Commissioner of Taxation v Eskandari

Background 2 In the 2000-01 income year the respondent earned $43,046 from his job as a storeman. He incurred losses from his unrelated business activity as a registered migration agent trading as 'Australian Migration & Education Advice' ('AMEA'). Subject to certain exceptions (none of which applies here) and to the Commissioner's discretion under s 35-55, s 35-10 of the ITAA 97 precludes the respondent claiming those losses against his assessable income from other sources and provides that those losses be carried over to the next income year in which that activity is carried on. Consequently on 27 January 2002 the respondent applied to the Commissioner for a private ruling seeking the exercise of the Commissioner's discretion under s 35-55 to allow him to deduct losses from his assessable income in 2001-02. He sought a similar exercise in respect of the income year 2000-01 but no appeal is brought in respect of that year. 3 In support of his application the respondent provided the Commissioner with material about his business activity. That material revealed that during the relevant income year AMEA had permanent offices in George Street, Sydney and advertised its services in community newspapers as well as in a newspaper in Hong Kong. The respondent, who was registered as a migration agent on 20 February 2001, registered his business name on 1 June 2001. It is not in dispute that AMEA is a commercial enterprise having the purpose of generating profit for the respondent. At the relevant time AMEA had three clients and the material provided to the Commissioner included two of its agreements with clients. Under those agreements the clients undertook to pay an initial fee of $900 in one case and $1,000 in the other. They also undertook, upon a visa being granted, to pay an additional fee of $2,700 and $4,000 respectively. 4 On 14 May 2002 the Commissioner issued a private ruling in which he refused to exercise the discretion in s 35-55(1)(b) in the respondent's favour. An objection to the private ruling was disallowed on 16 August 2002. The respondent applied to the Tribunal for a review of this decision. The Tribunal was satisfied that the conditions in s 35-55(1)(b) for the exercise of the discretion had been met and, on 28 March 2003, remitted the matter to the Commissioner with a direction that the private ruling be granted in accordance with the respondent's application. The Commissioner appeals to this Court. 5 The jurisdiction of this Court derives from s 44(1) of the AAT Act and is limited to appeal on a question or questions of law; TNT Skypak International (Aust) Pty Ltd v Federal Commissioner of Taxation (1988) 82 ALR 175 at 188 per Gummow J; Birdseye v Australian Securities and Investments Commission [2003] FCAFC 232 ('Birdseye'). In addition to raising a question of law, a notice of appeal (as pointed out in Birdseye at [18]) must also comply with the requirements of O 53 of the Federal Court Rules which regulates the practice and procedure in respect of appeals from the Tribunal. 6 The Commissioner contends that, as set out in the amended notice of appeal filed on 2 June 2003, the following are questions of law which arise in this appeal: 'Whether the discretion conferred by section 35-55(1)(b) of the [ITAA 97] may be exercised in respect of a business activity that does not have a lead time between the commencement of the activity and the production of any assessable income but generates income during its start-up phase. Whether the Commissioner of Taxation may exercise that discretion in favour of a taxpayer in the absence of evidence from independent sources of the matters in paragraph 35-55(1)(b)(ii) of [ITAA 97] and in the absence of evidence or grounds for concluding that such evidence is not available. What is meant by the expression "because of its nature" in section 35-55(1)(b)(i) of [ITAA 97]. The meaning and manner of assessing "a period that is commercially viable" for the industry concerned for the purposes of section 35-55(1)(b)(ii) of [ITAA 97]'. 7 It will be immediately apparent that, with regard to the latter two questions at least, there is a preliminary issue as to whether they are questions of law and consequently whether this Court has any jurisdiction with regard to them. As the Full Court observed in Collector of Customs v Pozzolanic Enterprises Pty Ltd (1993) 43 FCR 280 ('Pozzolanic') at 286, 'The limitation of the jurisdiction to the resolution of questions of law imposes a significant constraint upon the role of the Court in reviewing decisions of the Tribunal. The appealable error of law must arise on the facts found by the Tribunal or must vitiate the findings made or must have led the Tribunal to omit to make a finding it was legally required to make.' 8 I shall deal with each question separately (although not in the above order) and, where relevant, will deal with the issue of compliance with s 44(1) and O 53 r 3 at that time.

