxpayer has no arguable case. This matter will be considered by reference to the objection itself and such other material as the taxpayer puts before the Commissioner. It will seldom, if ever, require the decision maker to consider matters such as credit or endeavour to reconcile the evidence which the taxpayer choses to rely upon with other factual material in the possession of the Commissioner. No doubt the stronger the case the more likely that the discretion would be exercised in favour of a taxpayer even where the explanation for the delay was thought not to be strong. Whether the converse is the case need not here be considered.
2. Such other matters as the circumstances of the particular case make relevant, including, if prejudice to the Commissioner be asserted, such prejudice as is shown to arise.
3. What is required is the balancing of the delay; the explanation for it; the circumstances which gave rise to it and such prejudice if any as may be shown to exist to the Commissioner against the prejudice which may arise to a taxpayer who has by reason of the failure to object in time lost the right to a review of the assessment. In this balancing process the Commissioner or the Tribunal on a review will be guided by what the justice of the case requires. The balancing process should be approached on the basis that while Parliament has stipulated a time in which objections are required to be lodged it has entrusted to the Commissioner a power to extend that time in appropriate circumstances. The decision maker should not lose sight of the fact that s 14ZW is an ameliorating provision designed to avoid injustice. [Emphasis added]

36. In Brown, Hill J also said (at 4527) the following in relation to the merits of the taxpayer's objection (at 4527):

1. .........What is involved is whether the objection on its face discloses a case which is arguable, not whether having regard to other matters, including evidence which may not even be known to the taxpayer at the time of making the application, the case is one that the taxpayer will or will probably lose. [Emphasis added]

37. Practice Statement Law Administration PS LA 2003/7, titled "Taxation objections - late lodgement" (PSLA 2003/7), provides guidance in making decisions on requests to deal with late taxation objections as if they were lodged within time. PSLA 2003/7 essentially adopts what was said by Hill J in Brown. More specifically, PS LA 2003/7 states (at [3]) that

ATO personnel should consider the following factors and weigh them in the balance to decide either to agree to such a request or to refuse it:

• The taxpayer's explanation for the failure to lodge the objection within the allowable time limits;
• The circumstances of the delay;
• Whether the taxpayer has an arguable case for the objection to be allowed in whole or in part; and
• Other relevant matters that arise in the circumstances of the particular case. [Emphasis added]

Mr Jonshagen's explanation for the failure to lodge the objection within time & the circumstances of the delay

1. Pursuant to s 14ZW(1) of the TAA, the last date on which Mr Jonshagen could have lodged an objection to the 1998 and 1999 Amended Assessments was 17 August 2006.. Consequently, Mr Jonshagen is more than 8 years and 9 months out of time in which to lodge an objection against the 1998 and 1999 Amended Assessments.
2. In an email to Ms Camelia Ocello of the ATO, dated 14 August 2014, Mr Jonshagen explains the reasons for his delay in objecting to the 1998 and 1999 Amended Assessments. In summary, his reasons are:
   • he thought he had objected in the many letters he had sent and phone calls he had made to the ATO and he was "certainly under the impression that [he] was objecting as clearly and as loudly as [he] could to the ATO", but he now understands that none of these letters or phone calls were considered "a legal objection" to the 1998 and 1999 Amended Assessments;
   • the Commissioner only recently understood that there is a factual error in the ATO Position Paper; and
   • he was unwell at the time (i.e. he was suffering from anxiety and depression).
3. Similar reasons were given by Mr Jonshagen in his Statement of Facts, Issues and Contentions, dated 6 April 2015, in his Submissions, dated 8 May 2015, and in his oral evidence at the hearing.
4. Mr Jonshagen's explanation for the lengthy delay in objecting to the 1998 and 1999 Amended Assessments is inadequate.
5. The factual error that Mr Jonshagen refers to in his email to Mr Ocello, dated 14 August 2014, is the following statement in an email from Assistant Commissioner Collins, to Mr Jonshagen, dated 10 June 2011 (refer to paragraph 20 above):

Essentially, the statement made in the ATO position paper that people could make more money from the tax refunds than the cash outlay on the investment was not accurate from the investor perspective, based upon what you and other investors were told in the prospectus.

