Carey v Field

REASONS FOR JUDGMENT 1 The applicant has commenced a proceeding under the Administrative Decisions (Judicial Review) Act 1977 Cth ("the ADJR Act") to set aside a decision made on behalf of the Federal Commissioner of Taxation ("the Commissioner") on or about 7 December 2001 to withdraw Product Ruling PR 2001/92 ("the Product Ruling") as from 12 December 2001. Although the applicant relied on numerous grounds of review ultimately he submitted that the decision should be set aside as the Commissioner erred in law and in fact, misdirected himself as to the matters he was required to take into account and failed to comply with the rules of natural justice in making the decision. 2 The Product Ruling was a public ruling of the Commissioner pursuant to Pt IVAAA of the Taxation Administration Act 1953 (Cth) ("the TA Act"). Section 14ZAAF, which is in Pt IVAAA, provides: "The Commissioner may make a public ruling on the way in which, in the Commissioner's opinion, a tax law or tax laws would apply to a class of persons in relation to an arrangement." 3 Subject to a contrary intention, s 14ZAAA defines an "arrangement" for the purposes of Pt IVAAA as including: "(a) scheme, plan, action, proposal, course of action, course of conduct, transaction, agreement, understanding, promise or undertaking; (b) part of an arrangement;" 4 The binding effect of a public ruling is provided for in s 170BA(3) of the Income Tax Assessment Act 1936 (Cth) ("the ITA Act 1936") which provides: "Subject to sections 170BC and 170BDA, if: (a) there is a public ruling on the way in which an income tax law applies to a person in relation to an arrangement ('ruled way'); and (b) that law applies to a person in relation to that arrangement in a different way; and (c) the amount of final tax under an assessment in relation to that person would (apart from this section and sections 170BC and 170BDA) exceed what it would have been if that law applied in the ruled way; the assessment and amount of final tax must be what they would be if that law applied in the ruled way." 5 Sections 170BC and 170BDA are not relevant to the present case. 6 Under s 14ZAAK(1) of the TA Act the Commissioner may withdraw a public ruling, either wholly or to an extent, by publishing notice of the withdrawal in the Gazette. Section 14ZAAL provides: "(1) A public ruling that is wholly withdrawn: (a) continues to apply to arrangements begun to be carried out before the withdrawal; and (b) does not apply to arrangements begun to be carried out after the withdrawal. (2) A public ruling that is withdrawn to an extent: (a) continues to apply wholly to arrangements begun to be carried out before the withdrawal; and (b) does not apply to that extent to arrangements begun to be carried out after the withdrawal." 7 On 7 December 2001 the Australian Tax Office ("the ATO") caused notification of decision to withdraw the Product Ruling to be submitted for publication in the Gazette to be published on 12 December 2001. The notice of withdrawal published in the Gazette on 12 December 2001 was in the following terms: "Notice of Withdrawal Product Ruling Income tax: Grampians Olive Project 2001 Product Ruling PR 2001/92 is withdrawn with effect from today. We have reviewed the Grampians Olive Project 2001 and determined that the arrangement, as implemented, is materially different from that described in the Ruling on the following grounds: (1) the Project arrangement as implemented involved seven separate partnership's which entered into separate sets of agreements, and (2) work to be completed by 30 June 2001 under the Planting Agreement and the Construction of Water Facilities Agreement was not commenced by that date. As a result, there is no class of persons to whom the Ruling applies. Commissioner of Taxation 12 December 2001" 8 A decision to withdraw a product ruling is required to be made by the Commissioner. The decision to withdraw the Product Ruling appears to have been made by the respondent as the delegate of the Commissioner. In the circumstances I have treated the decision as that of the Commissioner. 9 In reliance upon the Product Ruling, 94 investors, of which 87 were individuals, subscribed funds to seven partnerships, each of which was formed to carry on business as a commercial grower of olives in the Grampians region in Victoria on different parts of a property known as "Arizona". The business carried on by the seven partnerships was referred to in the Product Ruling as "Grampians Olive Project 2001" ("the Olive Project"). As a result of the withdrawal of the Product Ruling the partners in the seven partnerships are only entitled to rely upon s 170BA(3) of the ITA Act 1936 in respect of arrangements begun to be carried out before the withdrawal, which was on 12 December 2001: see s 14ZAAL(1)(a) of the TA Act. However, the notice of withdrawal stated that, as the arrangement implemented was materially different from that described in the Product Ruling, "there is no class of persons to whom the Ruling applies". 10 The applicant, a partner in one of the Olive Project partnerships, disputes that the arrangements implemented differ from those ruled upon and claims that the substantive and procedural errors made by or an behalf of the ATO should result in the decision to withdraw the Product Ruling being set aside by the Court. 