The legislative scheme 9 Division 35 of ITAA 97 applies to losses from certain business activities for the income year ending 30 June 2001 and subsequent years. Section 35-10(2) provides, with respect to business activities of an individual in an income year: 'If the amounts attributable to the business activity for that income year that you could otherwise deduct under this Act for that year exceed your assessable income (if any) from the business activity for that year, or your share of it, this Act applies to you as if the excess:

(b) were an amount attributable to the activity that you can deduct from assessable income from the activity for the next income year in which the activity is carried on.'

10 The rule in s 35-10(2) will not apply where: (i) pursuant to subs 35-10(4), the business activity is a primary production business or professional arts business and the taxpayer's assessable income (excluding capital gains) from other sources is less than $40,000;

(ii) one of four tests in ss 35-30, 35-35, 35-40 or 35-45 is met; or

(iii) the Commissioner exercises the discretion in s 35-55.

11 Section 35-55 provides: '(1) The Commissioner may decide that the rule in section 35-10 does not apply to a business activity for one or more income years if the Commissioner is satisfied that it would be unreasonable to apply that rule because:

(a) the business activity was or will be affected in that or those income years by special circumstances outside the control of the operators of the business activity, including drought, flood, bushfire or some other natural disaster; or

Note: This paragraph is intended to provide for a case where a business activity would have satisfied one of the tests if it were not for the special circumstances.

(b) the business activity has started to be carried on and, for that or those income years:

(i) because of its nature, it has not satisfied, or will not satisfy, one of the tests set out in section 35-30, 35-35, 35-40 or 35-45; and

(ii) there is an objective expectation, based on evidence from independent sources (where available) that, within a period that is commercially viable for the industry concerned, the activity will either meet one of those tests or will produce assessable income for an income year greater than the deductions attributable to it for that year (apart from the operation of subsection 35-10(2)).

Note: This paragraph is intended to cover a business activity that has a lead time between the commencement of the activity and the production of any assessable income. For example, an activity involving the planting of hardwood trees for harvest, where many years would pass before the activity could reasonably be expected to produce income.'

12 It is common ground that the only way in which the respondent could avoid the application of the rule in s 35-10(2) is by the Commissioner exercising his discretion under s 35-55 in the respondent's favour.

The object of Division 35 13 Section 35-5 of ITAA 97 states the object of Division 35: '(1) The object of this Division is to improve the integrity of the taxation system by preventing losses from non-commercial activities that are carried on as businesses by individuals (alone or in partnership) being offset against other assessable income.

(2) This Division is not intended to apply to activities that do not constitute carrying on a business, for example, the receipt of income from passive investments.'

14 Division 35 was introduced following a report ('Review of Business Taxation - A Tax System Redesigned', 1999) to the Commonwealth Government by a committee chaired by Mr J T Ralph AO (the 'Ralph Report'). The Ralph Report identified a leakage of revenue caused by individuals carrying on unprofitable non-commercial 'business' activities and claiming deductions from such business activities against their taxable income. The Ralph Report stated, at 296: 'Many of these activities are no more than hobbies and/or lifestyle choices but even those that have business like characteristics (according to existing law) are often unlikely to ever make a profit and do not have a significant commercial purpose or character. They continue in a net loss position year after year, offsetting so-called business losses against other income, notably salary and wages. On average they make little or no contribution to the revenue raising task but gain a significant tax advantage … The law in relation to carrying on a business is very difficult and resource intensive to administer and must be done on a case-by-case basis. The need to apply the existing law on that basis does not permit the efficient and effective use of resources and creates uncertainty.

A systemic solution that better deals with losses arising from such non-commercial activities is warranted.' 15 Division 35 was put before Parliament in the form of the New Business Tax System (Integrity Measures) Bill 2000 (Cth) (the 'Bill'). The Explanatory Memorandum and second reading speech for the Bill reflected the findings of the Ralph Report (see Explanatory Memorandum [1.7] - [1.9]; Australia, House of Representatives, Debates, 13 April 2000).

16 The Explanatory Memorandum and second reading speech also outlined the intended scope and purpose of the Commissioner's discretion in s 35-55. In the second reading speech for the Bill the Treasurer said: 'There is also a discretion to allow the losses where the business is affected by special circumstances, such as natural disasters, or is in its start-up phase.'

