Background
6 On 24 June 1994, following an audit, the Commissioner issued the respondent taxpayer with an amended assessment of income tax for the year ended 30 June 1988 including in his assessable income for that year an amount of $1,228,500 received by him in respect of a certain large infrastructure project. Additional Tax for incorrect return, shown at label D of the notice of amended assessment, in the sum of $586,858.75, was also imposed.
7 The taxpayer, by his taxation agent, lodged an objection to the amended assessment by letter dated 5 July 1994, but the grounds were confined to the inclusion of the sum of $1,228,500 in his assessable income and did not put in issue the imposition of the additional tax of $586,858.75.
8 By letter dated 16 February 1996 the Commissioner disallowed the taxpayer's objection for the reason:
'It is considered that the income received from Kumagai Gumi Co Ltd and Transfield Pty Ltd forms part of your assessable income.'
Not surprisingly, the objection decision made no reference to the imposition of additional tax because it was not raised as a ground of objection. Indeed, it was not mentioned in the objection at all.
9 By letter dated 31 October 2003 solicitors acting for the taxpayer filed a statement of facts, issues and contentions on behalf of the taxpayer, however, the matter of additional tax was not raised as an issue and it certainly formed no part of the taxpayer's contentions. Not surprisingly, the Commissioner's amended statement of facts, issues and contentions dated 26 October 2004, likewise made no reference to the matter of additional tax.
10 The first time the matter of additional tax or 'penalty', as it is sometimes referred to, was raised was before the Tribunal. How it was raised and why the Tribunal allowed it to be raised is not disclosed in the transcript of proceedings before the Tribunal, nor in the Tribunal's reasons for decision. However, these documents suggest, with respect, that:
(i) Neither counsel for the taxpayer, nor counsel for the Commissioner, nor the Tribunal was aware that the taxpayer had not included any ground in his notice of objection going to the additional tax imposed at label D of the amended notice of assessment. So much is exemplified in the following extract from p-95 of the transcript of the hearing on the second day (19 November 2004):
'MR QUINN [Counsel for the Commissioner]:Just briefly on penalty, we say it is a matter - the Tribunal stands in the shoes of the Commissioner. We say there wasn't full and true disclosure. I mean, it couldn't be the case that having regard to the number of taxpayers and the way the Commissioner must administer the Act that not to put at least copies of the agreements, that that was full disclosure. To that extent we say that the amount of penalty is appropriate in the circumstances. Unless there's anything else ---'
(ii) If counsel for the taxpayer was aware that the taxpayer had not included any ground in his notice of objection going to the additional tax imposed at label D of the amended notice of assessment, no attempt was made, by way of application to the Tribunal, to include the additional tax issue as an additional ground of objection and, even if an application was made, no such order was made by the Tribunal pursuant to s 14ZZK of the Administration Act. On the hearing of the appeal there was an interruptive protestation on the part of counsel for the taxpayer that any such conclusion would be misleading. However, it was not taken further (apart from what was said to be anecdotal evidence from the bar table) in the written submissions I afforded counsel for the taxpayer, at his request, further time to make.
(iii) The Tribunal seems to have regarded itself as having jurisdiction with respect to not only additional tax imposed at label D of the amended notice of assessment, but also additional tax by way of interest for late payment of tax assessed pursuant to s 207 of the Income Tax Assessment Act 1936 (Cth) ('the ITAA 36'). So much is exemplified in the following extract from p-77 of the transcript of the hearing on the second day:
'MR RAPHAEL: Now, if we might go to the question of penalty.
MR LINDSAY:And on that the witness gave evidence, did he - the applicant gave evidence that the sum assessed has not yet been paid?
MR RAPHAEL: Yes.
MR LINDSAY:So there must be quite a large amount of interest that has accrued on this sum, is that ---
MR RAPHAEL: Yes.
MR LINDSAY:I'm not privy to all of the - I haven't read all of the detail, Mr Raphael ---
MR RAPHAEL: One should not give evidence from the bar table but ---
MR LINDSAY:No, I know, but you are trying to - I'm getting some assistance from you, but is interest running from 1987 on this amount?
MR RAPHAEL: So I would tender the report of the Australian Tax Office …'
It is also exemplified in the Tribunal's reasons for decision:
'57. Where a taxpayer omits an item of assessable income from their return, s.223(7) deems the taxpayer to have made a statement in their return to the effect that they did not derive that item of income. The provision applies in this matter.