1. This is not a recent statement. Mr Jonshagen did not request an extension of time to lodge an objection for nearly 3 years after it was made.
2. It is not in dispute that Mr Jonshagen was unwell around 2002, as he was suffering from anxiety and depression, and that he has not completely recovered his health. However, this does not adequately explain his delay in lodging an objection.
3. Mr Jonshagen has corresponded with the Commissioner on numerous occasions over the ten year period from 2004 to 2014, raising his concerns about the accuracy of the ATO Position Paper: refer to paragraphs 20 above. Instead of raising concerns about the accuracy of the ATO Position Paper in correspondence to the ATO, Mr Jonshagen could instead have lodged an objection to the 1998 and 1999 Amended Assessments.
4. Mr Jonshagen also advances the ATO's failure to act on information provided by him "numerous times to several tax commissioners and high level officers" as a reason for the delay in objecting to the 1998 and 1999 Amended Assessments.[1] The summary of the correspondence between Mr Jonshagen and the Commissioner in the ten year period from 2004 to 2014 (as set out in paragraph 20 above), in summary, establishes that:
   • the Commissioner did not fail to act on information provided by Mr Jonshagen but, rather, considered Mr Jonshagen's position on at least five occasions between 2004 and February 2014, when Mr Jonshagen applied to the Tribunal for a review of the Refusal Decision. Mr Jonshagen did not raise any new issues or provide any new information to the Commissioner on the third, fourth and fifth occasions and, at no time, did Mr Jonshagen state that he objected to the 1998 and 1998 Amended Assessments; and
   • over the relevant period Mr Jonshagen requested his notices of assessment for the 1998 and 1999 income years be amended on three separate occasions and that all of those requests were made in correspondence to the Commissioner that focussed on the accuracy of the ATO Position Paper. At no time did Mr Jonshagen state that he objected to the 1998 and 1999 Amended Assessments. On the first occasion, Assistant Commissioner Bruce referred to the Project Settlement Deed and indicated that the ATO considered the matter closed: refer to paragraph 20 above. On the second and third occasions, the responses given by the Assistant Commissioners to Mr Jonshagen were made against a background of correspondence between Mr Jonshagen and the ATO in which Assistant Commissioner and other ATO officers had considered the accuracy of the ATO Position Paper on numerous occasions. An explanation of why the Assistant Commissioners did not expressly refer to Mr Jonshagen's requests to have the 1998 and 1999 Amended Assessments amended on these occasions is that the ATO had already considered Mr Jonshagen's substantive complaints on a number of occasions and did not consider that the ATO Position Paper contained errors such that it was unnecessary to consider his requests: refer to paragraph 20 above.

1. Central to Mr Jonshagen's case (objection) are the alleged inaccuracies in the ATO Position Paper. In the Online Complaint, Mr Jonshagen wrote:

The ATO published a position paper to outline the reason for why the dominant purpose of my investment was to avoid tax. There is serious error in the ATO position paper on the [Project]....The ATO claims, three times, that the Project can give cash refunds larger that the cash contributions so that a taxpayer can make a profit from the tax deductions alone.

1. Specifically, Mr Jonshagen takes issue with the following statements in the ATO Position Paper:

(i) "The arrangements the taxpayer entered into were structured so that they received a tax refund greater than the cash contributions they were required to make under the project agreements" (First Statement);

(ii) "The tax deductions claimed by the Growers for the management fees far exceed their cash outlay. If the tax savings exceed the cash contributions, the taxpayer is able to make a profit from the tax deduction alone"; and

(iii) "Tax savings generated the necessary funds to meet the required cash payments by the participants on the top marginal tax rate".