17 The Explanatory Memorandum to the Bill stated at [1.48] - [1.53]:

'The discretion is provided to ensure that certain individuals who carry on genuine commercial business activities are not disadvantaged due to particular circumstances which prevent them from satisfying tests 1 to 4. … The safeguard rule incorporates a second arm whereby the Commissioner may allow a taxpayer to offset losses from a business activity that does not satisfy any of the objective tests where there is an objective expectation that it will either pass a test or produce assessable income within a reasonable time. The taxpayer would need to establish the objective expectation based on information from industry bodies or scientific research, for example, if such information is available. … This arm of the safeguard discretion will ensure that the loss deferral rule in section 35-10 does not adversely impact on taxpayers who have commenced to carry on activities which by their nature require a number of years to produce assessable income. Examples of activities which could fall into this category are forestry, viticulture and certain horticultural activities. … The Commissioner must not exercise this arm of the discretion after the time that it is reasonable to expect the activity to first produce a profit or pass one of the tests'.

18 As Hill J commented in Commissioner of Taxation v Estate of Subrahmanyam (2001) 116 FCR 180 at 183, in reviewing the Commissioner's decision not to change a private ruling, 'The task of the Tribunal is to stand in the shoes of the Commissioner and itself make, in respect of the arrangement which is the subject of the ruling request (supplemented by such other information as the Commissioner seeks and is given and perhaps inferences to be drawn therefrom), the right or preferable decision, if necessary itself ruling on the arrangement the subject of the request.'

In Commissioner of Taxation v McMahon (1997) 79 FCR 127 at 133, Lockhart J said of the Commissioner's task, 'In making his decision about the private ruling the Commissioner is bound by the facts said by him to constitute the arrangement as identified in the ruling. Nor can the Tribunal travel beyond those facts as identified in the ruling. What the Tribunal does is to "go over again" the objection decision to consider what it thinks should be the proper answer to the question about the way in which the relevant tax law operated on the identified facts constituting the arrangement.'

The 'nature' of the respondent's business activity - s 35-55(1)(b)(i).

19 It is common ground that the respondent has not satisfied any of the four objective tests in ss 35-30, 35-35, 35-40 or 35-45. In its amended notice of appeal the applicant alleged that the Tribunal was in error in concluding that the failure of the business activity to satisfy one of the tests mentioned in s 35-55(1)(b)(i) was attributable to the nature of the business activity.

20 The question as formulated in the amended notice of appeal (see [6] above) fails to state a question of law with the precision required by O 53 r3(2). However, although no formal amendment to the question was sought, the appeal was argued, without objection from the respondent, on the basis that the question was whether the Tribunal had erred in construing the phrase 'because of its nature' in s 35-55(1)(b)(i) as referring to the particular incidents of the respondent's business as a migration consultant. I am satisfied that, expressed in this way, the question has the requisite precision. In considering this claim, however, I must be satisfied that it is a question of law.

21 The Commissioner, relying on the definition of 'nature' in the Shorter Oxford English Dictionary, submits that, on its true construction, the phrase refers to the essential qualities of the type of business activity in which the respondent is engaged; that is, 'the inherent and inseparable combination of properties' that give the respondent's business activity its fundamental character. The Commissioner contends therefore that s 35-55(1)(b)(i) can only be satisfied if the failure of the respondent's business activity to meet one of the four objective tests is attributable to its essential features. By definition those features would be common to business activities of the same kind or class as the respondent's business activity.

22 The Commissioner further contends that the respondent failed to submit adequate evidence of the nature of migration consultancy businesses as a kind or class of business, and that there was no basis for inferring that his particular practice or experience, including his practice of charging a success fee, reflected the nature of migration consultancy businesses generally. In the absence of this evidence the Commissioner contends that the Tribunal erred in having regard to the small scale of the respondent's business and his particular charging practices and in determining that the respondent had satisfied s 35-55(1)(b)(i) by virtue of those factors.

23 The respondent notes that the opening words of s 35-55(1)(b) refer to the particular business activity of the taxpayer. He submits that the phrase 'because of itsnature' refers back to that particular business activity and therefore requires the Tribunal to consider the features of the taxpayer's particular business activity not those of the generic class or kind of business activity which the taxpayer conducts. In the present case the respondent conducts his business activity on a success fee basis. Such evidence as the respondent put to the Tribunalshows that there is commonly a substantial delay between lodgement of a visa application and a final decision on that application; for example an extract from A Manager's Guide to Visa Times records that it takes 94 weeks to finalise 75% of all applications for family migration visas made in Hong Kong. The respondent says that this is an inherent feature of his business or, in other words, it is in the nature of his business activity and it is this which accounts for his business's failure to meet the assessable income test in s 35-30. 24 In addition the respondent submits that the task of the Tribunal was to determine whether the facts as found fall within the ordinary meaning of the words used in the statute. He claims that the Tribunal's conclusion that s 55-35(1)(b)(i) was satisfied was reasonably open to it; and that therefore there was no relevant error of law.