58. …
59. I find that there are mitigating circumstances present in this matter that should be taken into account on review in the exercise of the discretion in s.227(3) to remit additional tax:
…
60. …
61. I accept the applicant's submission that this transaction or dealing is one that falls into the clearly arguable category. I also accept that his income tax return gave the respondent some information about the transaction and this should be contrasted with the situation where there is a total omission of any reference to the particular transaction. Having regard to the policy of encouraging accuracy and completeness of returns that is embodied in s.223, but being cognisant also that the discretion has been introduced to mitigate potential harshness resulting from the imposition of penalty under s.223(1) being double the amount of tax avoided, I am satisfied that this is an appropriate case in which to remit the culpability component of the penalty in full. In relation to the per annum component, it is relevant to note that the respondent consented to the matter being held in abeyance for a number of years pending the finalisation of proceedings brought by Jones, extending to his appeals to the High Court. I consider it appropriate that any per annum component be remitted for the entire period from the date of issue of the amended assessment.'
11 While the Tribunal's ultimate decision ([2], supra) in relation to 'penalty' is clearly a reference to additional tax imposed at label D of the amended notice of assessment, it is equally clear, in my view, that what the Tribunal is referring to in the last two sentences of par 61 of its reasons for decision and in the extract from the transcript cited above is the additional tax by way of interest pursuant to s 207 of the ITAA 36 and, if it is, it is clearly beyond the Tribunal's jurisdiction. This latter matter was not, however, the subject of the Tribunal's ultimate decision. It follows that ground 4.5 of the Amended Notice of Appeal is misconceived.
12 I hesitate to suggest this, but it seems to me that the Tribunal's analysis of the 'penalty' issue was a function of the confused thinking inherent in the submissions put to the Tribunal by both counsel below. This is further exemplified in the Commissioner's grounds of appeal and in his original written submissions, both having as their focus the construction and application of s 14ZS and, by force of the definitions therein, s 14ZQ of the Administration Act.
13 It is s 14ZS, as originally enacted (see Taxation Laws Amendment (No. 3) Act 1991 (Cth)), that applies to objection decisions that relate to the remission of additional tax under s 223 of the ITAA 36. As originally enacted, s 14ZS relevantly provided:
'(1) For the purposes of this Part, an objection decision is an ineligible income tax remission decision if subsection (2) … applies.
(2) An objection decision is an ineligible income tax remission decision if it relates to the remission of additional tax payable by a taxpayer under the Income Tax Assessment Act 1936 other than Division 11 of Part IIIAA, except where the additional tax is payable under Part VII of that Act and its amount, after the decision is made, exceeds:
(a) …
(b) in the case of additional tax payable under section 223 of that Act because of the making of a statement:
(i) if the statement relates to only one year of income - the amount calculated, in respect of the period commencing on the day that is the prescribed day in relation to the taxpayer in relation to the year of income and ending on the day on which the assessment of the additional tax is made, at the rate of 20% per year of the amount of the relevant affected tax in relation to the taxpayer in relation to the year of income; or
(ii) …' (Emphasis added)
14 Relevantly, s 14ZQ defined 'objection decision' as having the meaning given by subs 14ZY(2), namely, by reference to subs 14ZY(1), a decision of the Commissioner to allow an objection, wholly or in part, or to disallow it.
15 It is difficult to understand the focus of the Commissioner on s 14ZS of the Administration Act in the present case when neither the taxpayer's objection nor, in consequence, the Commissioner's objection decision, referred in any way to the remission of additional tax imposed by the amended notice of assessment. In support of that focus I was referred to cases which, correctly in my view, hold that the words 'relates to' are wide words signifying some connection between two subject matters - with the connection or association signified by the words being either direct or indirect, substantial or real. However, in the present case, there is absolutely no connection or association between the objection decision and the remission of additional tax payable under s 223 of the ITAA 36. It may be, as the Full court of this Court observed in Grollo Nominees Pty Ltd v FC of T (1997) 73 FCR 452 at 523,
'that it would seem an odd thing if there were … an appeal to the Tribunal on the question of the amount of income tax payable which did not carry with it the right to question any consequential imposition of additional tax',
but this is such a case, in the absence of the Tribunal making an order pursuant to s 14ZZK of the Administration Act allowing the taxpayer to include the additional tax issue as an additional ground of objection. In short, the objection decision in the present case is not an ineligible income tax remission decision under s 14ZS of the Administration Act and, insofar as the Commissioner's appeal is grounded on this issue, it must fail.
16 In his written submissions in reply, the Commissioner refocussed his argument, to where it always should have been focussed, on subs 43(1) of the AAT Act.