1. In his letter to Ms Ocello, dated 16 May 2014, Mr Jonshagen repeats the contentions he made in the Online Complaint (as set out in paragraph 20 above) and adds two more. First, that the loan arrangements for the Project were "genuine" and, second, that the management fees for the project were not inflated for the first years of the Project.
2. The Commissioner accepts that the First Statement (as set out in paragraph 48 above) was not accurate in its application to Mr Jonshagen. That is, the Commissioner accepts that in Mr Jonshagen's case there was a shortfall of $505 between his cash contributions to the Project and the tax benefit he would have received if the deductions were allowed. Mr Jonshagen asserts that his cash contribution in the first year of the Project was $4,455. In contrast, the figure used in the ATO Position Paper is $2,440. However, as the Commissioner points out, the First Statement is correct if the figure in the ATO Position Paper is used and the participant (Grower) paid for a "guarantee".
3. As outlined in the ATO Position Paper (which is based on the information contained in the prospectus for the Project), an important feature of the Project was that participants could borrow their subscription fees from a lender associated with the promoters of the Project and that participants could (but were not required to) pay a "guarantee". The "guarantee" meant that beyond the first two years of the Project further principal payments only had to be repaid from net income derived from the Project (interest after the first two years was capitalised).
4. In any event, the Commissioner's view that Part IVA of the ITAA 1936 applied to the Project, does not rest on the First Statement (as set out in paragraph 48 above).
5. The Commissioner's position, as set out in the ATO Position Paper, is that the "deductions claimed for management fees, rent and interest in connection with the investment in [the Project] are not allowable" because:

(i) the general anti-avoidance provisions in Part IVA of the ITAA 1936 apply to the Project to disallow deductions claimed by investors; and

(ii) the expenditure in respect of lease fees, management fees and pre-paid interest is otherwise not wholly deductible under s 8-1 of the ITAA 1997.

1. Mr Jonshagen's case (objection) to the 1998 and 1999 Amended Assessments relates only to the first of the above reasons.
2. The key statement in the ATO Position Paper as to why the Commissioner considers that Part IVA applied to the Project concerns the "form and substance" of the Project (Key Statement), as follows:

The substance of the Scheme is the creation of an inflated tax deduction, not the provision of funds for the management of the underlying business activity. The investor buys a tax deduction with minimal funds contributed by themselves and the majority covered by way of a limited recourse loan. Part of this tax benefit is used to finance the underlying commercial activity.

1. The Key Statement is not about making a profit from tax benefits, it is about inflated deductions. Under the Project, there can still be an inflated tax deduction and no profit from the tax benefit. This is Mr Jonshagen's situation.
2. To the extent that the First Statement is incorrect, it is just one of six reasons given in the ATO Position Paper in support of the Key Statement: refer to paragraph 11 above.
3. Further, the "form and substance" of the Project was just one of eight matters that the Commissioner was required to have regard to when forming his view whether Part IVA of the ITAA 1936 applied to the Project. In the ATO Position Paper, the Commissioner also considered the following seven matters, as required by s 177D of the ITAA 1936, in concluding that Part IVA applied to the Project: (i) the manner in which the scheme (Project) was entered into; (ii) the time at which the scheme (Project) was entered into and the length of the period in which the scheme (Project) was carried out; (iii) the result in relation to the operation of the ITAA 1936, but for Part IVA, would be achieved by the scheme (Project); (iv) any change in financial position of the relevant taxpayer resulting from the scheme (Project); (v) any change in financial position of any person connected with the relevant taxpayer resulting from the scheme (Project); (vi) any other consequence for the relevant taxpayer or any connected person; and (vii) the nature of any connection between the relevant taxpayer and any person connected with the relevant taxpayer resulting in the scheme.
4. Mr Jonshagen relies on an email from Assistant Commissioner Collins to him, dated 10 June 2011 (refer to paragraph 20 above), in support of his contention that the First Statement was incorrect. However, in that email, Assistant Commissioner Collins is not saying that the First Statement was incorrect but, rather, is explaining that it is inaccurate from the perspective of an investor who, based on the prospectus for the Project, anticipated making a return from the Project. Assistant Commissioner Collins proceeds in that email to note that the Project did not in fact make the returns as set out in the prospectus for the Project.
5. As stated above (in paragraph 49), Mr Jonshagen contends that the loan arrangements for the Project are "genuine" and therefore do not support the Commissioner's statements in the ATO Position Paper. At the hearing, Mr Jonshagen elaborated on this contention by stating that Churchill Finance did in fact advance funds to the manager of the Project and this meant the loans were "genuine". The ATO Position Paper does not state that Churchill finance failed to advance funds to the manager of the Project. Rather, it states:

The loan provided by Churchill Finance involved a round robin arrangement, with Churchill Finance borrowing the funds from the project manager, forwarding the funds to the Trustee, who paid them to the project manager. The arrangement resulted in no real funds being made available for any of the participants' interests.

The only funds that became available to the project from Growers were prepayments of interest and actual repayments of principle on the loan provided.

Whilst the loans to Growers were created to cover the management fees they did not result in real funds becoming available for use in the project.

The loan arrangements involve artificial, blatant and contrived round-robin transactions, with no real provision of funds. These were included as steps in the project only for tax reasons. [Emphasis added]

1. As the Commissioner contends, the statement in the last paragraph (extracted above) does not mean that Churchill Finance did not advance funds to the manager of the Project. It provides a description of the loan arrangements as a whole, as described in the preceding paragraphs.
2. Mr Jonshagen also contends that the management fees for the Project were not inflated as stated in the ATO Position Paper and in support of this contention he relies, by anology, on up-front management fees for other agricultural investment schemes. The ATO Position Paper states:

[the] up-front management fees are excessive compared with money actually injected into the project.

.........

The forecast of project expenditure to 30 June 1999, page 20, of the Prospectus, provides a breakdown of the project fees on a leased area basis and how they will be expended. However, the actual expenditure incurred by the manager for this period is less than twenty five percent of the fees due by growers.

1. Nowhere in the ATO Position Paper is it stated that the management fees for the Project were excessive relative to other agricultural investment schemes. The ATO Position Paper simply makes the point that the management fees for the Project were inflated to enable participants to claim a large up-front tax deduction.
2. In his oral evidence at the hearing, Mr Jonshagen emphasised that he did not participate in the Project for the dominant purpose of obtaining a tax benefit. However, it is well-established that a taxpayer's subjective purpose is irrelevant for the purposes of Part IVA of the ITAA 1936: see Calder v Commissioner of Taxation [2005] FCA 911 at [38] per Nicholson J.
3. For the above reasons, the Tribunal considers that Mr Jonshagen's objection to the 1998 and 1999 Amended Assessments is weak and does not, on its face, disclose a case which is arguable. That is, Mr Jonshagen's case (objection) is one which he will, or will probably, lose: Brown per Hill J at 4527.

1. The Project Settlement Deed is a factor that weighs against an extension of time being agreed to. The reasons for this are as follows.
2. By lodging the application and requesting an extension of time Mr Jonshagen has breached an express term of the Project Settlement Deed. By signing the Project Settlement Deed, Mr Jonshagen agreed that he would "not lodge an objection/s nor request an amendment or review in respect of the matter": see paragraph 18 above.
3. An agreement to an extension of time would undermine the purpose of the Project Settlement Deed. The purpose of such a deed is to allow the parties to resolve disputed assessments by agreement and to avoid the costs and uncertainty of litigation.
4. The Project Settlement Deed is a legally enforceable settlement agreement. In signing it, Mr Jonshagen accepted the terms of the Commissioner contained in the deed: see paragraph 18 above.
5. Mr Jonshagen claims that he was forced to sign the Project Settlement Deed under duress. In his letter to Ms Ocello, dated 16 May 2014, Mr Jonshagen states:

The settlement that (sic.) was forced through based on false allegations of tax avoidance and severe penalties with punitive interest rates. Note: penalties were only reduced upon signing the settlement, admitting guilt and giving up rights to justice.