Consideration 25 It appears to be accepted that, in general, the ordinary meaning of a word is a question of fact; Pozzolanic at 287, accepted on this point at least by the High Court in Collector of Customs v Agfa-Gevaert Limited (1996) 186 CLR 389 ('Agfa-Gevaert') at 395-7. In Life Insurance Co of Australia Limited v Phillips (1925) 36 CLR 60 at 78, Isaacs J distinguished between 'meaning' (a question of fact) and 'construction' (a question of law). Quoting Lindley LJ in Chatenay v The Brazilian Submarine Telegraph Company Limited [1891] 1 QB 79 at 85, his Honour explained, '[Lindley LJ] says: "The expression 'construction' as applied to a document, at all events as used by English lawyers, includes two things: first, the meaning of the words; and, secondly, their legal effect, or the effect which is to be given to them. The meaning of the words I take to be a question of fact in all cases whether we are dealing with a poem or a legal document. The effect of the words is a question of law." ' 26 In Agfa-Gevaert the High Court viewed this distinction with some scepticism, commenting at 396-7, 'With respect this distinction seems artificial, if not illusory. The meaning attributed to individual words in a phrase ultimately dictates the effect or construction that one gives to the phrase when taken as a whole and the approach that one adopts in determining the meaning of the individual words of that phrase is bound up in the syntactical construction of the phrase in question. … If the notions of meaning and construction are interdependent, as we think they are, then it is difficult to see how meaning is a question of fact while construction is a question of law without insisting on some qualification concerning construction that is currently absent from the law.' 27 In construing a phrase used in a statute it may be that the missing qualification is the need to take into account the legal context in which the phrase is used and the nature of the error that is alleged. In Agfa-Gevaert it was not necessary for the High Court to resolve this problem and it is not necessary here. I am satisfied that, for present purposes, the proper construction of the phrase, 'because of its nature' is a question of law. The definition of 'nature' relied on by the applicant is an 'essentialist' definition, incorporating the concept of a fundamental or essential character created by an 'inherent and inseparable combination of properties'. An instrumentalist definition might incorporate the concept of 'defining characteristics'. Either way, a decision as to the 'nature' of a business activity requires not just an understanding of the meaning of the word but a judgment as to which characteristics are 'essential' or 'defining' in respect of the relevant business activity. That judgment requires not only consideration of the meaning of the words but also of their statutory context and probably of the purpose of the amendment to ITAA 97 introduced following the Ralph Report. 28 This brings me to consider the correct interpretation of the phrase 'because of its nature'. Section 35-55(1)(b)(i) requires not just that the relevant business activity has failed to satisfy one of the tests referred to in the section but also that it has done so 'because of its nature'. The section does not apply if the business has failed, for example, because the taxpayer (or the person who controls the business) is incompetent or lazy. The reference to the 'nature' of the business indicates that the failure must be a result of some inherent feature of the business. The difference between the interpretations of the Commissioner and the respondent is the level of generality at which the relevant business activity is viewed: on the former view the nature of migration consultancies in general must be considered but on the latter view the nature of the respondent's particular business activity is the correct criterion. 29 It would seem clear from comments in the Explanatory Memorandum to the New Business Tax System (Integrity Measures) Bill 2000, which introduced Division 35 into ITAA 97, that in making these amendments, the legislature was concerned with common features of business activities not with features that are peculiar to the way in which the individual taxpayer runs his business. In relation to s 35-55(1)(b) the Explanatory Memorandum says at [1.51]: This arm of the safeguard discretion will ensure that the loss deferral rule in 35-10 does not adversely impact on taxpayers who have commenced to carry on activities which by their nature require a number of years to produce assessable income. Examples of activities which could fall into this category are forestry, viticulture and certain horticultural activities.