11 In order to appreciate the issues arising in the present case it is necessary to outline the history of the matter. Initially, the promoter of the Olive Project, Grampians Olives Pty Ltd ("Grampians Olives"), applied to the Commissioner for a private ruling under Pt IVAA of the TA Act. After receiving advice from the ATO that it was more appropriate to apply for a public ruling under Pt IVAAA an application for a ruling under Pt IVAAA was lodged with the ATO on 22 March 2001 by Jonathan D Madgwick ("Madgwick"), a Chartered Accountant acting for Grampians Olives. The application contained details of the arrangements which were proposed to be carried out to implement the Olive Project. 12 The Olive Project described in the application involved a partnership, consisting of not more than 20 partners who were "known to each other" (see ss 601ED(2) and 708 of the Corporations Law), which proposed to carry on business as a commercial olive grower on up to 400 hectares of land at "Arizona", that was to be leased to the partnership. An attraction to partners participating in the Olive Project was an entitlement pursuant to the proposed Product Ruling to deductibility of the fees paid prior to 30 June 2001 in order for the partners to become members of the partnership. 13 The application for the Product Ruling, which is a public ruling, enclosed draft copies of a proposed partnership agreement, a proposed management agreement, a proposed planting agreement, a proposed water facility agreement and certain other agreements. Under the agreements, as varied prior to the Product Ruling, the planting of the olive trees was to be completed by 30 June 2001, the water facilities required for irrigating the olive trees were to be completed by 30 June 2001 and the management services in respect of those matters were also to be provided by 30 June 2001. 14 After the lodging of the application for a product ruling there were a number of communications between Madgwick and ATO officers. In the course of those communications the ATO officers requested information concerning the identity of the partners, whether the partnership complies with s 115 of the Corporations Law and as to the feasibility of carrying out all of the works by 30 June 2001. Madgwick informed the ATO that the identity of the partners could not yet be ascertained, the partnership complied with s 115 of the Corporations Law as it "will be limited to no more than 20 persons" and the relevant agreements required the carrying out of all works by 30 June 2001. Madgwick forwarded to the Commissioner revised agreements which provided for all of the relevant services and works to be completed by 30 June 2001. Madgwick, at the request of the ATO officers, also provided a draft of the product ruling that his client was seeking from the Commissioner. 15 Grampians Olives' draft letter dated 10 May 2001 to potential investors was also submitted to the ATO. It stated: "RE: 2001 GRAMPIANS OLIVES PROJECT We refer to enquiries with regard to our capabilities to carry out the works as outlined in the Management agreement, by the 30th June 2001. We have spoken with our contractors, together with our own internal labour, and see no reason why we cannot establish the plantations before the 30th June 2001, in accordance with the Management agreement, as contemplated to be entered into by investors in the Grampians Olives Project 2001. We have undertaken not to take on any work which cannot be planted by the 30th June 2001, bearing in mind the tax consequences of these actions. We look forward to discussing this matter with you at your convenience. Yours faithfully, [Signed] MILHAM HANNA DIRECTOR" 16 The ATO also inquired as to the value of "Arizona" and was informed that it was valued at "$720,000". The value was relevant to the entitlement of individuals to deduct partnership losses under Div 35 of the Income Tax Assessment Act 1997 (Cth) ("the ITA Act 1997"). Under s 35-55 one of the requirements for deductibility was that the land on which the horticultural part of the business of the partnership was being carried on has a value in excess of $500,000. Thus, if more than one partnership was to carry on business at Arizona then, subject to the question of the value to be attributed to improvements, that may result in the requirements for s 35-55 deductibility not being met. 17 The ATO officers were concerned about whether the Olive Project could be completed by 30 June 2001. In order to allay those concerns Grampians Olives provided an undertaking to the Commissioner on 14 June 2001 stating that no investor will be accepted unless the: "manager is satisfied that all work that must be completed by 30 June 2001, in respect of that investor, will be completed by that date." 18 On 14 June 2001 Grampians Olives also signed a "Terms of Use" agreement with the Commissioner in which Grampians Olives, as promoter of the Olives Project, agreed, inter alia, that: "6. The Promoter will notify the Australian Taxation Office if the Project is implemented in a manner which is in any way different to the description of the arrangement contained in the Product Ruling and/or supplied to the ATO by the Promoter." 