17 Subsection 43(1) of the AAT Act is in the following terms:
'For the purpose of reviewing a decision, the Tribunal may exercise all the powers and discretions that are conferred by any relevant enactment on the person who made the decision and shall make a decision in writing:
(a) affirming the decision under review;
(b) varying the decision under review; or
(c) setting aside the decision under review and:
(i) making a decision in substitution for the decision so set aside; or
(ii) remitting the matter for reconsideration in accordance with any directions or recommendations of the Tribunal.'
18 The Commissioner submitted that the present appeal was one where the remission of penalty by the Tribunal could not have been for the purpose of reviewing the decision. It was not relevant to the making of the decision because the parameters of that decision had already been set by the taxpayer's objection. It could not have been properly raised by the taxpayer before the Tribunal unless and until an order was obtained by the taxpayer under s 14ZZK(a) of the Administration Act which did not occur. As such, there could not be 'an association' between the power exercised by the Tribunal and the decision under review. If an objection had been made to the assessment of penalty and an objection decision had been made in relation to that matter, there may have been (subject to the operation of s 14ZS of the Administration Act) some basis for saying that the exercise of a power to remit by the Tribunal was in the words of Hill J in Secretary, Department of Social Security v Hodgson (1992) 37 FCR 32 'relevant to the making of the decision under review'. There would be present 'an association' between any exercise of discretion by the Tribunal to remit penalty and the objection decision.
19 In my view, this misconceives the matter and puts an impermissible gloss upon s 43.
20 While the taxpayer did not include in his objection a ground putting in issue the imposition of additional tax; and while the Commissioner's objection decision disallowing the taxpayer's objection did not, in consequence, deal with that issue; and while the taxpayer had no right to agitate the issue before the Tribunal unless the Tribunal otherwise ordered (s 14ZZK(a) of the Administration Act), which the Tribunal did not, nevertheless, in deciding the taxpayer's objection, the Commissioner could have further remitted the additional tax imposed at label D of the notice of amended assessment, pursuant to the discretion vested in him by subs 227(3) of the ITAA 36. The fact that he had already exercised this discretion, at the time of assessment to remit the additional tax to $586,858.75 was no bar or impediment to his further remission of the additional tax at the time of making his objection decision.
21 If this be right, then it is difficult to see why subs 43(1) of the AAT Act did not give the Tribunal jurisdiction to make that part of the decision against which this appeal is brought, namely, remission of the penalty matter to the Commissioner with the direction that the assessment for the year ended 30 June 1988 be amended by remitting additional tax in full. Subsection 43(1) of the AAT Act has been construed as not requiring the power or discretion to be exercised by the Tribunal as being necessarily involved in the making of the decision under review: Secretary, Department of Social Security v Hodgson supra at 39 - 40. In Commonwealth Bank Officers Superannuation Corporation Pty Ltd v Commissioner of Taxation [2005] FCAFC 244 (30 November 2005, unreported) the Full Court of this Court observed at [29] - [30]:
'…Section 43 empowers the Tribunal to exercise all the powers and discretions conferred upon the original decision-maker, provided it does so for the purpose of reviewing a decision. Provided the necessary purpose is present, the power conferred upon the Tribunal is not otherwise limited. It is neither necessary nor permissible to put a gloss upon s 43 that would permit the Tribunal to exercise the discretion maker's powers and discretions only when those powers or discretions are necessarily interdependent with the decision under review, or where the power or discretion to be exercised by the Tribunal is necessarily involved in the making of the decision under review - see Secretary, Department of Social Security v Hodgson [supra].
Thus, so long as the exercise of powers and discretions by the Tribunal is for the purpose of reviewing a decision, all of the powers and discretions conferred by any relevant enactment on the decision-maker who made the decision, can be exercised by the Tribunal' (Emphasis)
22 In making this observation, the Full Court was adopting the views expressed by Hill J in Hodgson. In particular, what his Honour went on to say in that case at 40:
'Of course there must be an association between the power to be exercised by the Tribunal and the decision under review, but that association is to be found in the restriction of the grant of power in s 43(1) to the purpose of the Tribunal's review. The test is one of relevance rather than dependence. Where the exercise of a power or discretion is relevant to the making of the decision under review then, if requested, the Tribunal may exercise the discretion.' (Emphasis)
23 There can be no doubt, in the present case, that the exercise by the Tribunal of the discretion to remit the matter of the additional tax to the Commissioner with a direction that the additional tax be remitted in full is relevant to the making of the objection decision, if not dependent upon it. In that sense, the Tribunal exercised the discretion for the purpose of reviewing the objection decision and any argument that it did not must be rejected.
24 For the foregoing reasons, the appeal must be dismissed with costs.
I certify that the preceding twenty-four (24) numbered paragraphs are a true copy of the Reasons for Judgment herein of the Honourable Justice Edmonds.