30 Further support for this interpretation can be found in Example 1.6 of the Explanatory Memorandum which follows the comments on s 35-55(1)(b). The example concerns the cultivation of macadamia nuts by John and states, 'The standard time period for macadamia farming to become profitable at the time John commenced the activity was 5 years.' 31 The example refers to a common feature of macadamia farming, not a feature that could be said to be peculiar to the way in which John has chosen to carry on his business. The example in the Explanatory Memorandum is consistent with the note to s 35-55 which refers to the kind of business activity which the section is intended to cover and mentions, by way of example, the planting of hardwood trees for harvest. Such activities have an inherent characteristic that cannot be overcome by conducting the business activity in a different way but only by changing the nature of the business. 32 The respondent makes the valid point that an example is used to illustrate the operation of the section not to limit its application. Where, however, the example illustrates an exception to a general rule (in this case the rule in s 35-10) one should take care not to expand the exception so that the exception is greater than the general rule. In my view, to adopt the construction advocated by the respondent would be very close to allowing the exception to supplant the basic position set out in s 35-10. In my view, the phrase 'because of its nature' in s 35-55 indicates that the failure must be a result of some inherent feature that the taxpayer's business activity has in common with business activities of that type. 33 This brings me to the question of whether the Tribunal correctly construed the 'nature' phrase in determining whether the failure of the respondent's business activity to pass one of the tests referred to in s 35-55(1)(b)(i) was 'because of its nature'. The respondent's business activity was described in the private ruling as 'migration consultancy or agency work'. The applicant alleges that the evidence submitted by the respondent was inadequate to support the Tribunal's conclusion. For reasons explained in [5] above, whether the evidence before the Tribunal was adequate to support its conclusion is not an issue that the Court has jurisdiction to review. If, however, the Tribunal, acting on an erroneous interpretation of the 'nature' phrase, did not subject the evidence before it to the correct statutory criterion then the Tribunal would have made a reviewable error. 34 It is appropriate to quote the Tribunal's reasoning on this issue at length: 'What is the nature of Mr Eskandari's business activity? He is a registered migration agent and thus is permitted by the Migration Act 1958 to charge a fee for providing immigration assistance or for making immigration representations …. Registration is renewable annually …. Following registration with effect from 20 February 2001, Mr Eskandari started his migration consultancy in April 2001. The start-up phase, the period during which his business activity is being established, would last some months. I am prepared to accept that the start-up would extend into the 2001-02 income year. In the service industries it would not be uncommon for an activity to run at a loss for a period. Fixed costs of securing premises, hiring equipment and overdraft interest will typically be incurred, as well as other expenditure necessary for developing the business, such as advertising. Customers have to be found. The experience of a registered migration agent during the start-up phase would not be dissimilar to the experience of the newly admitted barrister, for example. Fees may be subject to contingencies. Cost may not be covered by revenue from the activity, so requiring the individual to supplement their income from a second job as Mr Eskandari has found. I am satisfied that the nature of the business activity of a registered migration agent encompasses the type of work entailed by giving immigration assistance and making immigration representations. The nature of Mr Eskandari's business activity is that he charges an initial fee on being retained by a client. He does not receive the larger part of his overall fee unless and until the visa application is granted. There may be several years delay prior to the visa application being finally determined. I find that it is because Mr Eskandari's migration consultancy is being built up, which is a developmental stage or attribute applicable to the business activity, that it will not satisfy the assessable income test (s 35-30) in 2001-02, being its first full year of operations.' (underlining and emphasis added) 35 It is not entirely clear from this passage exactly how the Tribunal categorised the cause of the respondent's business failing to meet the 'assessable income test' (the only one of the four tests mentioned in s 35-55(1)(b)(i) that was relevant). In the passage underlined the Tribunal refers to the nature of migration agencies in general. In the passage in bold, however, the Tribunal refers to a feature of the respondent's particular business. The Tribunal notes that, under the respondent's particular fee structure, there might be several years delay before (in the case of successful applications) the larger part of his overall fee is payable. As I read the Tribunal's reasons, the conclusion that the respondent's business activity would not satisfy the relevant test was based on this particular feature and not on an aspect of the nature of migration agencies in general. One might reasonably take the view that the delay to which the Tribunal refers is an inherent feature of migration consultancy businesses but there is nothing to support the view that the 'success fee' approach is an essential or even a common means of dealing with this delay. 36 Alternately, the Tribunal's conclusion might be that the respondent's business activity is in a developmental stage which the Tribunal regards as a feature of its nature, and responsible for failing the assessable income test. The problem with this reasoning is that it could apply to almost any new business. Most tellingly it could apply to the business described in the example in the note to s 35-10; an example which is clearly meant to illustrate a situation when, inter alia, the discretion in s 35-55 does not apply. On either view of the Tribunal's reasoning its decision is tainted by legal error and cannot stand.