19 The product ruling was sought by Grampians Olives in accordance with Product Ruling PR1999/95. Clauses 9 and 10 of that ruling provided: "9. A Product Ruling provides certainty to potential investors by confirming that the tax benefits set out in the Ruling part of the Product Ruling are available, provided that the arrangements are carried out in accordance with the information provided by the applicant and described in the Arrangement part of the Product Ruling. The highest levels of disclosure are expected of the applicant. If the arrangement described in the Product Ruling is materially different from the arrangement that is actually carried out, investors lose the protection of the Product Ruling: · the Ruling has no binding effect on the Commissioner, as the arrangement entered into is not the arrangement ruled upon; and · the Ruling will be withdrawn or modified. This is likely to occur when there is a material omission or misrepresentation in the application for the Ruling. 10. Potential investors in a particular project may wish to seek assurances from the promoter of the project that the arrangement will be carried out as described in the Product Ruling relating to the project." 20 The Product Ruling was set out over some 25 pages and dealt with the relevant provisions of the tax laws that impacted upon the Olives Project. Relevantly, for present purposes, the Ruling contained the following provisions: "Class of persons 6. The class of persons to whom this Ruling applies is those who enter into the arrangement described below on or after the date this Ruling is made. They will have a purpose of staying in the arrangement until it is completed (i.e., being a party to the relevant agreements until their term expires) and deriving assessable income from this involvement as set out in the description of the arrangement. In this Ruling these persons are referred to as 'Growers'. … Qualifications 8. The Commissioner rules on the precise arrangement identified in the Ruling. If the arrangements described in the Ruling are materially different from the arrangements that are actually carried out: · the Ruling has no binding effect on the Commissioner, as the arrangements entered into are not the arrangements ruled upon; and · the Ruling will be withdrawn or modified. ... Date of effect 10. This Ruling applies prospectively from 20 June 2001, the date this Ruling is made. … Withdrawal 12. This Product Ruling is withdrawn and ceases to have effect after 30 June 2003. The Ruling continues to apply, in respect of the tax law(s) ruled upon, to all persons within the specified class who enter into the specified arrangement during the term of the Ruling. Thus, the Ruling continues to apply to those persons, even following its withdrawal, who entered into the specified arrangement prior to withdrawal of the Ruling. This is subject to there being no change in the arrangement or in the persons' involvement in the arrangement. Arrangement 13. The arrangement that is the subject of this Ruling is described below. This description incorporates the following documents: · Application for a Private Binding Ruling dated 15 December 2000; · Application for a Product Ruling dated 22 March 2001; · Draft Private Offer Information Memorandum included with Application for Product Ruling; · Draft Management Agreement between Agreement between Grampians Olives Pty Ltd and the Partners, received 4 May 2001; · Draft Partnership Agreement received 4 May 2001; · Draft Planting Agreement between Tree Maintenance Services Pty Ltd and the Partners received 4 May 2001; · Draft General Maintenance Services Agreement between Grampians Olives Pty Ltd and the Partners, received 4 May 2001; · Draft Lease Agreement between Maclary Investments Pty. Ltd and the Partners received 4 May 2001; · Draft Accounting, Administrative, Secretarial and Other Services Agreement between Mezina Enterprises Pty Ltd and the Partners received 4 May 2001; · Draft Construction of Watering Facilities Agreement between Tree Maintenance Services Pty Ltd and the Partners received 4 May 2001; · Letters from the applicant's representative dated 4 May 2001, 14 May 2001, 22 May 2001, 24 May 2001 and 29 May 2001. Note: certain information received from the applicant has been provided on a commercial-in-confidence basis and will not be disclosed or released under Freedom of Information legislation. 14. There are no other agreements, whether formal or informal, and whether or not legally enforceable, which a Partnership will be a party to, that are part of the arrangement to which this Ruling applies, except agreements that come within paragraph 28 below, concerning the provision of finance. The effect of the agreements listed above is summarised as follows. Overview 15. The arrangement is called the Grampians Olive Project 2001: Location: Property known as 'Arizona' situated in the Grampians region of Victoria 5km from the township of Balmoral. Type of business each Grower is carrying on: Commercial growing of a number of varieties of olives for sale. Name used to describe the product: Grampians Olive Project 2001. Number of hectares under cultivation: Between 20 and 400 hectares. Minimum subscription for Project 20 hectares Minimum subscription per investor 10 hectares Number of trees per hectare 200 approximately The term of the investment 24 years. Initial cost per 10 hectare investment $551,850 Initial cost per hectare $55,185 Ongoing costs: $1168 in the second year increased by 4 per cent in each subsequent year.