1. Further, in his letter to Ms Ocello, dated 14 August 2014, Mr Jonshagen states that he was experiencing anxiety and depressive symptoms at the time he signed the Project Settlement Deed.
2. Attached to the Project Settlement Deed is a signed "Statement" from Mr Jonshagen, dated 1 July 2002, which notes that he applied for an extension of time on medical grounds, states that he submitted the Project Settlement Deed to minimise his risk and criticises the actions of the Commissioner in connection with the Project.
3. It is not in dispute that the period around mid-2002 was a difficult time for Mr Jonshagen (i.e. that he was unwell, suffering from anxiety and depression) and that his decision to sign the Project Settlement Deed was likely to have been a difficult one. However, there is nothing to establish that the Commissioner did anything to force Mr Jonshagen to sign the Project Settlement Deed or that he did so under "duress" in the legal sense of that word.
4. Further, the Tribunal notes that in signing the Project Settlement Deed Mr Jonshagen acknowledged that "no promises, threats or inducements have been made to me": refer to paragraph 18 above.
5. Mr Jonshagen contends that he had less than one week "from receiving the amended assessments (issued and posted on 11 June 2002) and the ATO imposed settlement deadline (21 June 2002)". According to Mr Jonshagen:

At this time I was suffering from depression and anxiety and informed the ATO that I could not consider their proposal for health reasons...I asked for a six month extension hoping to be able to recover to be able to understand the ATO allegations against me and my options.

........A new 2 week deadline was issued and I was informed in no uncertain terms.....that I had to immediately give up my right to object of the ATO would demand immediate payment of full penalties and interest on top of a huge tax bill, there would be no further settlement opportunity.[2]

1. The Tribunal does not accept this contention. Mr Jonshagen had sufficient information and time to properly consider his position in relation to the Project Settlement Deed and seek independent advice if necessary. The Commissioner provided Mr Jonshagen with his decision that the Project subscription fees were not deductible and the ATO Position Paper more than a year before he announced the ATO Settlement Offer to Project participants (including Mr Jonshagen) on 14 February 2002. At that time, the deadline for acceptance of the ATO Settlement Offer was 29 May 2002, a period of almost two and a half months. The Commissioner subsequently extended the settlement offer deadline for all Project participants to 21 June 2002. Then, following a request from Mr Jonshagen based on medical reasons, the Commissioner extended the deadline for him to 5 July 2001. Consequently, Mr Jonshagen had four and a half months to consider his position on the Project Settlement Deed.
2. As submitted by the Commissioner, Mr Jonshagen always had an alternative to signing the Project Settlement Deed. Instead of signing the Project Settlement Deed, Mr Jonshagen could have objected to the 1998 and 1999 Amended Assessments.

1. As the Commissioner contends, the Commissioner (ATO) has entered into settlement agreements with many taxpayers who have participated in mass marketed investment schemes, including other taxpayers who participated in the Project. If Mr Jonshagen's request for an extension of time were to be agreed to, it will raise an issue of "fairness" between Mr Jonshagen and other participants in mass marketed investment schemes and, in particular, other participants in the Project: see Case Y58 91 ATC 497 at [9] per SM Balmford.

1. If an extension of time is agreed to, the Commissioner will be prejudiced because he has carried on his business on the basis that all matters between him and Mr Jonshagen were finalised when they entered into the Project Settlement Deed and he will not be able to consider all relevant documents as he no longer holds documents relating to the Project.
2. On the other hand, if an extension of time is not agreed to then Mr Johnsagen will be prejudiced because he will not be able to have his objection considered.
3. On balance, the prejudice to the Commissioner if an extension of time is agreed to is greater.

1. Having considered Mr Jonshagen's explanation for his failure to lodge an objection to the 1998 and 1999 Amended Assessments in time, the circumstances of the delay, whether Mr Jonshagen's case is arguable and other relevant factors and, having weighed those factors, the Tribunal finds that an extension of time should not on balance be agreed to: Brown.

1. For the above reasons, the Tribunal affirms the Refusal Decision.

I certify that the preceding 83 (eighty three) paragraphs are a true copy of the reasons for the decision herein of Senior Member CR Walsh

...(Sgd) A Tran.....................................................................