The 'lead time' issue 37 The Commissioner submits that the discretion conferred by s 35-55(1)(b) should not be exercised in this case because the respondent's business generated income in the relevant period. He submits that the note to subs 35-55(1)(b) describes the class of cases that are intended to be covered by the Commissioner's discretion, namely, where there is a lead time between the commencement of the activity and the production of any assessable income. The Commissioner contends that this note should, in effect, operate as a condition precluding the application of subs 35-55(1)(b) where the receipt of initial fees by the respondent meant that the business did not have a lead time between the commencement of the activity and the production of assessable income.

38 The respondent counters that the note is not an operative provision and its purpose is to assist taxpayers to identify accurately and quickly the provisions that are relevant to them and to help them understand those provisions. The respondent contends that the note can be taken into account in construing s 35-55(1)(b) but there is no compelling reason for reading down the subsection by reference to the note. The respondent submits that to interpret the note as laying down a condition governing the application of the subsection would be inconsistent with the policy of the provisions as expressed in the Commonwealth Treasurer's second reading speech in which the Treasurer, without mentioning any requirement for lead time, commented, 'There is also a discretion to allow the losses where the business is affected by special circumstances, such as natural disasters, or is in its start-up phase.'

This comment must, however, be read in context of the other remarks made by the Treasurer and quoted at [40] below.

39 It is not advisable to rely heavily on an isolated comment in a second reading speech or to construe a note as if it were an operative provision. While it is clear from s 950-100 that the notes and examples to subs 35-55(1)(b) form part of ITAA 97 their purpose is to help 'identify accurately and quickly the provisions that are relevant' to an individual taxpayer and to assist in understanding those provisions: s 2-35; see also the comments of the Full Federal Court in Brooks v Commissioner of Taxation (2000) 100 FCR 117 ('Brooks') at 135.

40 In my view the note to subs 35-55(1)(b) with its reference to 'lead time' illuminates but does not definitively identify the type of business activity to which the subsection applies. The reference to 'lead time' is an illustration of the type of business which 'because of its nature' might fail the tests referred to in s 35-55(1)(b)(i) but does not limit the section to that type. As the Full Court said in Brooks at 135: 'An example is just that, an example, it is not intended to be exhaustive of cases which might fall within the section.'

This is not to say that s 35-55(1)(b) necessarily applies to the respondent's business. It may be that any business activity that meets the requirement in s 35-55(1)(b)(i) will have such a lead time. However, as I have found that the Tribunal's conclusion that s 35-55(1)(b)(i) was satisfied was made in error it is not necessary for me to decide this point. The only additional comment I would make on this issue is that the respondent's submissions on this point ignore the main thrust of Division 35 which, as the Treasurer said in his second reading speech, is '[to] limit the extent to which taxpayers can use non-commercial losses to reduce the tax paid on their other income;'

The Treasurer continued: 'The rules ensure that individual taxpayers carrying on a business activity either alone or in partnership may only claim a loss from that activity against their other income in an income year if they satisfy one of five tests in that year. The tests look at the activity's level of turnover, history of profitability, the value of real property used in carrying on the business and the value of other assets used in carrying on the business. Only one of the tests needs to be passed to enable an individual's loss from a business activity in a year to be deducted against the individual's other assessable income, such as wages and salary. There is also a discretion to allow the losses where the business is affected by special circumstances, such as natural disasters, or is in its start-up phase.'

41 The Commissioner also takes issue with the Tribunal's conclusion that the requirement of s 35-55(1)(b)(ii) had been met. In considering this point the Tribunal said, '… [I] note Mr Eskandari did not provide the Commissioner with any independent evidence regarding the expected time by which his business activity would become commercially viable.' 42 In passing, I note that the section actually refers to the business meeting certain requirements within a commercially viable period, not to the business becoming commercially viable. I accept however that this is an error of expression and does not indicate that the Tribunal was confused about the requirements of the section. The respondent filed a notice of contention stating that this statement was erroneous and that the Tribunal should have found that there was an objective expectation based, at least in part, on evidence from independent sources. In support he pointed to an extract from a Procedures Advice Manual for officers administering migration legislation and an extract from the Butterworths publication, A Manager's Guide to Visa Times, both of which were before the Commissioner and the Tribunal. Both documents give some guidance about the period of time required for certain visa decisions. They do not directly address the future of the business. In any event, the Tribunal referred to the latter document in its comments on this issue. Clearly the Tribunal did not overlook this evidence and the remark is probably a very specific comment about the nature of that evidence. Even if the Tribunal's statement quoted above is incorrect, it relates to the characterisation and evaluation of the evidence and this is a matter for the Tribunal not for the Court. The Notice of Contention must be rejected.

43 Section 35-55(1)(b)(ii) requires a taxpayer, on the basis of evidence from independent sources (where available), to establish that there is an objective expectation that, within a period that is commercially viable for the industry concerned, the relevant business activity will meet one of the four tests referred to in s 35-55(1)(b)(i) or produce an excess of assessable income over deductions in an income year. 44 The Commissioner contends that the respondent has failed to adduce such evidence from independent sources, has not demonstrated that evidence from independent sources is not available and has not invited an assumption about those matters and no assumption has been made. In my view the Commissioner's contentions attempt to impose far too formal a structure on the inquiry required under the legislation. I do not find any mandate for this approach in the words of the section. 45 In determining whether there is the requisite 'objective expectation' as to the matters mentioned in the subsection, including the period that is commercially viable for the industry, the Tribunal, standing in the Commissioner's shoes, (see [18] above) must consider the facts and circumstances of each case. The words used in the subsection are not used in any special technical or legal sense and I see no reason to go beyond their ordinary meaning. This is a matter of fact to be determined by the Tribunal. This is not to say that there could never be an error of law in determining the meaning of 'a period that is commercially viable for the industry in question'. If, for instance, a decision-maker construed the term as applying to an infinitely long period, there would be a strong argument that there was an error of law involved. It is not necessary for me to explore this issue further as I am satisfied that in this case there was no such error. 46 In some cases it may be a straightforward exercise to identify the industry in which the business activity takes place. Some industries are well-established and the basis for an 'objective expectation' can readily be based on a comparison between the taxpayer's business and other businesses within that industry, particularly where businesses or business associations within the industry produce material such as annual reports or industry papers. In other cases business activity may exist in an industry that is difficult to identify because of the innovative nature of the business or the undeveloped nature of the industry. There may, because of the nature of the industry, be very little or no independent source material. In such circumstances it will, as an evidentiary matter, be more difficult for the taxpayer to discharge the burden imposed by s 14ZZK(b)(iii) of the Taxation Administration Act 1953 (Cth)and convince the Commissioner that the requirements for the exercise of its discretion have been met. It may be necessary to refer to the circumstances of the taxpayer. Forming an objective expectation in such cases requires an extrapolation from those circumstances taking into account the nature of the relevant business activity, the costs or losses incurred and an estimated duration for the start-up phase. Ultimately, however, this question, including the meaning of a 'commercially viable period', is one of fact that is for the Tribunal to decide, and only where the Tribunal's decision constitutes an error of law will it be reviewable by this Court. 47 In the present case the Tribunal was satisfied that the respondent's business was in its start-up phase; see the passage from the Tribunal's reasons quoted at [34] above. The Tribunal considered the respondent's experience 'in the industry', the hours he devotes to the business, his efforts to obtain clients (including his advertising strategy) and his fee structure. The Tribunal also considered the documentary evidence provided to the Commissioner. On the basis of this material the Tribunal concluded that there was an objective expectation that the business would meet the assessable income test or become profitable within a 'reasonable period'. The Tribunal apparently equated a 'reasonable period' with a 'commercially viable period' for this industry. While it might have been preferable to use the words of the statute, one should not scrutinise an administrative decision-maker's reasons seeking to discern error in the way in which they are expressed; Minister for Immigration and Ethnic Affairs v Wu Shan Liang (1996) 185 CLR 259 at 272. Given that the Tribunal was clearly directing its comments to s 35-55(1)(b)(ii) it would be perverse to conclude that the Tribunal's finding that the business would meet the required standard within a 'reasonable period' was anything other than a finding that it would do so within a 'commercially viable period'. 48 Although the Tribunal did not spell out every step in its reasoning, it apparently regarded this information as indicative of the period it might take a migration consultancy business to finalise family visa applications. Where the income of the business is contingent upon finalisation it may reasonably be expected that the period for commercial viability to be achieved will be commensurate with the relevant time period. This evidence goes towards explaining the delay between commencement of business activity and deriving income. Alone it may not be sufficient to discharge the onus of showing that within a period that is commercially viable for the migration consultancy industry the business will meet one of the four tests or its income will exceed deductions. However, in conjunction with what may be described as non-independent source material it was reasonably open for the Tribunal to find that there was an objective expectation that the business would satisfy s 35-55(1)(b), and there was no error of law in the Tribunal's conclusion.

Orders 49 The Tribunal has made findings of fact as to why the business failed to meet the requirements of s 35-55(1)(b)(i) and I have concluded that, on those facts, the failure was not 'because of its nature' as that phrase is properly construed. It follows that the Tribunal's decision must be set aside. This raises the question whether the appropriate order is to remit the matter to the Tribunal for reconsideration in the light of my reasons or to affirm the decision under review by the Tribunal. 50 The scope of this Court's power to make orders under s 44(4) of the AAT Act was discussed at length by Sheppard J in Minister for Immigration and Ethnic Affairs v Gungor (1982) 63 FLR 441 at 454-5: 'It is, in my opinion, not correct to say that this Court is by these provisions given wide powers to make such order as it thinks fit. Implicit in its powers are a number of restrictions. The appeal is expressly limited to error of law, which alleged error is the sole matter before this Court and is the only subject matter of any order made consequent on the appeal. The order which this Court can make after hearing the appeal is also similarly restricted to an order which is appropriate by reason of its decision. It follows that the only order which can be properly made is one the propriety of which is circumscribed by and necessary to reflect this Court's view on the alleged or found error of law. To go further I would see as amounting to exceeding the jurisdiction of this Court under this section. A power to make "such order as it thinks appropriate by reason of its decision" is much more restrictive than a power "to make such order as it sees fit" or a power "to make a decision in substitution for the decision" the subject of the appeal. Section 44(5) confirms, thought it states that it does no purport to limit, this as an appropriate reading of the power in s 44(4) when it limits its statement of the express power of the court when setting aside a decision to the making of an order remitting the case to be heard again. Having set aside a decision it has no express power to substitute what it sees as the correct decision unless such is the appropriate order by reason of its decision on the point of law in the context of the particular proceedings.' 51 Despite the limitations properly identified by Sheppard J there are instances where the Court has declined to remit a matter to the Tribunal because to do so would be an exercise in futility. In Morales v Minister for Immigration and Ethnic Affairs (1995) 60 FCR 550 at 560 Sackville J observed, '[I]f the Court hearing an appeal from the AAT finds an error of law in its reasons, but nonetheless considers that the decision was clearly correct on the material before the AAT, it is open to the Court to dismiss the appeal …' In Comcare v Calipari (unreported 8 November 2001) at [12] Finn J commented, 'Ordinarily this course will not be adopted unless only one result could have been reached by the AAT had it correctly applied the law.' 52 In Harris v Repatriation Commission (2000) 62 ALD 174, despite finding the Tribunal to have made an error of law, Finn J declined to remit the matter to the Tribunal because the error had no practical consequences and was not a basis for impugning the correctness of the Tribunal's decision. The Court may also decline to remit a matter to the Tribunal where the an error of law leads to the Tribunal's decision being set aside. In such a case the Court affirms the decision under review. In Secretary, Department of Community Services and Health v Theologidis (1991) 33 FCR 186 the Full Federal Court set aside the Tribunal's decision but held at 191: '[T]he powers of the court under s 44 of the AAT Act are of sufficient width so as to permit, in a case such as the present, the making of an order affirming the decision under review by the Tribunal … As we understand the reasons of the Tribunal, it would have affirmed the decision under review if it had decided the question of law as it has now been decided by this Court. 53 In this case, the application of the correct statutory criterion to the facts as found by the Tribunal can only lead to the Commissioner's objection decision being affirmed. Nevertheless I am not satisfied that it would be manifestly futile to remit the matter to the Tribunal. The Tribunal, approaching its task with the correct construction of the phrase 'because of its nature' in mind, might attach significance to facts it previously disregarded or make findings that previously it did not see to be necessary. 54 Accordingly I will order that the application be allowed, the Tribunal's decision of 28 March 2003 be set aside and the matter be remitted to the Tribunal for reconsideration in the light of these reasons. For reasons previously given the Notice of Contention filed on 2 October 2003 will be dismissed. I certify that the preceding fifty-four (54) numbered paragraphs are a true copy of the Reasons for Judgment herein of the Honourable Justice Stone.

Solicitor for the Applicants: Australian Government Solicitor

Solicitor for the Respondent: Dibbs Barker Gosling